In order to avoid difficulties of barter system it was necessary to decide upon intermediate commodity which would always be accepted in exchange of goods and services and which would form a basis of measurement and comparison of the value of all other commodities. Such intermediate commodity is called money.
The Functions of Money
The function of money in modern economy may be classified under three head:
1.Primary functions – Money perform two basic functions which are given below –
• Medium of Exchange – Money came into use in order to avoid inconvenience of barter system. It is the most important and unique function of money. It enables a person to buy and sell goods and services directly. Money by itself has no utility. It is only an intermediary. Thus, use of money facilitates exchange, exchange promotes specialisation and specialisation increase productivity and efficiency.
• Measure of Value –Money is the measuring rod by which value of goods and services expressed. Thus, it serves common means of payment because people accept it without any hesitation. In the absence of money, one commodities would be expressed only in terms of other goods and services like barter system.
2. Secondary Functions – The other important function of money derived from the primary functions are :
• Standard of Deferred Payment – Money facilitates not only the current transaction of goods and services but also the future transaction. It presents credit transaction when present goods are exchanged against future payments.
• Store of Value – People, can’t save rice or bread for longer period because rice or bread sustain good only for certain period of time and when it would keep for longer period then it is not good for human consumption and it’s value will decrease. But when we keep money in bank then we get interest on it and automatically its value will increase. Therefore, people wish to keep part of their present income. Money represent purchasing power and a perfectly liquid assets. Besides, it is more durable and stable in its value.
• Transfer of Value – Money is the most convenient form in which value can be transferred from one person to another and also from one place to another. Because it is acceptable by all and it’s cost less due to high value with low weight.
3. Contingent Functions – Money perform the following contingent function –
• Money helps in distribution of national income and output among the people who has contributed in the production.
• It is the basis of the credit system in the country.
• It serve the consumer to maximise their satisfaction by way of purchasing goods and services and it also serves the producers to maximise their profit by selling maximum good and services.
• It provides liquidity and uniformity in assets in society. Money can buy any assets and all assets can be converted into money as well.