Money and Functions of Money

Money is derived from a Latin word, Moneta, which was another name of Goddess Juno in Roman history.

The term money refers to an object that is accepted as a mode for the transaction of goods and services in general and repayment of debts in a particular country or socio-economic framework.

Traditionally, economists considered four main functions of money, which are a medium of exchange, a measure of value, a standard of deferred payment, and a store of value.

In simple words, money can be defined as a medium for transaction of goods and services.

Some of the popular definitions of money are as follows:

Robertson has defined money as “Anything which is widely accepted in payment for goods, or in discharge of other kinds of obligations.”

According to Hawtrey, “Money is one of those concepts which like a teaspoon or an umbrella, but unlike an earthquake or buttercup are definable primarily by the use or purpose which they serve.”

Money can be in various forms, such as notes, coins, credit and debit cards, and bank checks. Traditionally, economists considered four main functions of money, which are a medium of exchange, a measure of value, a standard of deferred payment, and a store of value.

However, in modern days, only three functions of money, such as a medium of exchange, measure of value, and a store of value are taken into consideration.

Functions of Money

Economists considered four main functions of money, which are a medium of exchange, a measure of value, a standard of deferred payment, and a store of value.

These functions are broadly grouped into two categories, which are shown in Figure 1:

1. Primary Functions

Refer to the basic or original functions of money. The primary functions of money include:

(a) Medium of Exchange

Refers to a function of money in which money is considered as a mode of exchanging goods. The medium of exchange function is considered as the main and unique function of money as it has solved the main problem of barter system of double coincidence of wants.

Double coincidence of wants refers to the condition when one person receives the commodity provided by the other person in exchange. For example, a butcher would not get the cloth unless the weaver does not require meat.

In such a case, it is essential that both the parties require goods that they are receiving from each other. Therefore, it was difficult to obtain required goods. However, with the introduction of money, goods are easily made available without dependence on any other good.

This is due to the fact that money is generally acceptable throughout an economy. Apart from this, money is also considered as medium of exchange as it is easily portable and divisible as well as authenticated by the government.

(b) Measure of Value

Refers to a function of money that helps in determining the value of goods and services. The value of all goods and services are expressed in terms of money. Money is taken as the common denominator while measuring the value of goods and services in monetary terms.

The measure of value function of money has the following advantages:

• Helps in comparing and calculating the exchange rates between two goods
• Provides more meaningful accounting systems
• Helps in determining and comparing national income of different countries
• Helps in comparing the cost incurred on production and distribution and the revenue generated from the consumption of goods and services

2. Secondary Functions

Refer to important functions of money that are obtained from primary functions.

The secondary functions of money are as follows:

(a) Store of Value

Refers to a secondary function that has been derived from the medium of exchange function of money. Generally, individuals store their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time.

In barter system, there used to be only one transaction, which was a simultaneous sale and purchase of goods and services. However, in money economy, the sale and purchase are considered as two separate functions. It can be possible when money not only serves as a medium of exchange, but also store of value. For example, salary drawn by an individual is not spent simultaneously rather it is consumed gradually for purchasing different goods and services.

(b) Standard of Deferred Payments

Refers to one of the most important functions of money. Deferred payments refer to payments made on loans, salaries, pensions, insurance premium, interests, and rents. The necessary condition for deferred payment is that the amount of repaid money should be the same as it was at the time of purchase.

In barter system, it was not possible to find out whether the amount returned in the form of commodity is same as it was at the time of purchase. For example, the price of one quintal rice purchased today would not be same after one year. However, the standard of deferred payment function of money is not free from limitations as the value of money has always remained a subject of fluctuations due to inflation.

Different economists have given different viewpoints on money. They treated money as a concept rather than a commodity. The definition of money has always been a controversial issue. Therefore, a universally accepted definition of money has not been provided.