All the difficulties of barter were overcome with the introduction of money. Money is defined as anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and as a store of value. An important point about this definition is that it regards anything that is generally acceptable as money. Thus, money includes coins, currency notes, cheques, Bills of Exchange, and so on. It is not always easy to define money. That is why Prof. Walker has said that money is that which money does. By this, he refers to the functions of money. Money performs many functions in a modern economy.
There are many functions of money and it can be used for different purposes. However, the functions of money are broadly classified as primary functions and secondary functions. They are briefly described below:
Primary Functions of Money
- Medium of exchange: The most important function of money is that it acts as a medium of exchange. Money is accepted freely in exchange for all other goods. Barter system is very inconvenient. So the introduction of money has got over the difficulty of barter.
- Measure of value: It is another important function of money. In a barter system, there wasn’t common measure of value so the value of different kind of goods could not be compared with each other. Money can be used as a measure of value for different goods and services. Individuals find it convenient to use the monetary units as a measuring unit.
Secondary Functions of Money
- Store of value: An important secondary function of money is a store of value of any goods and services. It is a convenient form to store wealth. Money is a medium in which people wishes to hold the wealth. It increases the purchasing power.
- Standard of deferred payments: It is one of the important functions of money as it can be used as standard of the deferred payments. Deferred payments are known as those payments which are to be made in the future. Money is used as a standard of deferred payments because of which borrowing and lending have become easier.
- Transfer of value: Another important function of money is transfer of value. It helps to transfer the value of the assets, properties and also the income of the person to another person. It also had made the transfer or transaction of goods and services simpler.