Some of the advantages of money are as follows:
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.)
(iv) Money as standard of deferred payments helps to solve the barter problem of lack of standard of deferred payment. Again, it helps to make contracts which involve future payments. Doubtlessly money helps in removing the difficulties of barter system.
2. It facilitates exchange of goods and services and helps in carrying on trade smoothly. The present highly complicated economic system will not exist without money.
3. Money helps in maximising consumers’ satisfaction and producers’ profit. It helps and promotes saving.
4. Money promotes specialisation which increases productivity and efficiency.
5. It facilitates planning of both production and consumption.
6. Money can be utilised in reviving the economy from depression.
7. Money enables production to take place in advance of consumption.
8. It is the institution of money which has proved a valuable social instrument of promoting economic welfare. The whole economic science is based on money; economic motives and activities are measured by money.