5 Functions Of Money

The primary function of money in the economic framework is simply to facilitate the trade of commodities, which helps in carrying on trade without face-to-face interaction between traders. Money performs primary, secondary, incidental and many other functions necessary to overcome difficulties in barter and to grease the wheels of world trade and industry. We discuss these aspects of money theoretically.

1. Primary Functions

Money has two main functions: medium of exchange and standard for deferred payment. a) Medium of Exchange: Money acts as a medium of exchange thereby getting rid of the need for double coincidence of wants, and also eliminating all the inconveniences and difficulties associated with the process of barter. The introduction of money as a medium of exchange has split the single transaction of barter into two parts – sale and purchase – disintegrating it, destroying the double coincidence of wants in the process. Money is given to the purchaser only on the satisfaction of the purchaser’s wants from the point of view of production, as medium of exchange is the proper way of acquiring it. We can say: From the point of view of economics, money does such a miracle. It is justified in perfecting the market mechanism of providing us with economic freedom as well as increasing competition and widening the market. Money serves the medium of exchange – it will serve as a substitute for production when money acts as an intermediary – and, therefore – as an intermediary in the exchange of use values… – Money is the middle medium in exchange, and thus, it is a tool with which people exchange goods and services… – It acts indirectly in production through specialization and division of labor and as a result increases the efficiency and output of production.

b). Money as a function of account or value: Money functions in such a way that it acts as a unit of account or a measure of value. Money is the measuring stick i.e., it is the unit in terms of which the values of other goods and services are measured in terms of money and expressed accordingly. Various commodities produced in the country are measured in mile meters of cloth, milk in liters and sugar in kilograms, there is no common unit among all these commodities. This would also make the exchange of goods very difficult. Therefore, it states that the value of all goods and services can be expressed in a single value-money unit. Therefore without a means of value, the pricing process is missing. The pricing process would mean no organized marketing and production. In this sense, the use of money as a measure of value is the basis of specific production.

2. Secondary Functions

Money has the following three secondary functions: a) Money as a Store of Value: Along with being a secondary function, money acts as a store of value of the kind that is in terms of time. Money can be stored as wealth for the future. This is the best way of storing things because spending it at any later time can get us any kind of things. Thus, people have a natural tendency to save some part of their wealth in cash, given that saving goods is very cumbersome. Clearly, cash is the best store of value. Wheat or any other product that has any value cannot, in fact, be stored for a long period. b) Money as a Standard of Deferred Payment: Deferred payment implies payment at a future date. The reason for deferred or deferred payment would make the lending and borrowing network quite simple because money generally retains value over time. This facilitates the development of capital markets and the work of financial intermediaries which include stock exchanges, investment trusts and banks. Money has become the common link of values today and in the future. c) Money as a Transfer of Value: Generally after assuming the status of payer and store of value, it continues to transfer values across persons and places. Any person who has cash or assets must have transferred it across places.

3. Casual Functions

In its performance, money also performs various casual functions.

4. Other Functions

Thus money is intended to perform certain functions by influencing the decisions of consumers and governments. a) Helps in decision making: Money acts as a store of value by which consumers make their choices for all goods and services on the basis of the amount of money available with them. b) Money as the basis of adjustment: Adjustment of money market and capital market takes place in order to maintain business activities effectively. Adjustment in foreign exchange also takes place through money.

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