Essay on the Nature of a Monetary Economy


A monetary economy is one in which money is wildly used and accepted as a medium of exchange. It is a monetised economy.

Unlike in barter economy, in an organised market of a monetary economy, money buys goods and goods buy money but goods do not buy goods directly. In short, in a money economy goods are exchanged indirectly goods are sold for money and money purchases goods.

In a monetary economy, money serves as a means of payment. It is the general and permanent abode of purchasing power. Thus, all transactions are measured and recorded in terms of money.


Money serves as a unit of account in a monetary economy. Money being a common denominator of value, the price system has emerged as a distinct characteristic of monetary economy.

As compared to the barter system, exchange process is more efficiently organised in a monetary economy when money is used as a medium of exchange. The use of money in the process of exchange has far-reaching consequences when it reduces the amount of information required in concluding a transaction.

All the inconveniences of barter like want of double coincidence, want of a means of sub-division, want of efficient store of wealth etc., are automatically eliminated in a monetary economy, cost and time involved in searching for a double coincidence is saved.

Further, the use of money and consequent emergence of the price mechanism simplifies the process of transactions by condensing the complex signalling, mechanism of prices into simple assimilable forms of information.


Money serves as an indispensable factor of production in a monetary economy for enabling its output to increase and diversify. A higher level of output and more varieties of goods and services are enjoyable by the people in a monetary economy as compared to a barter economy.

Indeed, the flow of money and credit enables and encourages entrepreneurs to innovate and accelerate “the process of growth.

Monetary economy has a greater degree of liquidity than a barter economy. Money being the most liquid asset, it serves as a link between the present and the future in a monetary economy. There is an absence of any such link in a barter economy.

Further, unlike the barter system, a monetary economy contains banking institutions. There are commercial banks and the Central Bank as the apex financial institution.


There exists a capital market too for long-term credit activities. Credit is the edifice of modern commerce which rests on the institution of money, especially bank money.

A distinguished feature of a monetary economy is that it is covered with a veil of money. There is a circular flow of money side by side and corresponding to the real flow of economic transactions. In fact, there is a continuous flow of money payments and spending among households and the government sector of a modern monetary economy.

Money matters much in a modern capitalist economy. It is the embodiment of Adam Smith’s “Invisible Hands”. Money is the bloodstream of the organic composition of a modern monetary economy.

It serves as a great wheel of circulation and a great instrument of commerce.Every fabrication of the modern economic society in its present complex form may be attributed to money that has served as a means of valuing, distributing and contracting for commodities of various kinds.No doubt money has conferred inestimable benefits to modern man’s living and progress.

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