In the early days people were mainly
subsistent producers of goods and services. By this we mean that people
produced for themselves all that they needed. They were able to do so because
their wants were very simple and limited. Their primary needs were simply food,
clothing and shelters. At that time, animal’s skin were enough for clothing,
fruits came near to satisfying all their food requirements and caves and
hollows in big tress provided the shelter for them (Okoro, 2009).
Consequently, there was no need for
exchange. But with increase in human needs over the years gave rise to the need
of exchange and consequent money economy. The world to day is bubbling with
economic activities because money has very much facilitated the exchange
system. Every economic phenomenon deals with monetary system or crises. Keynes
(1930) held that money is a far more ancient institution than man had been made
to believe some time ago. Vaish (2005) added that the coming into existence of
money was a multifold blessing to man, introduced as a unit of account to do
away with the need of starting the value of goods and services in relation to
other goods and services which were unmanageable in a simple economy.
Classical economist considered money
to be of trivial importance in economic life, just as Adam Smith was noted to
have compared money with the highway on which no grass grew. Money has brought
together the demands of consumers and large scale production by providing large
markets, means of moving goods and determination of prices. Infact, it is the
existence of money that have made it possible to solve the basic economic
problems of what to produce, how to produce and in what quantities to produce;
thereby facilitating efficient and effective use of the limited resources.
Every efficient production must be evaluated with respect to money (Noko,
2011). Supporting this, Moolton (1930) added that money is an indispensable
condition to assembling factors of production.
Communists, like Marx Lenin and
other held that money had no place in the economy. They dreamed of an economy
that world be free from the evil of money, and sought to abolish money. In an
attempt to achieve a natural economy in Russia where the evils of money world
have no place, the Bolshevist’s on assuming power in 1917 attempted to abolish
the use of money through extensive direct controls and free distribution of
goods. However, Trotsky (1933); Noko (2011) high – light the importance of
money in a socialist economy; stating that, “blue prints produced by offices
must demonstrate economic expediency though commercial calculation, adding that
without a monetary units accounting in commerce will only increase confusion in
such economy”.
THEORIES OF MONEY
The crude quantity theory of money
represents the earliest attempt to explain the cause of inflation price change.
The theory in its crudest form is associated with a French economist, Jean
Bodin, who postulated that increase in money supply would bring about
proportionate increase in general price level. This theory therefore attributed
inflation to increase increases in money supply (Onovkwe, 2011). To elucidate
this theory, Jean Bodin meant that if money supply increases by say, 30 percent
over a period, then prices of goods and services would increase by the same
percentage i.e. 30 percent over the same period of time. This is more specific
term means that, if money supply increases by the say x%. They the general
price level will also increase by same x %.
However, this would quantity theory
of money was later modified by an American scholar, professor lruing Fisher who
introduced the concept of velocity of circulation into the theory and proceeded
to explain the theory with the aid of a four – variable equation which is
expressed as follows: MV = PT. This was later changes as MV = PQ
Where; M = Money supply or money stock
V = Velocity of circulation
P = Average price level
Q = Quantity of item traded (Onwukwe,
2011)
This theory mainly concerned itself
with the monetary variables and the effect of changes in these variables,
different from the value theory. It is noted, that the concept velocity of
circulation means the number of times a unit of money changes hands. Professor
Fisher did not disagree with Bodin earlier assertion that money supply
increases bring about proportionate increase in prices. He simply added that
the more money changes hand, the more the quality of money in circulation and
consequently the more the rate of inflation. In line with Bodin postulation,
the rate of increase in money stock which brought it about. Although the
quality theory of money was popular until the 1930s when it came under attack.
Being criticized by Gowther (1958).
The quantity theory can only explain the “how it works of the fluctuations in
the value of money but not the “why it work”. Patinkin (1965) in criticizing
the quantity equation stated that the familiar equation MV = PT can be looked
upon as determining the equilibrium price level, P as the resultant of force
represented by the aggregate demand for goods, MV and their aggregate supply, T
it restrict monetary theory to the case of an aggregate demand function for
goods, which is independent of the rate of interest and directly proportionate
to the quantity of money, hence, misleading as it is unrealistic.
John Maynard Keynes challenged the
theory in the 1930s, saying that increase in money supply lead to a decrease in
the velocity of circulation and that real income, the flow of money to the factors production, increase. Therefore,
velocity could change in response to changes in money supply. It was conceded
by many economists after him that Keynes’s idea was accurate. Cash balances or
the Cambridge equation, M = KPT, arose from the works of Keynes and Robertson
to integrate the monetary theory with the theory of value. As show that the
technique of the demand and supply cures could be used to determine the value
of money. The famous Cambridge equation, M = KPT was produced by equating the
demand for money to the supply of money.
Furthermore, it is of great
importance, to note that the quantity theory of money was rooted in monetarism,
and popular among economist in the 1980s and a good number of economists such
as the United States and Great Britain under Ronald Reagan and Margaret
Thatcher respectively. At the time, leader tried to apply the principles of the
theory to economics where money growth targets were set. However, as time went
by many accepted that strict adherence to a controlled money supply was not
incessancy the are – all for economic malise. Hence, money supply is not the
sole instrument in controlling economic activities. This, enduce the desire for
a better money instrument that can used to control to control the economy.