Functions of Money

• Money came into existence to overcome the difficulties of the barter system.
• It removed problems like double coincidence of wants, storage issues and high search costs.
• Main idea is often summarised as: “Money is a matter of four functions – a medium, a measure, a standard and a store.”

Before money existed, people used the barter system — exchanging goods directly for other goods. But this system had serious problems:​

• A farmer with rice had to find someone who had cloth and also wanted rice — this is called the "double coincidence of wants" problem​
• There was no common way to measure value (How many mangoes = one goat?)​
• Perishable goods like vegetables couldn't be stored as wealth​
• Future payments (loans, debts) were nearly impossible to settle fairly​

Money was invented to solve all of these problems. As Prof. Walker famously said: "Money is what money does" — meaning anything that performs the functions of money IS money.​

David Kinley was a Scottish-born American economist and the head of the Department of Economics at the University of Illinois, where he later became President. He specialised in money and banking, and his classification of money's functions (Primary, Secondary, Contingent).

A. Standard of Deferred Payments 

• Deferred payments are payments to be made in future.
• Loans, interest, rent, wages, salaries, pensions, insurance premia are expressed in money.
• Money is suitable due to general acceptability, standard units and relatively stable value.

B. Store of Value 

• Store of wealth or purchasing power for future use.
• Money is not perishable, storage cost is low, and it is acceptable to anyone at any time.
• Called asset function of money and a link between present and future.

C. Transfer of Value 

• Helps transfer value from one person to another and from one place to another.
• Example: buying a pen for ₹20 transfers value to shopkeeper; selling a house in one city and buying in another.

A. Maximisation of Utility/Satisfaction

• Helps consumers maximise satisfaction by relating marginal utilities to prices expressed in money.

B. Maximisation of Profit / Employment of Factors

• Helps producers decide how many units of each factor to employ. Producer equates marginal productivity (value terms) with factor price in money.

C. Distribution of National Income

• National income and factor payments (wage, rent, interest, profit) are expressed in money.
• Money makes distribution among factors easy and more fair.

D. Basis of Credit

• Money is basis of credit; cheques, drafts, bills of exchange, etc., depend on money. Credit plays a key role in modern economies.

E. Liquidity and Macroeconomic Measurement

• Money is the most liquid asset; easily converted into any asset and vice versa.
• Variables like GNP, total savings, total investment, taxes and budgets are measured in money terms.

• Some countries are moving towards less cash and more digital transactions.
• Cashless society: transactions done through digital information instead of physical notes and coins.
• In India, initiatives like Jan Dhan, Aadhar-enabled payments, e-wallets, NFS support financial inclusion and going cashless.

• Money removes barter difficulties and supports smooth exchange.
• Primary functions: medium of exchange and measure of value/unit of account.
• Secondary functions: standard of deferred payments, store of value and transfer of value.
• Contingent functions: maximise utility and profit, distribute national income, support credit and provide liquidity.
• Overall, money is “a medium, a measure, a standard, a store” with transferability added by some authors.