FUNCTIONS OF MONEY
The functions of money can be divided into three main categories:
1. Primary Functions
2. Secondary Functions
3. Contingent Functions
Primary Functions:
a) Medium of Exchange: Money serve as a medium of exchange. It is used to make payments
for goods and services. Different goods can be sold in terms of money and this money can
be used to purchase other goods. So it acts as a medium of exchange between the buyer and
the seller.
b) Measure of Value: Money is used to measure the value of everything (Except love, life, care,
respect etc.) in the same way as we can measure the weight in Kilograms and distance in
Kilometers. It acts as a standard of Value. Goods and services are priced and valued in terms
of money.
Secondary Functions:
a. Monetary Management: Money is very important factor of monetary and fiscal policies.
Collection of taxes and public finance management is only possible in terms of money.
Under barter system, it is impossible to collect taxes in the form of goods and then to use the
amount of tax for the development projects.
b. Future Payments: The money has removed the inconvenience of future payments. Now the
loans can be taken from banks and financial institutions. The future payments can be stated
in terms of money.
c. Income and Consumption: Income and consumption of different factors of production is
determined in terms of money. Money helps in determination, valuation and budgeting of
expenses and revenues.
d. Specialization: In barter system specialization is not possible because everyone tries for self
sufficiency. Work specialization has been made possible because of use money.
Specialization has played vital role to up lift the economy.
e. Economic Activities: All kinds of economic activities such as investment, savings, credit,
advances etc. are made in terms of money. The use of money has facilitated the expansion of
trade.
f. Market Mechanism: The use of money provides basis of market mechanism. The demand
and supply are two major forces of market which work only because of money. Money is a
factor which leads to the determination of prices, demands and supply.
g. Promote Foreign Trade: Money has made possible the huge foreign investment in today's
world. Under barter system the foreign investment was not possible but the use of money
made it possible because in money economy wealth can easily be transferred from one place
to another.
h. Transfer of Wealth: Money also serve as a means of transferring value from one place to
another place. A person may sell his movable and immovable property for money at one
place and can use that money to purchase property at some other place.
Contingent Functions:
Besides the primary and secondary functions, Professor Kinley has also given following four
contingent functions:
a) Distribution of National Income: With the help of money, it is possible to determine and
distribute national income among various classes of society.
b) Basis of Credit System: Money also provide the basis of bank credit. Bank creates credit
only when they possess cash. Also the money value of securities is considered by banks
while granting loans.Different negotiable instruments also work on the basis of money.
c) Maximum Satisfaction: Money enables consumers to get maximum satisfaction through the
law of Equi-marginal utilities. Similarly the producer can get maximum profit by equalizing
the marginal productivity of different factors of production.
d) Liquidity of Wealth: Money gives a liquid form to wealth. A property can be converted into
liquid form with the use of money.
