The concept of money is not contemporary, but rather primitive, however, as a medium of exchange it was introduced after the barter system became obsolete and could not facilitate market activity, which was expanding at a high rate. We also learn, from the systematic study of money as an economic tool and a medium of exchange that at different stages of economic evolution, different goods were identified as money. However, mostly commodities that were ornamental were used as money, rather than those commodities, which were useful. For instance, gold and silver preferred as a medium of exchange, rather than other commodities that could categorize as a necessity (The Book of Popular Science 266).
We also learn that as commerce or market activity expanded and became more complex, it was decided by the states/banks to issue treasury notes, which was given a value by the stamp/reference of/by state or bank. Another factor, which necessitated the issuance of treasury notes backed by state or government, was lack of security in carrying ornamental commodities used as a medium of exchange (Glick).
UNDERSTANDING THE ROLE AND FUNCTION OF MONEY IN POSTINDUSTRIAL REVOLUTION WORLD
Both economy and understanding regarding economy changed drastically after Industrial revolution, which changed the volume of production, the process of production and market structure, drastically. During this period, money was discussed in detail to understand its role in the economy and how it can be used as an instrument to bring about change in an industrial economy. Classical economists understood money as a medium of exchange and ameasure of value. Some classical economists assert that medium of exchange and measure of values is the same function; therefore, it has no role in the economy. It suggests that monetary policy, which is an only method of bringing about change in an economy, is not as potent as it is believed to be (Classical Dichotomy regarding money). However, it is acknowledged that the general price level is affected by money supply and for that devised equation is MV=PT, where V and T are constant (The Book of Popular Science 290).
However, in Keynesian economics, which became prevalent economic theory and system, money is more than a medium of exchange, as it is also a store of value. Also, in contrast to classical economics, Keynesian economics attribute various roles of money and assert that money can change the general price level, interest rates, and the level of employment, income, and output. In fact, it asserts that these changes are permanent (The Book of Popular Science 298).
CONTEMPORARY ECONOMIC SYSTEM AND MONEY
The contemporary system is based on Keynesian principles and understandings of economics. Therefore, in the contemporary economic model, money has an expanded role, which we will discuss in detail to understand how money can affect investment, employment, and output. We will also discuss, at length, how modern economies use supply as an instrument to meet various political-economic objectives. However, it must be acknowledged that in technology driven economy, which is more complex and has fiscal instrument, role of money is diverse and its functions are established.(Rochon and Rossi).
Money and General Price Level: Both Classical and Keynesian economists agree that when the money supply expands, general price level increases. However, only Keynesian economists believe that output will be affected by increased price level. It is because the increase in price is interpreted as higher profits, which acts as an incentive for the industries or companies to produce more (expansion of supply). Itincreases output and reduces the general price level in the long-term, as demand also increases because of the diminishing of prices. The new equilibrium is at an almost same price; however, at the higher national output (The Book of Popular Science 268).
Interest rate and Money: The increase in the money supply decreases the money supply, whereas the decrease in the money supply increases the interest rate. It is because to increase money supply, government purchases bonds and because of the increase in the general price level, savings decrease and investment increases. Though, interest rate and money supply have an indirect relationship; however, investment and employment have a positive correlation. It implies that when the money supply expands, investment increases, which also increases employment and output. In fact it is asserted that interest rate can be used to create money, which is one way of expanding economy in various dimensions (Carlstrom and Fuerst 12). Both employment and output are the true and foremost concerns of any economy; therefore, money as an instrument of change in both employment and output has great relevance in a modern economy (The Book of Popular Science 304).
Money and Output: Money as a medium of exchange has little symbolic value; however, money as an instrument to affect investment has great relevance, and this is why it can affect output level. For instance, when the economy is in recession, Central banks employ an expansionary the monetary policy, as a first-line defense to avoid dwindling in growth (Carlstrom and Fuerst 15). The decrease in interest rate, in fact, causes the change in investment, which then increases output. It must be acknowledged all these concepts, such as employment-investment-output, are interconnected and change in one brings about changes in others. Therefore, money is such a potent economic instrument to affect economic realities. For instance, money can increase both output and employment, which are true economic realities and real concern of a state (The Book of Popular Science 303).
FUNCTIONS OF MONEY
Store of value: This implies that money can be exchanged, retrieved, and saved at a later time. In simple terms that Money retains the power of purchase for the latter times; however, it must also be acknowledged that at the purchasing power of money can be affected by prices (demand and supply). It must also be recognized that financial capital and precious metals also fall into this category; however, they do not have liquidity value as money has (Glick).
Standard of a Deferred Payment: This implies that money can be used to settle the debt in the future, which is one of the functions of the money. This also reveals that public has confidence in money as medium of exchange (Rochon and Rossi).
Unit of Count: Money helps understand, in numbers or currency, the cost and the value of the good. Therefore, it is a Unit of Count. It is the classical function of money, which imperative for the commerce and trade (The Book of Popular Science 269).
CONCLUSION
In the end, it is concluded that in the contemporary economic system, money is more than a medium of exchange, which can affect the general price level, interest rate, investment, employment, output, and income on the macro scale. Modern economies use expansionary and contractionary monetary policies to achieve political-economic objectives. In the primate times, money had a limited role, however, in modern economies; it is a potent economic instrument, with various roles and functions.
Work Cited
Carlstrom, Charles T and Timothy S Fuerst. “Investment and interest rate policy: a discrete time analysis.” Journal of Economic Theory 123.1 (2005): 4-20.
Glick, Mark A. Competition, technology, and money: classical and post-Keynesian perspectives. E. Elgar, 1994.
Rochon, Louis-Philippe and Sergio Rossi. Modern Theories of Money: The Nature and Role of Money in Capitalist Economies. Edward Elgar Publishing, 2003 .
The Book of Popular Science. New York: The Grolier Society, 1929.
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