Functions of money are placed in four categories :

(i) Primary Functions – The two primary functions of money are as under. These functions are necessarily done by money in all kinds of economies.

(a) Medium of Exchange – This is an important function of money, which is also its identity. All types of exchange take place through currency as the quality of acceptability exists in money. Manufacturers, sellers, receive money as value for their products, and the buyer pays for the value of goods/services purchased by means of money.

(b) Measure of Value – This is another important function of money. Determination of price of all commodities and services is done only through money. Exchange of goods and services becomes easy if their value is measured in terms of money.

(ii) Secondary or Subsidiary Functions : These are those functions that money performs to help execute its primary functions : Following are the functions :

(a) Basis of Deferred Payment – Money has made it much easier to make payments in future, since, the value of money does not fluctuate much. In present time, most commercial exchanges are based on credit. Loaned amount can easily be recovered in future by means of money.

(b) Means of Store of Value – It was not possible to store value in barter system as commodities had low shelf-life, but the circulation of money has made this work very easy. Money has stability, thus storage of value can easily be done by means of money.

(c) Transfer of Purchasing Power – Purchasing power can easily be transferred from one place to another, or from one person to another by means of money. This also does not entail any financial loss. For example, if a person wants to settle in Jaipur after leaving Bharatpur, he can easily sell his property in Bharatpur, receive the money and use it to buy property in Jaipur. This makes wealth mobile.

(iii) Contingent Functions of Money – Money also performs some contingent functions which make money more convenient and useful. These functions are as follows :

(a) Distribution of Social Income – Money makes the equitable distribution of social income easier. Presently, large scale of production is done, in which various means of production contribute greatly. Distribution of income generated by production, between different means is possible through the use of money.

(b) Basis of Credit – Money is the basis of credit. Today, banking institutions provide various kinds loans on a large scale and provide use of credit letters. This has become possible only due to money.

(c) Liquidity of Wealth – Money lends liquidity to capital and wealth. In liquid form, money can be used immediately for any purpose.

(iv) Other Functions of Money – Apart from the above mentioned functions, money also performs certain other important functions. These are :

(a) Basis of Solvency – Availability of money is an indicator of a person’s capacity of clearance of payments. This is an estimation of that person’s ability to repay loans. The more money a person has, the greater is his capacity to pay loans.

(b) Money acts as a bearer of Options – Money allows a person to make decisions regarding investment of his wealth in various works. It helps people to take financial decisions.