Functions of money can be broadly classified into two categories - Primary functions and Secondary functions.
Primary functions
1. Medium of exchange: It is the most important function of the money. Money is an instrument which acts as a medium of exchange of goods and services. Exchange of goods & services implies sale and purchase of goods and services. Everything is bought and sold through the help of money. In the absence of money, under the barter system, goods were exchanged for goods which require the double coincidence of wants due to which exchange was difficult and therefore limited. Double coincidence of wants means a transaction can happen only when I want to purchase what you are selling and you want to purchase what I want to sell. Money being a standard medium of exchange overcomes this problem. With money, there is no requirement of double coincidence of want for a transaction to take place. You can sell your goods without waiting for a person who wants to sell something which you want to buy. I don't have to do my purchase and sale at the same time. I can do my purchase and sale transaction separately.
Importance of this function:
(a) Exchange has become easier as it doesn't require the double coincidence of wants i.e, simultaneous sale and purchase.
(b) Size of the market of every product and service has been increased.
2) Common unit of value/ standard unit of account: Money is the measuring rod, by which the values of other commodities and services are expressed. Money is something which is acceptable to all. So money serves as a standard unit of account in which all the goods and services can be measured. It provides a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the seller and the purchaser of the good to make decisions about how much quantity of the good to supply and how much quantity of the good to purchase. In the barter system, there was no common unit in which all the commodities can be measured. It becomes very difficult to determine the value of the commodity in terms of another commodity. After the evolution of money, it serves as a standard unit of account which is easy to value goods and services as well as acceptable by all. For example, wheat can be valued as Rs. 1,500/-per quintal
Importance of this function:
(a) Facilitated comparison between markets.
(b) Accounting of transactions is now possible. (c) Growth can be numerically measured in terms of GDP.
Secondary Functions:
1. Standard for deferred payment: Deferred Payments are those payments which are to be made in future. These payments are also known as contractual payments. Loans and borrowings requiring future repayments are quite difficult in the barter system as there is no standard basis for future payments in the barter system. Borrowings in term of commodities can be paid back with higher units of that commodity for compensating interest but the quality of paying goods may not be same as borrowed goods and its value may also change, money can be easily used as a standard for future payment as its value remains stable.
Importance of this function:
(a) This has led to the emergence of lending and borrowing (Financial market).
(b) Money in the form of demand deposit has emerged.
(c) Availability of credit has increased consumption as well as investment expenditure in the economy, so the rate of growth has increased.
2) Store of value: Money is durable, portable, liquid and divisible so the store of value in terms of money is very convenient. Store of value implies a store of wealth. Barter system doesn't allow any convenient system of storage of value as storing wealth in terms of food grains and cattle is quite expensive, even food grains are perishable in nature. Storing wealth in terms of money is very easy as money can be stored easily in terms of paper titles and even in the bank.
Importance of this function:
(a) Easy storage of wealth in money form has increased savings.
(b) Stored savings leads to investment which is a key reason for growth and development.
3) Transfer of value: Money is highly liquid and portable. Money acts as a convenient mode of transfer of value. Transfer of value in barter system is very difficult as food grains and cattle are quite bulky. Money can be easily transferred from one place to another either in a pocket or through banks
Importance of this function:
(a) This has facilitated investment across borders.
(b). Mobility of capital has increased.
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