Q: What is the role of money?

Robertson in his book Principles of Money' states

"Money enables man as consumer to generalize his purchasing power and make his claims on
society in the form which suits him most."
The modem economists fully recognize the economic role of money as a medium of exchange
and standard of value. They regard it as an economic catalyst.
Role of money in economy can be categorized in different ways:
Static Role of money
In static role of money, the importance of money lies in removing the difficulties of barter e.g.
serving as medium of exchange
Acting as unit of account and store of value
Dynamic Role of money
In dynamic role, money plays an important role in daily life of every citizen whether he is
consumer, a producer, a businessman, a politician and administrator etc.
Role of money in capitalist economy
They emphasize that in a capitalistic economy, money exercises a decisive influence on the
volume of production, distribution of wealth and income, direction and volume of exchange and
on the rate of saving and investment in the country.
Role of Money in a Capitalistic Economy:
Money is the sovereign queen of all delights. For her the teacher
teaches, the lawyer pleads, the dancer dances, the soldier fights.

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In a capitalistic economy, money is revolving around in which all economic activities come
together. Money is an indicator as well as a surveyor of wealth.
The importance of money can be judged from the powerful influence which it exercises on the
(1) Volume of production;
(2) Direction of production;
(3) Pattern of consumption;
(4) Method of distribution
(5) Direction and volume of exchange; and
(6) Rate of saving and mi investment in the country.

Production Decisions
Production

has

been

greatly

facilitated

by

the

introduction

of

money. Money makes possible the accumulation of wealth in those hands which are

Able to organize the production- The captain of the industry hires the various factors '
of production in order to meet the future demand for goods and services and pays them in
terms of money If the reward was to be paid in commodity, then the exchange of goods
would have been very limited and only done on a small scale production.

Production without the use of money cannot be organized on a large scale and run
efficiently and economically.

The decision of what, where, when and how much to produce are all guided by the
amount of money offered in exchange of goods and service.

The cost of production is also estimated in terms of money.

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The profit or loss which is the difference between the sales proceeds and the total money
cost is also expressed in terms of money.

With the introduction of money, the consumption can be easily postponed and the assets
can be stored for use to a future date.

Exchange Transactions
In a moneyless economy, exchange of goods was a very inconvenient process. People used to
face the difficulties of double coincidence of wants. There was also no common measure of
value. The use of money has successfully removed the awkwardness of barter.
Money, by acting as a medium of exchange, has greatly stimulated the exchange of goods.
Distribution of National Dividend
The four factors of production, combining together, produce a net aggregate of commodities
every year. The share of each factor of production i.e., rent of land, wages of labor, interest on
capital and profit to entrepreneur is paid in terms of money,
If the share of each factor of production was to be paid by dividing joint products, it would have
caused much inconvenience to each distributor.
As money is generally acceptable as a medium of "exchange and at the same time acts as a
measure and a store of value, therefore, the distribution of national dividend through the medium
of money greatly facilitates the processes of distribution.
In the words of Jevon: "Money subdivides and distributes properly and lubricates the activities
of exchange.
Money in the Field of Public Finance
Money renders a very valuable service in the field of public finance.. Money helps the state in
the achievement of these objectives. The government can easily raise revenue through the
medium of money and can spend it for the betterment of the people.
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Money in the Sphere of Banking

As, money serves as standard of deferred payments. The general confidence in the purchasing
power of money makes it the chief farm of credit. The debtor can safely borrow money for
consumption or for production purposes. This has led to the building up of a gigantic
superstructure of banking and credit system.
Attainment of High Level of Production and Employment
The introduction of money in the economy has facilitated exchange. It has led to high degree of
specialization and interdependence of economic units; If the money is properly managed, it
ensures rising level of productions employment and real income in the Country.
Role of money in socialist economy are as follow:
Capital Accumulation
Besides, capital accumulation is possible through money. It is money that provides liquidity and
mobility required for capital accumulation. In a socialist economy the sources of investment
funds are basically the same as under a capitalist economy.
Foreign Trade
Moreover, socialist economies do not enter into foreign trade on bilateral trade relations based on
commodity transactions. Rather, being members of the World Bank and the IMF, they make
payments in monetary terms in their international trade relations.
Circular Flow of Money
There is also circular flow of money exist in a economy. The producing units receive funds for
investment from the state budget as grants or as loans from the state bank to purchase the
necessary inputs and for making payments to workers.

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Basis of Capitalist Production

In fact, money is the very basis of the capitalist production. By facilitating the purchase of
inputs, and by increasing specialization and division of labor, money helps in the growth of
research in the agricultural, industrial and tertiary sectors of a capitalist economy. Since all these
sectors are mutually dependent and are based on mutual exchanges through money.
Basis of Credit
The entire system of production is based on credit. Credit instruments are a form of money
which is issued by banks to facilitate trade, commerce, agriculture, industry, transport, etc. under
capitalism. It is on the basis of credit instruments that banks advance loans to the different
sectors of a economy.
Means of Capital Formation
The growth of a economy depends upon the capital accumulation. And capital accumulation is a
process whereby people save out of their money incomes deposit them with banks and other
financial institutions which, in turn, lend them to agriculturists, industrialists, transporters and
other businessmen for investment in capital assets. The different stages in the process of capital
formation under capitalismreceiving income, saving and investingare all performed in
money terms.
Link between the Present and the Future
Money establishes a link between the present and future through the freedom of enterprise and
freedom of consumption under economy. The freedom of consumption the part of the consumer
leads to freedom to save a part of his money income. Saving leads to the production of capital
goods via investment and capital goods contribute to the growth of the economy.
This is possible through money when the goods are stored n the present and sold in the future. It
is in this way that money helps to establish a link between the present and the future.

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Leads to Business Cycles

Besides these apparent merits of money in a capitalist economy, it has one serious defect in that
an excess of money leads to inflation and its shortage leads to deflation. These changes in the
quantity of money result in cyclical fluctuations with their attendant consequences on the
economy. In fact, an excess of money supply creates more demand which, in turn, leads to
overproduction, to glut of commodities in the market and finally to depression and mass
unemployment.
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