Money – Money plays an important role in modern economies. In the initial stage of civilization, there was no common medium of exchange. Every family produced all the goods required by its member. With the passage of human wants increased and a family could not produce all the things required by it. This led to barter system. Thus the barter system may be defined as the direct exchange of one commodity for another commodity. But barter system could not survive because of many difficulties. In order to remove difficulties in barter system, it was essential to invent money. To understand the nature of money we must understand its function. Money also includes cheques, promotes, bill of exchange etc also along with metallic coins and currency notes.
Functions of money – Money performs following functions
- Medium of exchange – Money facilitates trade by acting as the medium of exchange. Money has the quality of general acceptability and so all exchanges take place in terms of money. Money comes in between the exchange of two commodities and acts as a medium of exchange. It acts as an intermediary in the exchange of goods because the seller gets the money and the purchaser gives the money to the seller.
- Measure of value – Money is a measure or a standard of value. It serves as the unit in terms of which the value of goods and services is measured by money. Money works as a common denominator, a unit of account and a standard of measurement. Money also determines the rate of exchange between different types of goods and services because all values are expressed in terms of money.
- Store of value – Money acts as a store of value. In barter system, it is difficult to store the value or purchasing the power because some goods are perishable and others lose value as the time passes. Money has solved this difficulty. It can be held for future use.
- Standard of deferred payments – A deferred payment means payment is postponed to a future date that is debt. Money acts as a standard of deferred payments because debts are expressed in terms of money. Borrowing and lending are possible with the help of money. When the goods are sold on credit, the debt is expressed in terms of money.
- Other functions – Money helps the Governments to spend beyond their means by resorting to deficit financing which is necessary for economic growth. Money helps to compute the changes in the general price level and study the influence on production and employment with the help of index numbers. Money also acts as a means of transfer of purchasing power from one place to another. Money also gives liquidity to capital.