Money: Meaning and Definition | Four Functions of Money

Definition and Meaning of Money

Money is a medium of exchange that is generally acceptable to people as a unit of exchange and as a store of value. 

Generally, currency notes and coins are considered money by the public. 

But money can be any instrument with some purchasing power and can be stored for future use.

The great economist Geoffrey Crowther, who was the editor of a newspaper, "The Economist" during the 1930s and 1940s and later became the Managing Director and Chairman of The Economist Newspaper Ltd., defined money in his book "An Outline of Money" as follows:

"Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value".

So, money is anything that is legally and socially acceptable for buying and selling goods and services or for making payments, or for the repayment of debts.

The Importance of Money

Money plays a crucial role in economics. 

It serves as a medium of exchange for goods and acts as a unit and store of value for executing transactions. 

Without money, obtaining goods and services would be much more difficult. 

In the ancient barter system, individuals had to find someone who was willing to exchange their goods for what they needed. This meant that both parties in the barter system had to have products that the other desired, creating a challenge in matching needs and offers. 

However, in today’s money economy, there is no need to search for someone who wants your product in exchange for what you need. You can sell your product directly in the market and receive money in return. With that money, you can purchase whatever you require. 

Using money simplifies transactions. 

You can buy goods or services whenever it's convenient for you, pay your bills, deposit money in banks for future use, transfer it anywhere in the world, and access it as needed. This illustrates the significance and benefits of money in our lives.

Four Functions of Money in the Economy

Money performs four major functions:
1) Money is the medium of exchange.
2) Money is a unit of account and measure of value.
3) Money functions as a store of value.
4) Money is a standard of deferred payments.

Among the four functions of money, the medium of exchange and measure of value are considered the primary functions. 

The store of value and standard of deferred payment are viewed as secondary functions, as they are derived from the primary functions.

Primary Functions of Money:

1) As a Medium of Exchange:
Money is a medium of exchange in the sense that it is used to exchange for goods and services. The buyer purchases goods and services and pays money for them. The seller sells goods, and the service provider provides services, and in both cases, they receive money from the buyer. Thus, money is an important medium for their transactions.

For example, you buy a chocolate and pay money for it. The seller of chocolates receives money in exchange for his chocolate. 

Similarly, you get the services of a barber to shave your beard, and in exchange, you pay money. The barber provides the service and receives money. 

Thus, money serves as an important medium of exchange in all transactions.

2) A Measure of Value or Unit of Account:
Money acts as a unit of account or measure of value. You value goods and services in terms of their monetary value. You are fixing monetary value per one unit of a good or service. 

So, any goods or services that we buy or sell are quoted in their value/ per unit.

For example, a chocolate is quoted at Rs 5, a loaf of bread at Rs 50, and a computer at Rs 20,000. Similarly, one shave is quoted at Rs 50, one haircut at Rs 100, and one car wash at Rs 200. 

When you give a value to a unit of a good or service, it becomes very easy to identify those goods and services and compare them with other similar products or services offered by different sellers or providers.

Secondary Functions of Money:

1) Money as A Store of Value:
Money can be stored and used subsequently without losing its value for a certain period. Money can be used only when you need to buy or procure something. Till then, you can keep your money in your purse or wallet, or deposit it in your bank account. 

Money gets stored for your future needs. 

With that, you can buy anything like rice, bread, chocolate, wheat flour, a car, a computer, and so on in the future, whenever you need them. 

Thus, you are storing the purchasing power of money for a certain period, until you actually need those goods or services. 

You are much more relaxed as you know that you can purchase anything with the stored value of money. This is one wonderful function performed by money.

This function of money is the result of its primary functions as a unit of account and as a medium of exchange. It is because of those two functions that you are capable of storing money. 

It is because money is generally accepted as a medium of exchange that you are keeping it in store. 

It is because of the fact that it is a unit of transaction that you are procuring different denominations of money and using them for your purchases.

2) Standard of Deferred Payments
Money functions as a standard for deferred payments. When someone borrows money from you and agrees to return it after a certain period, he will pay it back in the form of money on that stipulated date, along with interest, if any, charged by you for lending him the money instead of using it for other useful purposes by you. Millions of transactions are taking place now, which are not paid immediately.

Payments get deferred till a certain period of time or till the happening of a certain event or till the actual goods or services reach you. So, till such period, the payment gets postponed or deferred, and nobody worries as money will not lose its value even if paid later under normal circumstances. 

You defer the payment because of the standard value of money and its general acceptability. 

This function of money has given rise to various financial institutions and lending businesses and thereby advanced economic development.