Functions of Money

Once money exists, it performs several distinct jobs in an economy, and economists traditionally group these jobs under three heads: primary functions (which are what make something 'money' in the first place), secondary functions (which extend money's usefulness further), and contingent functions (wider roles money plays across the economy as a whole).

Primary functions — the functions money must perform to be called money at all:

• Medium of exchange — money is accepted by everyone in a transaction, so a seller no longer needs a buyer who happens to want exactly what is on offer; goods and services can be sold for money, and money used to buy anything else in turn. This single function is what removes the double coincidence of wants that made barter so difficult.
• Measure of value — money supplies a common unit (the rupee and paise, in India) in which the value of every good and service can be expressed, added, and compared, exactly the common yardstick barter never had.

Secondary functions — functions that extend money's usefulness across time and distance:

• Store of value — money can be saved and its purchasing power carried forward to a later date, unlike a perishable barter good.
• Standard of deferred payments — loan instalments, wages, rents, and other future obligations are fixed and settled in money, because its value is assumed to stay reasonably stable over the period of the contract.
• Transfer of value — money lets value move easily from one person or place to another — through a bank transfer or a currency note handed over — something direct barter could never do efficiently over any distance.

Contingent (other) functions — wider roles money plays in a modern economy:

• Basis of the credit system — banks accept money as deposits and lend a multiple of it out again, so the entire structure of credit in the economy rests on money as its base.
• Equitable distribution of national income — rent, wages, interest, and profit — the returns earned by land, labour, capital, and enterprise — are all paid and compared in money terms, which lets the value contributed by each factor of production be assessed on a single, common scale. …