Money is an instrument that serves as: 

• a medium of exchange 

• a measure of value 

• a store of value 

• a standard for deferred payments.

Functions of Money:

1. Medium of exchange: Most important function of money is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desired each other’s goods and services. Use of money has separated the process of sale and purchase.

2. Store of value: In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. 

However, still, money is used as a store of value as:

• It is more liquid than most other stores of value. 

• It is readily accepted everywhere. 

• It is easy and economical to store as its storage does not require much space.

3. Unit of account: Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value of the price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

In the absence of the common measure, the seller has to express the value of his good in all other goods. 

For example: if you want to sell your horse you have to express its value.

1. Horse = 2 cows 

1. Horse = 5 bags of wheat 

1. Horse = 20 kg of iron

4. Standard of deferred payment:

(i) Money is accepted as a standard of deferred payments because:

• its price remains relatively stable compared to other commodities, 

• it has the merit of general acceptability, 

• it is more durable compared to other commodities.

It is because of this function of money that there has been a significant expansion of trade.

(ii) Using money as a standard of deferred payments is a direct consequence of the unit of account and store of value functions of money. 

(iii) Serving as a standard of deferred payments, money has stimulated the process of capital formation. It is because of this function of money that there has been a considerable growth of the money market as well as the capital market.