Money: Meaning and Functions of Money – Discussed!

A. Meaning of Money (D2007, 09; A2004. 10, 11):

Money is a concept which we all understand but which is difficult to define in exact terms.

Money is anything serving as a medium of exchange. Most definitions of money take ‘functions of money’ as their starting point. ‘Money is that which money does.’ According to Prof. Walker, ‘Money is as money does.’

This means that the term money should be used to include anything which performs the functions of money, viz., medium of exchange, measure of value, unit of account, etc. Since general acceptability is the fundamental characteristic of money, therefore, money may be defined as ‘anything which is generally acceptable by the people in exchange of goods and services or in repayment of debts.’

B. Functions of Money:


In general terms, the main function of money in an economic system is “to facilitate the exchange of goods and services and help in carrying out trade smoothly.” Its basic characteristic is general acceptability. Functions of money are reflected in the following well- known couplet:

“Money is a matter of functions four A medium, a measure, a standard, a store.”

Thus conventionally money performs the following four main functions, each of which overcomes one or the other difficulty of barter. Medium of exchange and measure of value are primary functions because they are of prime Importance whereas standard of deferred payment and store of value are called secondary functions because they are derived from primary functions.

1. Money as the Medium of Exchange:


Money came into use to remove the inconveniences of barter as money has separated the act of purchase from sale. Medium of exchange is the basic or primary function of money. People exchange goods and services through the medium of money. Money acts as a medium of exchange or as a medium of payments. Money by itself has no utility (except perhaps to the miser). It is only an intermediary.

The use of money facilitates exchange, exchange promotes specialisation Increases productivity and efficiency A good monetary system is, therefore, of immense utility to human society. Money is also called a bearer of options or generalised purchasing power because it provides freedom of choice to buy things he wants most from those who offer best bargain.

2. Money as a Unit of Account or Measure of Value:

Money serves as a unit of account or a measure of value. Money is the measuring rod, i.e., it is the units in terms of which the values of other goods and services are measured in money terms and expressed accordingly Different goods produced in the country are measured in different units like cloth m metres, milk in litres and sugar in kilograms.


Without a common unit, exchange of goods becomes very difficult Values of all goods and services can be expressed easily in a single unit called money Again without a measure of value, there can be no pricing process. Without a pricing process organised marketing and production is not possible. Thus, the use of money as a measure of value is the basis of specialised production.

The measuring rod of money is also indispensable to all forms of economic planning. Consumers compare the values of alternative purchases m terms of money Producers also compare the values of alternative purchases m terms of money. Producers compare the relative costliness of the factors of production in terms of money and also plan their output on the basis of the money yield. It is, therefore, highly important that the value of money should be stable.

3. Money as the Standard of Deferred Payments:

Deferred payments are payments which are made some time in the future. Debts are usually expressed in terms of the money of account. Loans are taken and repaid in terms of money.

The use of money as the standard of deterred or delayed payments immensely simplifies borrowing and lending operations because money generally maintains a constant value through time. Thus, money facilitates the formation of capital markets and the work of financial intermediaries like Stock Exchange, Investment Trust and Banks. Money is the link which connects the values of today with those of the future.

4. Money as a Store of Value:

Wealth can be stored in terms of money for future. It serves as a store value of goods in liquid form. By spending it, we can get any commodity in future. Keynes places great emphasis on this function of money. Holding money is equivalent to keeping a reserve of liquid assets because it can be easily converted into other things.

People therefore normally wish to keep a part of their wealth in the form of money because savings in terms of goods is very difficult. This desire is known as liquidity preference. Clearly money is the best form of store of value. Wheat or any other product which will command a value cannot be stored for a long period.

Another Function ‘Liquidity of Money’ is added these days. Money is perfectly liquid. Liquidity means convertibility into cash. Thus, the ability to convert an asset into money quickly and without loss of value is called liquidity of asset. Modern economists are laying stress on liquidity of money.


Since, by definition, money is the most generally accepted commodity, it is also the most liquid of all resources. Possession of money enables one to get hold of almost any commodity in any place and money never locks a buyer. It is this peculiarity which distinguishes money from all other commodities. A preference for liquidity is preference for money.

Money, thus, acts as common medium of exchange, a common measure of value, as standard of deferred payments and a store of value.