Primary Functions:
These are also referred to as original functions of money. Following are the main functions of money :
Medium of Exchange:
Money has the quality of general acceptability. As such all exchange take place in terms of money. In the modern exchange system money acts as the intermediary in sales and purchases. It is on this account that money is referred to as medium of exchange.
A Measure of Value:
The second important function of money is that it measures the values of all goods and services. Money is, thus, looked upon as a collective measure of values.
Secondary Functions:
The following are the secondary functions of money:
Money is a Standard of Deferred Payments:
Credit transactions or borrowing and lending operations were not possible in barter system. But in money exchange system, such types of transactions are done very frequently. Thus money acts as a standard of deferred payments. It acts so because of the following three reasons-
- As compared to other commodities, the value of money is stable;
- Money is more durable than any other commodity, and
- It has general acceptability hence it is always needed by all.
Money is a Store of Purchasing Power:
As money has purchasing power, goods and services can be purchased by money at any time in present or in future because it can be stored without much loss in value. This was not possible in barter system of exchange, because commodities could not stored without any appreciable loss in value of these commodities. Invention of money has removed this difficulty. Now, money is stored for its future use. Savings now can be accumulated and permanently in terms of stored money. This quality of money has made the capital accumulation possible which can be used in the economic development of the country.
Transfer of Value:
The economic development extended the field of exchange. The markets extended their boundaries from local to national or even international. The purchase and sale of goods now extended to distant lands. It therefore, became possible to sell goods and services at one place and to purchase the other necessary goods and services at other place because of the money. This was not possible under barter system. As money has the quality of general acceptability, the purchasing power can easily be transferred from one person to another or from one place to another. Borrowing and lending operations are also possible only due to this quality of money.
Contingent (Modern) Functions
Money as basis of Contribution of National Income:
Money measures the contribution of each factors of production and subsequently helps in distributing income accordingly. Money thus facilitates to determine the share of each factor should receive, and all these distributions are done through the of distribution of national medium of money. Thus money becomes the basis income.
Money as basis of Credit:
One of the characteristics of the present day world is the use of credit, and money forms the basis of credit. Today not only credit system is followed between individuals, traders, firms but also between countries. The expansion and contraction of credit depends simultaneously upon the expansion and contraction of the supply of money. Credit instruments like, cheque, draft, bills of exchange, promissory-note etc, depend upon the parent-base of money.
Equalizes the Marginal Utilities:
As we know, every consumer wants to equalize the marginal utilities of various commodities in order to get the maximum satisfaction out of his income. It is possible because the prices of all commodities are expressed in money. Likewise, producer can also equalize the marginal productivities of all factors of production with a view to get the maximum production because the productivities of different factors are measured in terms of money.
Helpful in Mobilizing Capital:
It is only money which has helped in the mobilization of capital. Different factors that contribute to the formation of capital get a general value when it is measured in terms of money. Money has helped in mobilizing capital because of its nature of 'high value in low bulk'. This feature has helped in the transfer of capital from one place to another.
Helpful in Making Capital Liquid:
Universal acceptability of money has made capital liquid. Money as capital can be put to any use according to the will of user. Money helps in making capital liquid and this function is considered as an important function of money.
Other Functions
Money also serves some other functions which are as follows:-
Bearer of Option:
Savings in the form of money can be put to any use in times to come. Since money is the only universally accepted medium of exchange, it can be exchanged with anything of his choice. Thus options can be made possible with the help of money.
Guarantor of Solvency:
Money sets the limit about the solvency of a person or institution. Every firm has to keep some amount of liquid money in its assets to safeguard repayment capacity.
FAQ
Que: What is the function of money?
Ans: There are many function of money such as medium of exchange, measure of value, store of value, transfer of value and standard of deferred payment etc.
