Various functions of money can be classified into three broad groups: (a) Primary functions, which include the

medium of exchange and the measure of value; (b) Secondary junctions which include standard of deferred payments, store of value and transfer of value; and (c) Contingent functions which include distribution of national income, maximization of satisfaction, basis of credit system, etc. These functions have been explained below: 1. Medium of Exchange: The most important function of money is to serve as a medium of exchange or as a means of payment. To be a successful medium of exchange, money must be commonly accepted by people in exchange for goods and services. While functioning as a medium of exchange, money benefits the society in a number of ways: (a) It overcomes the inconvenience of baiter system (i.e., the need for double coincidence of wants) by splitting the act of barter into two acts of exchange, i.e., sales and purchases through money. (b) It promotes transactional efficiency in exchange by facilitating the multiple exchange of goods and services with minimum effort and time, (c) It promotes allocation efficiency by facilitating specialization in production and trade, (d) It allows freedom of choice in the sense that a person can use his money to buy the things he wants most, from the people who offer the best bargain and at a time he considers the most advantageous. 2. Measure of Value: Money serves as a common measure of value in terms of which the value of all goods and services is measured and expressed. By acting as a common denominator or numeraire, money has provided a language of economic communication. It has made transactions easy

and simplified the problem of measuring and comparing the prices of goods and services in the market. Prices are but values expressed in terms of money. Money also acts as a unit of account. As a unit of account, it helps in developing an efficient accounting system because the values of a variety of goods and services which are physically measured in different units (e.g, quintals, metres, litres, etc.) can be added up. This makes possible the comparisons of various kinds, both over time and across regions. It provides a basis for keeping accounts, estimating national income, cost of a project, sale proceeds, profit and loss of a firm, etc. To be satisfactory measure of value, the monetary units must be invariable. In other words, it must maintain a stable value. A fluctuating monetary unit creates a number of socioeconomic problems. Normally, the value of money, i.e., its purchasing power, does not remain constant; it rises during periods of falling prices and falls during periods of rising prices. 3. Standard of Deferred Payments: When money is generally accepted as a medium of exchange and a unit of value, it naturally becomes the unit in terms of which deferred or future payments are stated. Thus, money not only helps current transactions though functions as a medium of exchange, but facilitates credit transaction (i.e., exchanging present goods on credit) through its function as a standard of deferred payments. But, to become a satisfactory standard of deferred payments, money must maintain a constant value through time ; if its value increases through time (i.e., during the period of falling price level), it will benefit the creditors at the cost of debtors; if its value falls (i.e., during the period of rising price level), it will benefit the debtors at the cost of creditors. 4. Store of Value: Money, being a unit of value and a generally acceptable means of payment, provides a liquid store of value because it is so easy to spend and so easy to store. By acting as a store of value, money provides security to the individuals to meet unpredictable emergencies and to pay debts that are fixed in terms of money. It also provides assurance that attractive future buying opportunities can be exploited.

Money as a liquid store of value facilitates its possessor to purchase any other asset at any time. It was Keynes who first fully realised the liquid store value of money function and regarded money as a link between the present and the future. This, however, does not mean that money is the most satisfactory liquid store of value. To become a satisfactory store of value, money must have a stable value. 5. Transfer of Value: Money also functions as a means of transferring value. Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all. For example, it is much easier to transfer one lakh rupees through bank draft from person A in Amritsar to person B in Bombay than remitting the same value in commodity terms, say wheat. 6. Distribution of National Income: Money facilitates the division of national income between people. Total output of the country is jointly produced by a number of people as workers, land owners, capitalists, and entrepreneurs, and, in turn, will have to be distributed among them. Money helps in the distribution of national product through the system of wage, rent, interest and profit. 7. Maximization of Satisfaction: Money helps consumers and producers to maximize their benefits. A consumer maximizes his satisfaction by equating the prices of each commodity (expressed in terms of money) with its marginal utility. Similarly, a producer maximizes his profit by equating the marginal productivity of a factor unit to its price. 8. Basis of Credit System: Credit plays an important role in the modern economic system and money constitutes the basis of credit. People deposit their money (saving) in the banks and on the basis of these deposits, the banks create credit. 9. Liquidity to Wealth:

Money imparts liquidity to various forms of wealth. When a person holds wealth in the form of money, he makes it liquid. In fact, all forms of wealth (e.g., land, machinery, stocks, stores, etc.) can be converted into money.

MONEY CHARACTERISTICS: The four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange. Almost any item, any asset, any "thing" can function as money so long as it is generally accepted as payment. In fact, a lot of different "things" have been used as money over the centuries--gold, silver, copper, nickel, animal skins, chocolate bars, cigarettes, precious gems, semi-precious gems, really precious gems, and assorted food products. While a number of "things" have been used as money, some have worked better than others. Those "things" that did not work so well were replaced by other "things" that worked better. Those "things" that worked best tended to have four basic characteristics: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Durability This first characteristic means that an item retains the same shape, form, and substance over an extended period of time; that it does not easily decompose, deteriorate, degrade, or otherwise change form. However, durability also extends beyond the physical realm to include social and institutional durability. Durability is critical for money to perform the related functions of medium of exchange and store of value. People are willing to accept an item in payment for one good because they are confident that the item can be traded at a later time for some other good. An

