According to classical economists money is just a medium of exchange and it
can not influence the income and employment of a country. In other words, the
money supply which is in circulation just performs the function of exchange of
goods and services. People keep money with themselves so that they could
transact goods and services. Thus, according to them money is just a token and
it has nothing to do with economic activity of a country. They further say that
money is like a veil which wraps the goods and services in itself. Money has
been accorded as a veil because it has camouflaged the operation of real
economic forces. Classical economists do not rule out the act of savings or
borrowing. They think the savings, borrowings and lendings take place under the
shield of a veil. It means that they have attached the problems of savings,
borrowings and lendings with the transactive motive of holding money. Whether
any body purchases the goods or services or borrows, both are similar functions.
The funds are borrowed or lent with the help of money but they do not influence the economic activity
in any way. In this respect, Adam Smith writes:
"Money is like a road which helps
in transporting the goods and services produced in a country to the market, but
this road does not itself produce any thing".
Again classical economists:
money like an agent which expedites the chemical action of any process, but it
can not change the components of chemical action".
Thus classical economists are
of the view, that money facilitates the transaction of goods and services, but
it does not influence the quantity of goods and services in any way. It means
that money can not influence the real variables like production, income and
employment. It can only influence the monetary variables like monetary wages and
prices. In other words, if the supply of money in a country is increased the
income and employment will remain unaffected. The increase in supply of money
will lead to increase the prices, hence monetary wages. When prices and wages
increase in the same proportion real wages will remain the same. As a result,
the employment and output will remain the same.
All above discussion shows that the ideology that money cannot influence
economy was a corner stone of classical economics. This philosophy remained
popular till before and after I world war. But when classical utopia of
nonintervention collapsed during 1970's depression the concept of money as a
veil disappeared and money was accorded a dynamic element. AH the problems which
emerged during 1930's were attributed to money. Because of this reason, "Money
was accorded Evil Genius". The money which got the importance by putting to an
end the problems of barter system, was later on accorded as veil and finally it
was held responsible for inflation and deflation.