What is function of money - Economicstool

Here we discuss about what is function of money. Money performs number of primary, secondary , contingent and other functions which remove difficulties of barter system and also run the trade cycle.  what is function of money we discuss one by one.

Function of money in economics

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What are the 3 functions of money

The three basic function of money are primary, secondary and contingent function. There are two types of primary function (i) Money as a medium of exchange (ii) Money as a unit of value and There are three types of secondary function (i) Money as a deferred payment (ii) Money as a store of value (iii) Money as a transfer of value but Contingent function have various types like money as most liquid assets, basis of credit system, measurement of national income, distribution of national income, equalizer of marginal utility.

Primary and Secondary functions of money

Primary function: -

The two primary function of money are as follows.

(i)  Money as a Medium of exchange:

 This is a primary function of money because it is out of this function that its other functions developed. Money removes inconveniences and all the difficulties produced by the barter system by serving as a medium of exchange.

(ii) Money as a Unit of value: 

The second primary function of money is Unit of value. Money is the standard for measuring value just as the yard or meter is the standard for measuring length. The monetary unit measures and express the value of all goods and services. In fact , the monetary unit expresses the value of each good or services in terms of price.

Secondary function: -

The secondary function of money are given blow

(i) Money as a standard of Deferred payments: 

The another function of money is that it acts as a standard of deferred or postponed payments. all debts are taken in money. it was easy under barter to take loans in goats or grains but difficult to make repayments in such perishable articles in the future. money has simplified both the taking and repayment of loans because the unit of account is durable. Money links the present values with those of the future. It is simplifies credit transactions.

(ii) Money as a store of value: 

Money is also use as store of value.Money as a store of value is meant to meet unforeseen emergencies and to pay debts. Newlyn calls this the assets function of money. One can store value for the future by holding short-term promissory notes, bonds, mortgages, preferred stocks, household furniture, houses, land, or any other kind of valuable goods.The principle advantages of these other assets as a store of value are that they , unlike money, ordinarily yield an income in the form of interest, profit,rent, or usefulness and they sometimes rise in value in terms of money.

(iii) Money as a transfer of value: 

Since money is a generally acceptable means of payment.It keeps on transferring values from person to person  and place to place. A person who holds money in cash or assets can transfer that to any other person. Thus money facilitates transfer of value between persons and places.

Contingent functions of money

To study what are function of money we have to study contingent function of money in detail.

(i) Money as the most liquid of all liquid assets:

Money is the most liquid off all liquid asset in which wealth is held. Individuals and forms may hold wealth in Infinitely varied forms. They may, for example, choose between holding wealth, in currency, demand deposit, time deposit, saving, bonds, treasury bills, short term government securities, long term Government Security, debentures, performance shares, ordinary shares,  stock of consumer goods, and productive equipment. All these are liquid forms of wealth which can be converted into money and vice versa.

(ii) Basis  of the Credit System:

Money is the basis of the Credit System. Business transactions are either in cash or  on credit .Credit economies the use of money but money is at the back of all credit. A commercial bank cannot create credit without having sufficient money in reserve. The credit instruments draw by Businessman have always a cash guarantee supported by their bankers.

(iii)Equalizer of marginal utility and productivity:

Money act as an Equalizer of marginal utilities for the consumer. The main aim of a consumer is to maximize his satisfaction by spending a given sum of money on various good and services which he want to purchase. Since prices of goods indicates there marginal utilities and are expressed in money, money helps in equalizing the marginal utility of various goods. This happens when the ratio of the marginal utilities and prices of various goods are equal.

(iv) Measurement of National Income:

It was not possible to measure the national income under the barter system. money helps in measuring national income. This is done when the various goods and services produced in a country are acid in money terms.

(v) Distribution of national income:

Money also helps in the distribution of national income, rewards of factor of production in the forms of wages, rent interest, and profit are determined and paid in the terms of money.

Other functions of money

Money also performs some other functions.

(i) Helpful in making decisions:

Money is a means of store of value and the consumer meets his daily requirements on the basis of money held by him. If the consumer has a cycle and in the near future he needs a bike he can buy a bike by selling cycle and money accumulated by him in this way money helps in taking decision.

(ii) Money as a basis of adjustment: 

To carry on trade in a proper manner, the Adjustment between money market and capital market is done through money similarly, adjustment in foreign exchange are also made through money. Further,international payment of various types are also adjusted and made through money.


So, now we know what is function of money and by these functions money provides options to the holders of money to use it any way.