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Chapter: 11th 12th std standard Indian Economy Economic status Higher secondary school College

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Functions of Money

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

Functions of Money

 

Money has overcome the difficulties of barter. Crowther, has defined money as 'anything that is generally acceptable as a means of exchange (i.e, as a means of settling debts) and that at the same time acts as a measure and as a store of value'. An important point about this definition is that it regards anything that is generally acceptable as money. Thus money includes coins, currency notes, cheques, bills of exchange, credit cards and so on. That is why prof. Walker has said: 'money is that which money does'. By this, he has referred to the functions of money. Money performs many functions in a modern  economy. The most important functions of money are given in the form of a couplet quoted below :-

 

'Money is a matter of functions four

 

A medium, a measure, a standard, a store'.

 

Thus, money, is a medium of exchange, a measure of value, a store of value and a standard of deferred payments.

 

1.        Medium of exchange : The most important function of money is that it acts as medium of exchange. Money is accepted freely in exchange for all other goods. Barter system is very inconvenient. So the introduction of money has got over the difficulty of barter.

 

2.     Measure of value : Money acts as a common measure of value. It is a unit of account and a standard of measurement. Whenever we buy a good in the market we pay a price for it in money. And price is nothing but value expressed in terms of money. So we can measure the value of a good by the money we pay for it. Just as we use yards and metres for measuring length and kilograms for measuring weights, we use money for measuring the value of goods. It makes economic calculations easy.

 

3.        Store of value : A man who wants to store his wealth in some convenient form will find money admirably suitable for the purpose. It acts as a store of value. Suppose the wealth of a man consists of a thousand cattle. It is rather difficult for him to preserve his wealth in the form of cattle. But if there is money, he can sell his cattle, get money for that and can store his wealth in the form of money.


4.     Standard of deferred payments : Money is used as a standard for future (deferred) payments. It forms the basis for credit transactions. Business in modern times is based on credit to a large extent. This is facilitated by the existence of money. In credit, since payment is made at a future date, there must be some medium which will have as far as possible the same exchange power in the future as at present. If credit transactions were to be carried on the basis of commodities, there would be a lot of difficulties and it will affect trade.

 

Money, to be used as a medium of exchange, must be universally acceptable. All people must accept a thing as money. Or, the Government should give it legal sanction. And for performing the other two functions, that is, to be used as a store of value and standard of deferred payments, money should have stability of value. In other words, the value of money should not change often.

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