What are the Functions of Money? | Functions of Money

Hi friends, in today’s article we are going to know about the primary, secondary and contingent functions of money. So let’s discuss in details.

Functions of Money in Economics

Money performs several functions in an economic system. Money has not only removed the difficulties involved in the barter exchange, it has made a very significant contribution in the advancement of the society.

Kinley has classified various functions of money into three broad groups (i) Primary functions (ii) Secondary function and (iii) Contingent functions.

What are the Primary Functions of Money?

The primary functions of money are those basic functions of money that are performed by it all the times, under all conditions and in all the countries. It includes the medium of exchange and the common measure of value function.

• Medium of Exchange – The most prominent function of money is that it acts as a medium of exchange or the means of payment. All the buyers and sellers make transactions related to goods, services and assets through money because it has the general acceptability.

It has helped in avoiding the difficulties and inconvenience involved in the barter exchange. It does not require the double coincidence of wants as it bifurcates the act of barter into two separate transactions, i.e. the sales and purchase through the medium of money.

• Measure of Value or Unit of Value – Money serves as a common measure of value in terms of which the value of all goods and services is measured and expressed.

In economic communication money has provided a language. It has made transactions easy and simplified the problem of measuring and comparing the prices of goods and services in the market.

Money also acts as a unit of account. As a unit of account it helps in developing and efficient accounting system because the values of a variety of goods and services which are physically measured in different units can be added up.

Secondary Functions of Money

According to Kinley the secondary or derivative functions of money are standard deferred payments, store of value and transfer of value.

• Standard of Deferred Payments – The term ‘deferred payments’ means the postponed payments or the payments in future. The people often take loans and the repayment of those loans and interest made on some future date.

The measurement of the deferred payments in terms of physical goods, animals, etc. used to be done under barter was unsatisfactory because of the perishable nature of goods and animals as well as the frequent fluctuations in their values.

Money which is relatively much more stable can serve as a better standard of deferred payment or the repayments of debt obligations.

• Store of Value – Money, being a unit of value and a generally acceptable means of payments, provides a liquid store of value because it is so easy to spend and so easy to store.

By acting as a store of value, money provides security to the individuals to meet unpredictable emergencies and to pay debts that are fixed in terms of money.

It also provides assurance that attractive future buying opportunities can be exploited. For this function of money Keynes considered money as a link between the present and future.

• Transfer of Value – Money also serves as a means of transferring value. Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all.

Contingent Functions of Money

Money has certain functions apart from its primary and secondary functions.

• Basis of Credit System – Credit plays an important role in the modern economic system and money continuous the basis of credit. People deposit their money in the bank and on the basis of these deposits the banks create credit.

• Distribution of National Income – Money not only helps in the exact measurement of national income, it also explains the distribution of national income among the different factors of production like labour, enterprise, capital and land.

• Maximization of Satisfaction – Money helps consumers and producers to maximize their benefits.

• Liquidity to Wealth – Money imparts liquidity to various forms of wealth. When a person holds wealth in the form of money, he makes it liquid. In fact, all forms of wealth can be converted into money.

• Measurement of Utility – The utility or one satisfying power of a commodity is measured by the units of money a consumer is willing to send on the purchase of that commodity.

From the above discussion, it is clear that money performs such vital functions in the economic system that it has become a powerful catalyst or instrument tool of all economic activities in the modern economy.

Conclusion

So friends, this was the functions of money. Hope you get the full details about it and hope you like this article.

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