A monetary economy, as distinguished from a barter economy has the following characteristics:
1. Use of Money:
Unlike the barter economy in which no money exists, a monetary economy employees money to perform the following function:
(a) Money is generally accepted as a medium of exchange,
(b) All payments are made in terms of money,
(c) Money serves as a unit of account or a numeraire, or a measure of value,
(d) Money functions as a standard of deferred payments,
(e) Money facilitates the transfer of value from one place to the other.
2. Money as an Asset:
In a monetary economy, individuals also use money as an asset. Like other assets, wealth can be stored in the form of money. Money is considered as an asset because it is a permanent abode of purchasing power, i.e., it is a claim against all goods and services which an individual desires to have. In the barter economy, on the other hand, wealth is stored only in the form of physical goods.
3. Greater Liquidity:
Monetary economy has greater liquidity than the barter economy has. Money is the most liquid asset and is used as a link between the present and the future in a monetary economy. Such a link is absent in a barter economy.
4. Existence of Financial Institutions:
Unlike the barter system, various financial institutions, such as central bank, commercial banks and other financial institutions exist in a monetary economy. These institutions deal with a variety of non-cash financial assets or near-money assets such as bills of exchange, bonds, shares, etc. There exists a money market dealing with short-term credit and a capital market dealing with long-term credit. Thus, in a monetary economy, besides money (i.e., currency and coins), a number of near-money assets are also created and widely used.
5. Efficient Exchange System:
As compared to the barter system, exchange activities are performed more efficiently and more conveniently in a monetary economy where money is used as a medium of exchange. All the difficulties and inconveniences of barter system, such as the problem of double coincidence of wants, the problem of divisibility, the problem of storing wealth, the problem of common measure, the problem of deferred payments, the problem of transportation, etc., are eliminated in a monetary economy.