item works as a medium of exchange precisely because it stores value from one transaction to the next. And this requires durability. Refined metals, such as gold, silver, copper, or nickel, have historically taken center stage as money because they are extremely durable materials. An ounce of gold today will be an ounce of gold tomorrow, next week, and a thousand years hence. Organic products, such as lettuce, ice cream, or raw meat, are seldom if ever used as money because they are extremely perishable. A crisp leaf of lettuce might not be recognizable as lettuce next week let alone a thousand years hence. While physical durability has been historically important for money, social and institutional durability is also important for modern economies. The durability of modern money, especially paper currency and bank account balances, depends on the durability of social institutions--especially banks and governments. While government-issued paper currency might remain physically intact for centuries, its ability to function as money depends on the institutional durability of the government. Divisibility This second characteristic means money can be divided into small increments that can be used in exchange for goods of varying values. For an item to function as THE medium of exchange, which can be used to purchase a wide range of different goods with a wide range of different values, then it must be divisible. The smaller the divisions, the better. For an item to function as THE medium of exchange it must have increments that allow it to be traded for both battleships and bubble gum, and everything in between. Divisibility is one reason why metals, such as gold, silver, copper, and nickel, have been widely used as money throughout history. As pure elements, each can be divided into really, really small units, in principle, down to the molecular level. In contrast, livestock, which has seen limited use as money in less sophisticated agrarian societies, never become widely used as money in modern economies. Dividing live water buffalo into increments small enough to buy bubble gum is highly impractical. For example, U.S. money, both paper currency and bank account balances, comes in increments of one penny, sufficiently divisible to accurately match the value of virtually

every good and service available in the economy. If U.S. money consisted exclusively of $100 gold coins, and nothing smaller, people would have problems buying goods such as soft drinks, gasoline, or bubble gum. These goods, and millions more, have values that cannot be rounded to the nearest $100. Transportability This third characteristic means that money can be easily moved from one location to another when such movement is needed to complete exchanges. When people head off to the market to make a purchase or two, then they need to bring along their money. But to "bring along their money" they obviously need to "BRING along their money." That is, the money must be transportable. Money that is NOT transportable is not transported, so it is not used. Once again, transportability has played a key role in the use of metals like gold, silver, copper, and nickel as money. Carrying around a satchel of metal coins was never much of a burden. However, these metals were largely replaced by paper currencies in the 20th century because paper was lighter and easier to carry. In fact, a $100 bill is just as easy to carry as a $1 bill. This notion has been taken a step farther with paper checks used to access checking account balances. A check for $1 million is just as easy to transport as a check for $1. Items such as granite blocks, radioactive plutonium, and maple syrup come up short on the transportability scale. Items that are physically heavy relative to their value in exchange, or need special handling, are not easily transportable. Heading off to the market with a vat of syrup or a lead canister of plutonium just does not work. And who wants to lug blocks of granite around the shopping mall? Noncounterfeitability This fourth characteristic means that money cannot be easily duplicated. A given item cannot function as a medium of exchange if everyone is able to "print up," "whip up," or "make up" a batch of money any time that they want. Why would anyone accept money in exchange for a good, if they can make their own? Money that is easily duplicated ceases to be THE medium of exchange. Preventing the unrestricted duplication of money is a task that has long been relegated to government. In fact, this task is one of the prime reasons why governments exist. An

economy needs government, ABSOLUTELY NEEDS government, to regulate the total quantity of money in circulation. By controlling money duplication, governments are also able to control the total quantity in circulation, and this control is what gives money value in exchange. While governments try to keep pace with counterfeiters, they are usually a step or two behind. Through the years governments have tried to thwart counterfeiters by stamping images on coins, using special ink and paper for currency, and generally maintaining high levels of security surrounding money "production." To counter advances in computer technology in the 1990s, the United States redesigned paper currency, adding water marks, microscopic printing, and magnetic strips, in an ongoing effort to make the task of counterfeiting currency just a little more difficult.

Barter system
Barter System is that system in which goods are exchanged for goods. In ancient times when money was not invented trade as a whole was on barter system. This was possible only in a simple economy but after the development of economy, direct exchange of goods without the use of money, was not without defects. There were various defects in this system. These were the following; 1. Double Coincidence of Wants: Exchange can take place between two persons only if each possesses the goods which the other wants e.g., if a weaver needs shoes and he has cloth to offer in exchange he should not only find a cobbler who makes shoes, but find such cobbler who needs cloth and is prepared to give shoes in exchange for it. In this case, it was difficult to find such a person.

2. Absence of Standard Value: Under barter system there was no measure of value. Even if two persons met together who wanted each other goods, they could not find a satisfactory equilibrium price. Under such conditions one party had to suffer.

3. Indivisibility of Commodities: It was difficult to divide a commodity without loss in its value e.g., a man who wants to purchase cloth equal to half the value of his cow and other commodities for the rest half value of cow; he could not divide his cow. 4. Absence of Store of Value: Wealth cannot be easily stored for future use in the form of commodities because they perish in the long run. In the modern economy barter system cannot succeed. Money is indispensable for large scale production. The functions of money are the same which were defects in barter system. Its functions in modern economy are: a) Money is a matter of functions four b) A medium, a measure, a standard and Store Now it is clear that functions of money have removed those difficulties which were in barter system. What are the advantages of Barter System? i. It is a simple system devoid of the complex problems of the modern monetary system. ii. There is no question of over or under-production (or of unemployment or over-hill employment) under the barter system since goods are produced just to meet the needs of the society. iii. The problems of international trade, such as, foreign exchange crisis, adverse balance of payments, do not exist under barter system. iv. There is no problem of concentration of economic power into the hands of a few rich persons under the barter system because there is no possibility of storing the commodities. v. Personal and natural resources are ideally utilised to meet the needs of the society without involving any wastage.

vi. The barter system also reaps the benefits of division of labour because it represents a great step forward from a state of self- sufficiency hi which every man has to be a jack of all trades and master of none.