The most liquid of all assets is money. It is globally accepted and may thus be easily swapped for other commodities. Money is defined as something that is widely recognised by people as a medium of exchange for goods and services.
Function of money are divided into two categories:
1. Primary Function.
2. Secondary Function.
Primary or Main Functions:
a. Medium of Exchange: Money is a medium of exchange, which means it can be used to buy and sell products and services. Goods were swapped for goods in the absence of money. This necessitated a two-fold alignment of desires. As a result, communication was difficult and so limited. The act of sale and purchase are now separated by the introduction of money, and the double coincidence of desires is no longer required. Exchange is now considerably easier and, as a result, limitless. This has increased an economy's total level of economic activity. Rather than being subsistence-oriented, production is now market-oriented.
b. Measure of Value: Money is a unit of account that acts as a measure of value. The worth of each commodity or service is quantified in monetary units, which is referred to as the unit of account. In the barter system, where one commodity was valued in terms of the other, determining value was extremely difficult. There was no universal monetary unit. The introduction of money has alleviated this problem.
Secondary of Substantiary functions:
A. Standard of deferred payments: Standard of deferred payments: Deferred payments are those that are made at some point in the future. Deferred payments, for example, have never been easier than they are now. When we borrow money from someone, we must pay back both the principal and the interest. Making such transactions in terms of products and services is tough. Because money retains a constant value over time, using it as a standard for postponed or delayed payments greatly simplifies borrowing and lending processes.
B. Store of Value: Money can be used to transmit purchasing power from the present to the future. Money is a form of wealth storage. Although wealth can be held in other ways, money is the most cost-effective and practical option. Individuals can use it to cover unexpected expenses, such as medical bills, and to pay off future debts.
Money has been able to overcome the disadvantages of the barter system in the following ways:
1. Money, as a means of exchange, has solved the major problem of the barter system i.e. double coincidence of wants. It distinguishes between the activities of selling and buying goods and services, allowing both parties to achieve maximum pleasure.
2. Various items had different values under the Barter system, and there was no standard nomenclature to describe their exchange ratios. Money, on the other hand, is the yardstick by which the value of other goods is expressed. The relative values of any two commodities become easy to compare.
3. It is extremely difficult to store items for future use in a barter economy. The majority of the commodities are perishable, necessitating a large amount of storage space and transit costs. Money, on the other hand, may be easily saved for later use. It is the most practical and cost-effective method of storing profits and capital. It has the advantage of widespread acceptance and a consistent value when compared to other items.
4. The lack of a sufficient standard for deferred payments in the barter system makes credit transactions problematic. At the time of repayment, the borrower may not be able to obtain products of the same quality. Future payments, on the other hand, are expressed in terms of money due to its widespread acceptance. Money has made borrowing and lending easier, as well as encouraging capital production.