Advantages and Disadvantages of money

Advantages of Money

Money occupies a unique position in a modern capitalist economy. In its absence, the whole prosperous economic life would collapse like a pack of cards.

The advantages or uses of money can be best understood by considering the system in which money is absent.

1. Money has overcome drawbacks of barter system. We have read drawbacks of barter system which make exchange process burdensome and highly inefficient. In fact, money was invented by the society to overcome these drawbacks.

The barter system suffers from four main drawbacks, each of which is overcome by a specific function of money as explained below:

(i) Money as medium of exchange solves the barter’s problem of lack of double coincidence of wants as money has separated the acts of sale and purchase. You can sell goods for money to whosoever wants it and with this money you can buy goods from whosoever wants to sell them.

Money is accepted as medium of exchange. People exchange goods and services through medium of money when they buy goods or sell goods. Thus, money becoming intermediary solves barter’s problem of double coincidence of wants.

(ii) Money as measure (unit) of value or a unit of account solves the barter’s problem of absence of common measure (unit) of value. Money serves as a unit of value or unit of account and acts as a yardstick to measures exchange value of all commodities. The value of each good or service is expressed as price (i.e. money units) which guides both consumer and producer to make a transaction. Thus money makes keeping of business account possible.

(iii) Money as store of value solves the barter’s problem of difficulty in storing wealth (or generalised purchasing power). Moreover, money in convenient denominations (like Indian coins of 5, 10, 20, 50, 100 paise and currency notes of 2, 5, 10, 100, 500, and 1,000) solves the barter’s problem of absence or lack of divisibility. (Coins of less than 50 paise are no longer in use now.)

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 blessings 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 its 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-nots' 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, brings 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.