Why do people need money? Promoted by Tiller Money

It was not a long time ago that I too could not fathom the reason why intelligent economists would propose to concentrate purchasing power in a single entity called 'money'. A barter system would be a more effective arrangement. However, I gradually understood that money overcomes most drawbacks of the barter system.

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

1. 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.

1. 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.

2. 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.)

3. Money as standard of deferred payments helps to solve the barter problem of lack of standard of deferred payment. How will I repay a goat after 10 years? The same goat would now be old, and of lower relative value. Again, it helps to make contracts which involve future payments. Doubtlessly money helps in removing the difficulties of barter system.