Functions of Money

In this article, we are going to learn about the functions of money. There are three major functions of money known as- primary, secondary and contingent functions.

The primary purpose of money is conveyed by the definition of money. These are the ones. 1. Money serves as a means of exchange. 2. Money serves as a form of value storage. 3. Money is a unit of measurement for value: the market price of goods and services is stated in dollars. 4. Money acts as a standard for deferred payments (future payments) when a commercial contract is signed on the basis of future payments.

Functions of money 

Money’s numerous functions can be divided into four categories.

  • Main functions or primary function 
  • Secondary functions
  • Contingent functions
  • Other functions

Primary function

These are also referred as the main function and the two main functions of money are: 

Money serves as a means of exchange. Money has a universal acceptance quality. Look up all of the money exchanges that have taken place. All pricing of goods and services are expressed in terms of money in the current money exchange system. The trade transaction has now been split into two components related to the use of money.

Concept of sale and purchase 

To begin, money is obtained through selling goods and services. This is referred to as a sale. The seller then uses the money to purchase things and services that he requires. This is referred to as a purchase. Thus money acts as a medium in the current exchange system when it comes to sales and purchases.

Money is a unit of measurement for value. Money’s second major purpose is to help as a unit of measurement for all products and services. It is the collective measure of values. A tally of values taken as a whole. Because all values are defined in terms of money, determining the rate of exchange between different types of goods and services in society is much easier. 

Drawback of money as a measure of values 

However, you may have mentioned that money still has difficulties in its position as a collective measure of values. The difficulty that money’s worth is prone to fluctuation from time to time. Any commodity that serves as a major must have a stable value. Money, unfortunately, does not fall under this category. With periodic variations in the internal price level, the value of money fluctuates.

The two functions of money mentioned above have a close link. In fact, these two functions are carried out in combination at the same time. Money cannot function as a medium of trade as long as the values of exchangeable commodities are not measured in terms of money.

Secondary functions

Given below are the secondary functions of money.

Money standards of deferred payments.  Both boring and landing are calculated in terms of money. Money does serve as a postponed payment standard. For the following three reasons, money has proven to be an appropriate standard of postponed payment: 

  • In comparison to the value of other goods, the value of money is steady.
  • Money has a longer lifespan than goods. 
  •  Money has the property of universal acceptance. As a result, it will always be desirable.

Money, however, has some limitations in its use as a standard for deferred payments. Money’s biggest disadvantage is that its own values are not completely stable. It’s worth, on the other hand, fluctuates from time to time. As a result, debaters and creditors are affected in different ways at different periods.

Money is a medium of exchange that allows you to buy things. Saving was discouraged under the barter system, as is widely known. The reason for this was that without money, saving could only be done in terms of commodities, some of which were perishable. In terms of commodities, the savings were not long-term. However, since the invention of money, this problem has vanished. It is now possible to accumulate wealth.

Money is a medium of exchange that allows you to move your purchasing power from one person to another. With the expansion of the economy, the realm of exchange expanded as well. The exchange of goods has now expanded to include faraway lands. As a result, purchasing power had to be transferred from one location to another. This function is simply and swiftly performed by money. Borrowing and lending take place in terms of money as well. It is a measure of money’s universal acceptance, or its capacity to transfer purchasing power from one person to another.

Contingent Functions

Prof. Kinley describes these functions.

Credit is based on money. Credit has become more important in recent years in all countries throughout the world. The use of cheques, bills of exchange, and other similar instruments has increased, notably in western developing countries. It is important to remember, however, that money is the foundation of credit.

Money makes it easier to distribute social income. The combined corporation of the many sources of production makes modern production feasible. Each factor’s share of total production is calculated in terms of money. Money, on the other hand, helps the producer in equalizing marginal productivity since, at the end of the day, production is measured in terms of money.

Money boosts capital production. The most liquid kind of capital is money. It can be applied to any purpose, and it is because of this liquidity that capital can be moved from less productive to more productive purposes. Because of the liquidity of money, capital mobility has also expanded.

Other functions

Money also serves a variety of other purposes, which can be summarised as follows.

  • Money helps in the maintenance of repayment capacity.
  • Money represents the purchasing power of the broader public.
  • Money provides capital with liquidity.


There are three main functions of money: 1. Primary function i.e money is used as a medium of exchange and it is the measure of value.2. The secondary function of money i.e.  It is the standard of deferred payments, the transfer, and store of value.3. Contingent function i.e.  The distribution of national income, maximum profit to the producers, and maximum satisfaction to the consumers, basis of credit and liquidity.


Frequently asked questions

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