Money serves as a great instrument of commerce and industry by performing four essential specific functions which have removed the difficulties of exchange system. The four functions of money are as follows:
Functions of Money
1. Money as the Medium of Exchange:
Although money has no power to satisfy human wants, but by acting as a medium of exchange in the economy it commands power to purchase those goods and services which satisfy human wants. By performing its role as a medium of exchange in society, money removes the inconveniences of barter.
The introduction of money as a medium of exchange in the economy by decomposing the single transaction of barter into two separate transactions of sale and purchase eliminates the need for double coincidence of wants.
Image Source: weknowyourdreams.com
ADVERTISEMENTS:
People exchange goods and services through the medium of money. Money by itself has no utility, it is only an intermediary.
The use of money facilitates exchange, exchange promotes specialisation, specialisation increases productivity and efficiency.
2. Money as a Store of Value:
Money being generally acceptable is the best form of reserve. People generally do not save commodities like rice or bread as these are not durable and also the prices of these things are changeable. Classical as well as neoclassical economists did not give due weight to this function of money.
It was Keynes who places great emphasis on this function of money. Holding money is equivalent to keeping a reserve of liquid assets because it can be easily converted into other things. People normally wish to keep a part of their wealth in this form of money. This desire is known as liquidity preference.
3. Money as a Measure of Value:
Money is the unit of account or the measuring rod by which the values of other commodities and services are expressed.
ADVERTISEMENTS:
Even when money is not used as a medium of exchange (for exchange in international barter transactions) it may be used for expressing the relative value of commodities exchanged and for accounting purposes.
Without a measure of value there can be no pricing process. Without a pricing process organised marketing and production is not possible. Thus the use of money as a measure of value is the basis of specialised production.
So the introduction of a unit of account in trips of which the values of all goods and services can be measured was as important for the development of economic life of the community as was the invention of the wheel for the development of technology.
4. Money as the Standard of Deferred Payment:
As money came to be used as a unit of value and a medium of exchange, it is also used as the unit in terms of which future payments are stated. In a modern economy, a large number of transactions relate to future contractual payments which are stated in terms of money unit.
ADVERTISEMENTS:
Debts are expressed in terms of money of account and loans are taken and repaid in terms of money.
The use of money as the standard of deferred payments immensely simplifies borrowing and lending operations and thereby facilitates the formation of capital markets. Money is the link which connects the value of today with those of the future.
Money is one of the fundamental inventions of mankind. As Crowther has aptly observed, every branch of knowledge has its fundamental discovery. In mechanics it is the wheel, in science fire, in politics the vote. Similarly in economics, money is the essential invention on which all the rest is based.