Functions of Money

G. Crowther defines money as “Anything that is generally acceptable as a means of exchange and at the same time acts as measure and as a store of value”.

The functions of money have been summed up in the following couplet:

“Money is a matter of functions four;

A Medium, a measure, a standard and a store”

The various functions of money can be classified into four categories:

I.  Primary functions.  II. Secondary functions.  III. Contingent functions IV.  Other functions.

I.  The primary functions of money are:

1.  Medium of exchange:  Money is a medium of exchange, a medium through which goods and services are bought and sold.

2.  Measure of Value:  Money also measures and expresses the value of goods and services.  For ex: When a mobile phone is purchased for Rs 10000, the value of the mobile phone is Rs. 10000.

II. Secondary functions:  are those functions which are derived from the primary functions of Money.  They are:

1.  Standard of Deferred Payments: Money acts Standard of Deferred payments.  That is the payments that are to the made at a future date.  It facilitates expression of credit transactions and has contributed to the growth of banks and other financial institutions.

2.  Store of Value:  Since money measures the value of goods and services money also acts as a store of value.  People can save a part of their incomes for their future use.  For Ex: When a person has saved Rs 10,000 in a year, it means he can purchase Rs 10000 worth of goods and services.

3.  Transfer of value:  Money helps to transfer value from one place to other.  A person can dispose his property in Bangalore and with that money can purchase property in Mysore.  Thus money helps to transfer value from one place to another.

III. Contingent functions:  The following are the various contingent functions of money.

1. Reward for the four factors of production in the form of rent, wages, interest and profit are distributed in terms of money.

2.  The modern credit system is based on money.

3.  Money maximizes the satisfaction of consumers and producers.

4.  Liquidity is given by money to different forms of wealth.

IV. Other functions: include the following.

1. Since money acts as a store of value it helps consumers to meet their daily needs.

2.  Money gives generalized purchasing power to consumers.

3.  Money helps to determine solvency of a person.