Advantages and Disadvantages Of Money

Advantages Of Money :-

            Following is the overview of the various advantages of money:

1.Removal Of Barter System Difficulties :- Introduction of money has helped in overcoming the difficulties of barter system such as the need for double coincidence of wants, lack of common measure of value, lack of divisibility, the problems of transportation and storage of wealth. Money serves as (a) medium of exchange, (b) a  common measure of value, (c) a standard of deferred payments, and (d) a store of value.

2.Importance In Capitalism :-Capitalism is a free enterprise economy in which competition and private ownership of property generally prevail and economic decisions are privately made. Money plays an all-pervading role in the smooth and efficient functioning of the capitalist system.

(i) The capitalist system revolves around price mechanism and price mechanism operates through money because all incomes and prices are expressed in terms of money.

(ii) The consumers get their income in the form of money which gives them ready command over a variety of goods and services.

(iii) Money helps the producers discover what people want and how much they want. This enables them to decide what they should produce and in what quantities and to make the best use of the available productive resources.

(iv) Extensive trade, both internal and international, is carried out through the medium of money.

(v) Money helps the process of distribution of national product among various factors of production in the form of rent, wages, interests and profit.

(vi) Government receives income and makes payments through the medium of money.

(vii) Money tends to influence the operative forces through its impact on investment, output, consumption and distribution of income.

3. Importance In Socialism :- Socialism, as an alternative to capitalism, is an economic system which is controlled and regulated by the government so as to ensure welfare and equality of opportunity to the people.

Advantages of money in socialist economy are :-

(i) In a socialist economy, where economic decisions are taken by the central planning authority and prices are fixed by the planners, and not left to the market forces, money performs an indirect role. It provides an essential link between physical and financial planning; the financial plan provides necessary monetary resources to fulfill the physical targets.

(ii) The values of all product and services are expressed in terms of money.

(iii) All buying and selling is done through money.

(iv) All payments are made through money.

(v) Money functions as the medium of saving and of the formation of cash reserves.

(vi) Money serves as the instrument of distribution.

(vii) Bonuses are paid to the workers in terms of money in order to induce them to work hard.

(viii) The individuals have the freedom to spend their money earnings on any consumption good of their choice.

(ix) Money enables the State to evaluate the economic activity of an enterprise.

4.  Importance In A Mixed And Developing Economy :- Mixed economy is a golden mean between capitalism and socialism. It integrates good features of both the economic systems. Private and public sectors coexist in such an economy. In a mixed economy of a developing nation, money plays an active and dynamic role to achieve the objective of planned economic  development.

(i) Development of money market promotes liquidity and safety of financial assets and thus encourages savings and investment.

(ii) Money market leads to a rational allocation of resources by channelizing saving into productive investment.

(iii) Expansion of money economy increases the mobility of financial resources.

(iv) Deficit financing (i.e. covering the budget deficit through printing new money) can provide adequate funds to the government for financing and successful implementation of monetary policy.

(v) More and more money and monetary instruments are needed for the monetization of the economy.

Disadvantages Of Money :-

            Money is not an unmixed blessing. Total dependence or misuse of money may lead to undesirable and harmful results. In the words of Robertson, "Money, which is a source of so many blessing to mankind, becomes also, unless we can control it, a source of peril and confusion."

            The following are the various disadvantages of money :

1. Instability :- A great disadvantage of money is that value does not remain constant which creates instability in the economy. Too much of money reduces its value and causes inflation (i.e. rise in price level) and too little of money raises its value and results in deflation(i.e. fall in price level). Inflation distorts the pattern of distribution in favour of the rich ; thus, it makes the rich richer and the poor poorer. Deflation, on the other hand, results in unemployment and hardships to the working class.

2. Inequality Of Income :- Money, through its excessive use and inflationary effect, creates and widens the inequalities in the distribution of income and wealth. This had divided the society into 'haves' and 'have-not's' and has led to a class conflict between them.

3. Growth Of Monopolies :- The use of money leads to the concentration of wealth in a few hands and this gives rise to monopolies. Growth of monopolies results in the exploitation of the workers, beings misery and degradation to them.

4. Over-Capitalization :- Easy borrowing and lending facilities, made possible through money, may lead certain industries to use more capital than is required. This over-capitalization, in turn, results in over-production and unemployment.

5. Misuse Of Capital :- Money, which is the basis of credit, leads to the creation of more and more credit creation. Credit creation, if not matched by the increase in production, results in inflationary rise in the prices.

6. Hoarding :- In the materialistic world, people give undue importance to money and,instead of utilizing in productive activities, may start hoarding. This would adversely affect the growth of income, output and employment of the economy.

7. Black Money :- Money, due to store-ability characteristic, is the cause of the evil of black money. It provides people a convenient way to evade taxes by concealing their income. Black money, in turn, encourages black marketing and speculative activities.

8. Political Instability :- Wide fluctuations in prices and business activities, caused by money, may lead to political instability. This may result in the change of government.

9. Moral And Social Evils :- In the modern times, moral values have been sacrificed at the alter of money. People have become so much money-minded that they openly of thefts, murders, frauds and other social evils.

To conclude :- The defects of money do not, however, indicate its elimination. The advantages of money far exceed its disadvantages. It is a good servant and a had master. What is required is the proper regulation of money supply through a wisely formulated monetary policy ensure the efficient working of the economic system and to achieve the socio-economic objectives of the economy. 

Post by:- Akshay Shivankar