The pace of monetisation in an economy is affected by a multitude of factors:
1. Difficulties of Barter:
The difficulties and inconveniences of the barter system tend to be more pronounced and intense with the growth of trade and increased over-dependence of a progressive economic community which work as a propelling force to introduce and use money as a medium of exchange.
2. Extent of Division of Labour and Specialisation:
With the increased application of complex division of labour in the process of production and more diversified output through growing specialisation and integrated system of production, the need for increased monetisaton is felt in the economy.
3. Transition of Subsistence Economy into Exchange Economy:
When a self-sufficient village economy is lifted up from its subsistence level through rural industrialisation process and commercialisation of agriculture, monetisation automatically occurs.
4. Development of Banking:
Extension of banking activities and other financial institutions in unbanked areas and backward regions obviously lead to an increased availability and use of money which helps rapid monetisation of the economy.
5. Development of Trade, Transport and Communication:
Size of market, volume of trade and commerce and consequent growth of exchange transactions are facilitated and encouraged by the increased network of transport infrastructure and development of communication system in the country which goes a long way in accelerating the process of monetisation.
With the growth of industrialisation and capital formation, the pace of economic development increases which leads to a rapid growth of the secondary and tertiary sectors of the economy with diversified occupational structure and rapidity of transactions calling for a greater degree of monetisation in the economy as a whole.
7. Demonstration Effect:
With the increased contacts between urban and rural population, when the latter is impressed by the consumption pattern of the former and when due to this demonstration effect.
The rural folk is induced to produce more marketable surplus of their goods for selling it to the urban areas and earning money to buy urban goods, monetisation is automatically accelerated.
8. Government Sector:
With the extension and intensification of the functions of the government in a welfare state, the budget is enlarged and more and more tax revenues are collected an increased public expenditure is incurred.
This necessitates increased use of money. Further, under the technique of deficit financing, the government resorts to the injection of more and more money into the supply stream which is also absorbed by the non-monetised sector to some extent and the pace of monetisation is accelerated as a result.
9. Degree of Development:
In general, degrees of development and monetisation are interconnected. Monetisation is the cause of, as well as the consequence of, economic advancement.
Monetisation facilitates more specialisation and rapid economic transactions and enlargement of the size of market and consequently rapid and smooth economic development.
So also, economic development needs more and more use of money as a more sophisticated instrument of exchange and creates scope for monetisation.