The functions of Money are broadly classified as follows:
I. Primary functions
II. Secondary functions
III. Contingent functions and
IV. other functions
I. Primary Functions: The primary functions of money are as follows: a) Medium of Exchange: Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. It helps the people to sell in one place and buy in another place. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.
(b) Measure of value: The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money. As a measure of value, money performs the following functions:
- The value of all goods and services are measured and expressed in terms of money.
- Rate of exchange of goods and services expressed in money.
- Facilitates the maintenance of accounts.
- It facilitates price mechanism.
- It makes goods and services comparable in terms of price.
II. Secondary functions: The secondary functions of money are as follows: a) Store of value: People can save part of their present income and hold the same for future. Money can be stored for precautionary motives needed to overcome financial stringencies.
(b) Standard of deferred payments: All the credit transactions are expressed in terms of money. The payment can be delayed or postponed. So, money can be used for delayed settlement of dues or financial commitments.
(c) Transfer of value: Money acts as a transfer of value from person to person and from place to place. As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world. Further, money earned in different places can be brought or transferred to anywhere in the world.
III. Contingent Functions of Money: Other than Primary and Secondary functions, money also performs other functions which are as follows: a) Basis of Credit: Money serves as a basis of the credit. The modern credit system exists only because of existence of money.
(b) Distribution of National Income: Money helps in distribution of national income. The reward paid to factors of production in the form of rent, wages, interest and profit are nothing but the distribution of National Income at factor prices.
(c) Provides Liquidity and Uniformity: Money provides liquidity to all kinds of assets both movable and immovable. Money can be converted into any type of asset and all assets can be converted into money.
(d) Helps in consumers’ and producers’ equilibrium: All goods and services are expressed in terms of money. The consumer attains equilibrium when the price of a product is equal to his marginal utility. Similarly, the producers reach equilibrium if they get maximum satisfaction. Both consumers and producers try to achieve equilibrium with the help of money.
IV. Other functions of money:
(a) Money helps in decision making.
(b) Helps the Government in collection of taxes and undertaking expenditure.
(c) The solvency of a person can be determined with the help of money.
(d)Money helps in determining purchasing power of rich or poor.
