In this article we will discuss about the primary, secondary and contingent functions of money.
1. Primary Functions:
These are the fundamental (or basic) functions of money and include the following:
a. Medium of exchange:
The most important function of money is that it is a common medium of exchange. Due to the introduction of money, commodities are not exchanged through money. Money, thus, helps in buying and selling goods and services freely. Because of money, today there is no problem of double coincidence of wants.
b. Measure of value:
Money is used to measure the value of all kinds of goods and services. This way, it has been helpful in removing one more problem of the barter economy. Money today serves as a unit of account; as such it can be used to measure the magnitudes of all kinds of economic variables, such as production, investment, costs, wages, wealth and so on.
2. Secondary Functions:
These functions of money are derived from the primary functions and are as follows:
a. Money as a store of value:
In the past, when commodities were directly exchanged for commodities people stored their wealth in the form of goods like cattle and grains. But, soon they found that it was difficult to preserve them for long. They could be stolen or destroyed easily and quickly.
Later on, people stored their wealth in the form of gold and silver ornaments or coins. But these, too, could not be stored safely and securely. But today people can store wealth in any quantity and for any period without any kind of risk and insecurity. They can deposit money in banks for use in future or at times of emergency. Thus, money serves as a store of value.
b. Standard of deferred payments:
The value of most of the commodities deteriorates with the passage of time, but the value of money can be kept stable for quite a long time. As such, it is helpful not only in current transactions but also in conducting credit transactions. Lending and borrowing and hire-purchase transactions are all carried out in terms of money because everyone is sure of its acceptability and stability.
c. Means of transferring value:
In the barter economy it was not possible to transfer values of things like a house, tree, garden, etc., from one place to another. It was also not possible to calculate their values in terms of other commodities. But nowadays one can sell his movable immovable property at one place and can buy such property elsewhere.
For this kind of transaction one can use money; money can be easily transferred from one place to another through cheques, bank drafts, money orders and other credit instruments. Thus, money has facilitated the transfer of value from one place to another.
3. Contingent Functions:
These are rather special functions of money. They are called contingent functions because they go on changing and multiplying with the changing phase of development of the country’s economy.
Under this category, we include the following functions:
a. Distribution of national income:
Money measures the contribution or productivity of each factor of production and, thus, facilitates the distribution of national income among the owners of resources.
b. Basis of credit:
The creit-structure of an economy depends totally upon the parent base of money. If the supply of money decreases, the credit system contracts.
c. Equalisation of marginal utilities:
Every consumer attempts to spend his money in such a way as to get the maximum satisfaction or utility from it. This is achieved when he follows the principle of equi-marginal utility. For this, the consumer has to make many changes in commodities purchased by him. This is possible only when he makes the use of money. Thus money helps the consumer in equalisation of marginal utilities of various commodities that he purchases.
d. Liquid form of all capital:
Furthermore, with the help of money transactions, all kinds of immovable property can be changed in the form of the most liquid asset, i.e., money. In a modern economy, money helps in bringing about a price system with the help of which all kinds of capital goods can be changed into money.
e. Unit of account:
Money is also a unit of account. National income or GNP is measured in terms of money. GNP is a collective of goods reduced to a common basis by being measured in terms of money.