Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. Most people will confuse the definition of money with other things, like income, wealth, and credit. Three functions of money are:
Generally, economists have defined four types of functions of money which are as follows:
(i) Medium of exchange
(ii) Measurement of value;
(iii) Standard of deferred payments
(iv) Store of value.
These four functions of money have been summed up in a couplet which says: Money is a matter of functions four, a medium, a measure, a standard and a store.
These functions have been presented below in the charitable.
(i) Money as a Unit of Value:
Money measures the value of various goods and services which are produced in an economy. In other words, money works as unit of value or standard of value. In barter economy it was very difficult to decide as to how much volume of goods should be given in exchange of a given quantity of a commodity.
Money, by performing the function of common measure of value, has saved the society from this difficulty. Now the value of various goods and services are expressed in terms of money such as Rs. 10 per metre, Rs. 8/- per kilogram etc. In this way, money works as common measure of value by expressing exchange value of all goods and services in money in the exchange market. By working as a unit of value, money has facilitated modern business and trade.
(ii) Medium of Exchange:
Right from the beginning, money has been performing an important function as medium of exchange in the society. Money facilitates transactions of goods and service as a medium of exchange. Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the consumers in exchange of money.
In the same way, all sections of society sell their services in exchange of money and with that buy goods and services which they need. Money, working as medium of exchange, has eliminated inconvenience which was faced in barter transactions. However, money can operate as medium of exchange only when it is generally accepted in that role. Bank money can be treated as money simply on the basis of their general acceptability for they are highly useful.
(iii) Standard of Deferred Payments:
Modem economic setup is based on credit and credit is paid in the form of money only. In reality the significance of credit has increased so much that it will not be improper to call it as the foundation stone of modem economic progress. Money, besides being the basis of current transactions, is also the basis of deferred payments. Only money is such a commodity in whose form accounts of deferred payments can be maintained in such a way so that both creditors and debtors do not stand to lose.
(iv) Store of Value:
It was virtually impossible to store surplus value under barter economy; the discovery of money has removed this difficulty. With the help of money, people can store surplus purchasing power and use it whenever they want. Saving in money is not only secure but its possibility of being destroyed is very less. Besides, it can be used whenever need be. By facilitating accumulation of money, money has become the only basis of promoting capital formation and modern production technique and corporate business facilitated there from.