What is the Significance of Money in Modern Economic Life?

Money occupies a central position in our modern economy. Money is everywhere and for everything in the modern economic life. Money has become the religion of the day in the ordinary business of life.

As Marshall rightly put: “Money is the pivot around which economic science clusters.” And, “the major part of the subject matter of economics is concerned with the functioning and malfunctioning of money.”

Indeed, the benefits conferred by the use of money, credit structure and the changes in the value of money, all have profound influence on the economic behaviour of mankind today.

Every branch of economic activity in a money economy is basically different from what it would have been in a barter economy.

As Robertson states, “The existence of a monetary economy helps society to discover what people want and how much they want it and so to decide what shall be produced and in what quantities, and to make the best use of its limited productive power.

And it helps each member of society to ensure that the means of enjoyment to which he has access yield him the greatest amount of actual enjoyment which is within his reach.”

Money has created a far reaching effect on all facets of economic activities: consumption, production, exchange and distribution, as also on public finance and economic welfare.

Money and Consumption:

Money enables a consumer to generalise his purchasing power. It gives him command over a wide variety of goods. It enables him to canalise his purchasing power and get what he wants. In fact, it is money through its immense purchasing power that makes a consumer sovereign in a capitalist economy.

The consumer’s sovereignty can be expressed through money spending. Money provides freedom of choice of consumption. Money and the price mechanism help a consumer to allocate his income over goods in such a way so that he derives maximum satisfaction from their consumption.

Money and Production:

“In the modern world, industry is closely enfolded in the garment of money,” says Pigou. The institution of money has made present-day mass production possible. Without money, production on a large scale would be impossible. For:

(i) Money has made extreme division of labour possible. Intensive specialisation is necessary for large scale production.

(ii) Money is the sine qua non for modern enterprise. Entrepreneurs are concerned, while planning their production activities, with the cost of production and selling prices together with the resulting profit, all calculated in terms of money.

(iii) The use of money enables a producer to concentrate on the organisation of the production process. Money provides a basis for supporting more complex methods of organising production.

(iv) Money has facilitated borrowing and lending and these are essential in present day production. Credit is the main pillar of modern business.

(v) Money is the most liquid and general form of capital which is highly mobile between different regions and industries.

(vi) Money helps the producer to discover through the price mechanism what buyers want and how much they want, so that he can produce and supply accordingly. In fact, money has changed the basic characteristics of production.

Money and Exchange:

Money overcomes the difficulties of a barter system of exchange. In a money economy, it is a simple matter to ascertain the market price in terms of monetary units.

Money facilitates trade by serving as a medium of exchange. Thus, rapid exchange in a modern economic system is possible because of money. Money is the basis of the pricing mechanism through which economic activities are adjusted.

Money and Distribution:

Money eases the process of distribution of factors’ rewards like wages, interests and profits which are all measured and disbursed in terms of money. It is with the help of money that the shares of different factors of production are properly adjusted.

Accounting, receiving and storing of its share of income by any factor-unit in kind is most inconvenient. Here money comes to the rescue.

Money and Public Finance:

In a modern economy, government plays a very important role. Government receives income in the form of taxes, fees, prices of public utility services, etc. and uses this income for administrative and developmental purposes.

But the great magnitude of public revenues and public expenditure in a modern state would become impossible without money. Further, fiscal devices like public borrowing and deficit financing for economic development can be adopted only in a monetary economy.

In recent times, the fiscal policy of a government has acquired very great importance in economic life, since economic activities can be regulated through budgetary operations that are facilitated by the institution of money.

Money, thus, plays an important role in the shaping of the economic life of a country. The growth of money economy has made the growth of economic liberalism and, hence, of the present day free enterprise or capitalist system possible.

In fact, the pattern of economic life has changed in accordance with the changes in the economic progress.

For better performance of an economy, a country’s monetary system should be operated in such a manner as to maintain high levels of employment and avoidance of business fluctuations. The economic history of the Great Depression in the thirties reminds us of its importance.

Money occupies a strategic position in the culture of a modern society. The smooth functioning of the money economy enables society to raise its standard of living by increasing production and equitable distribution through the medium of exchange.

Thus, money helps in widening the materialistic base of culture and civilisation. Marshall, therefore, maintained that the history of money is synonymous with the history of civilisation.

To quote Horace: “All things human and divine, renowned Honour and worth, at money’s shrine go down.”

Above all, money is the measuring rod of economic welfare. Macro-economic goals of a welfare state are expressed and their realisation is tested in terms of money.

Money serves as an index of economic growth. National income and per capita income are measured in terms of money. Again, physical planning for economic development has its counterpart of financial planning expressed in terms of money.

Money also influences international economy. International economic relations and foreign trade transactions are carried out through internationally accepted money key currency.

In the final analysis, we cannot think of a well- organised social, economic and political life in the present day without money.