Function of money are classified into two categories: 

1. Primary or Main function and 

2. Secondary or subsidiary functions. 

Primary or Main functions 

Money performs two primary functions, as under: 

(i) Medium of Exchange: It means that money acts as a medium for the sale and purchase of goods and services. In the absence of money, goods were exchanged for goods. This required double coincide of wants. Accordingly, exchange was difficult and therefore limited. 

Introduction of money has separated the acts of sale and purchase: double coincide of wants is no longer required. Exchange is now much simpler, and is therefore unlimited. This has raised the overall level of economic activity in an economy. Production is now market oriented, rather than subsistence-oriented. 

(ii) Measure of value: Money serves as a measure of value in terms of unit of account. Unit of account means that the value of each good or service is measured in the monetary unit. Measurement of value was very difficult in the barter system: one good was valued in terms of the other. There was no common unit of value. Introduction of money has removed this difficulty. Now, each good is valued in terms of money.

Secondary functions 

Following three functions are secondary functions of money: 

(i) Standard of deferred payments: Deferred payments refers to those payments which are made sometimes in the future. Example: Money has made deferred payments much easier than before. When we borrow money from somebody, we have to return both the principal as well as interest amount. It is difficult to make such transactions in terms of goods and services. 

(ii) Store of value: Store of value implies store of wealth. Storing of wealth has become considerably easy with the introduction of money. Stored wealth is a source for future investment. It was not convenient to store value in the barter system of exchange, because goods tend to wear out or perish.

(iii) Transfer of value: Money also serves as a convenient mode of transfer of value. Goods are purchased from far-off places both for consumption as well as investment. You need purchasing power at those places where goods are purchased. You need to transfer purchasing power from the place of your residence. Money performs this function very well. It can be easily transferred from one place to the other. 

Money overcomes the shortcomings of barter system in the following manner: 

i. Money solves the problem of double coincidence of wants. For example, if a person needs wheat in exchange of tea, then he/she must search for a person who is ready to trade wheat for tea. Money made the need for such searches redundant. 

ii. In barter system, it was very difficult to measure the value of one good in terms of another. For example, it is difficult to calculate the value of a cow in terms of wheat. 

iii. It was very difficult to store goods, especially perishable goods (fruits, meat, etc.) for the purpose of value storage. Money serves this purpose. 

iv. The contractual or future payments are much difficult to be made in barter system. For example, a worker working on contract basis could not be paid in terms of rice or chairs.