In a static sense, as a passive technical device, money serves (i) as a medium of exchange; (ii) as a measure of value or unit of account; (iii) as a standard of deferred payments; and (iv) as a store of value.

(i) Money as a Medium of Exchange:

The fundamental role of money in an economic system is to serve as a medium of exchange or as a means of payment. On account of its general acceptability, as a medium of payment, money has ready purchasing power and becomes a circulating medium.

Being a generally acceptable medium of exchange, money facilitates the multiple exchanges of goods and services with minimum effort and time.


In fact, the essential function of money is to obviate the difficulties of the barter system by serving as a medium of exchange. In doing so, it breaks up barter into sales and purchases.

Commodities, instead of being exchanged directly for other commodities, are exchanged for money, which is again exchanged for other goods. Thus, money, as a medium of exchange, permits an exchange of goods and services that need not be simultaneous.

This is, perhaps, the most significant property of money in a modern complex economy. Being a generally acceptable medium of exchange, money obviates the main difficulty of the barter system the need for a double coincidence of wants, and quickens the process of exchange transactions.

Though its physical substance does not have much relevance to the ability to perform its task as a medium of exchange, nevertheless, in order that it becomes a good circulating medium, money should possess certain attributes such as uniformity, cognisability, durability, portability, divisibility and general acceptability.


Uniformity or homogeneity and its cognisable characteristics facilitate money’s universal acceptability as a means of payment; its durability confers on money its role of purchasing power; its portability is desired for the convenience of making transactions; its divisibility facilitates the smooth operation of small and big transactions and its general acceptability generates public confidence in money.

(ii) Money as a Unit of Account:

Money conventionally as well as technically acts as a unit of account or numeraire. In a monetised economy, where money is the medium of exchange, money can be treated as a common measure or common denominator of value.

The value in exchange of all goods and services can be expressed in terms of money. Such an expression gives rise to the price system. Money, in fact, acts as a means of calculating the relative prices of goods and services.


In this sense, it has been regarded as a unit of account. For instance, the rupee is the unit of account in India; the dollar is the unit of account in the U.S.A., and so on.

The use of money as a unit of account in a monetised economy is a great technological improvement over the barter system. It is enough for people to know the relative prices of different goods and there is no need for them to remember multiple cross-relationships of the exchange values of these goods.

Again, in a monetised market, the real cost (measured in terms of time and efforts) of exchanging goods is low, since a minimum amount of information is required to conclude a transaction. This has far-reaching effects on the development of trade and economy.

Money is, thus, regarded as man’s most useful and revolutionary invention. It has provided a language of economic communication, and since it is a common measure of value, money makes possible a smooth operation of the price system or market mechanism in a modern economic society.


It automatically provides the basis for keeping accounts, calculating profit and loss, and costing. Money being a uniform and easily comprehensive unit of account, the aggregate real output of the economy of a nation can be measured as national income in monetary terms.

There is a marked distinction between money as a medium of exchange and money as a unit of account. As a medium of exchange, money functions as something real a coin, a currency note, a credit entry in a bank account, but as a unit of account, money functions as an abstract measure of value the rupee, the dollar, the yen etc.

Thus, money as a unit of account is only a mode of expression and does not necessarily have physical substance. In other words, the unit of account is something abstract, while the medium of exchange is concrete. The rupee, as a notion, has no physical existence but the rupee note is a physical entity.

In short, as a pure unit of account, money is just a measure, like the meter or the kilograms. It is viewed in an abstract sense. As a medium of exchange, however, money is viewed with some physical attributes.


(iii) Money as Standard of Deferred Payments:

Money serves as a standard of deferred payments. It is a unit in terms of which debts and future transactions can be settled. In India, for instance, the rupee or unit of account is the standard of deferred payments or future payments.

Since a barter economy lacks a standard of deferred payments, its progress is dull and slow. In a modern economy, however, money acts as a means of settling indebtedness, or measuring deferred payments or future payments. Loans are made and future contracts are, thus, settled in terms of money.

The existence of money in a modern economic society has enabled people to effectuate wide scale credit transactions. In fact, the edifice of modern commerce and trade is built on the citadel of credit, which rests on the foundation of money as a unit of account and a standard of deferred payments. In the process, money credit has brought dynamism to modern economic life.


(iv) Money as Store of Value:

Money acts as an efficient store of value. The function of money as a medium of exchange makes it a convenient asset to hold. Holding of money enables a person to avoid the time and effort which would otherwise have to be involved in synchronising market exchanges (as in the barter system).

Money being a permanent abode of purchasing power holds command over goods and services all the time present as well as future. To hold money or to keep cash balances, in fact, becomes a form of holding wealth.

The function of money here is in the form of an asset or a form of wealth, because it confers power on its holder to claim real goods and services.

It is a convenient means of keeping any income which is surplus to immediate spending needs and it can be exchanged for the required goods and services at any time.

Rather than keeping their wealth in non-liquid assets such as houses, or less liquid assets such as shares; many people in modern societies prefer to keep their wealth in the form of money. The function of money as an asset is the direct result of one of the most important properties of money, namely, its liquidity.

People tend to keep money balances as a representative part of their real income (the value stored) in anticipation of future monetary transactions. Money, in fact, is held to bridge over the period between receipt of income and its expenditure.

As such, money is a link between the present and the’ future. It serves as a store of value because it has purchasing power and its exchange utility can be used at any time. The holder of money is empowered to spend it at his will.

As a matter of fact, the two functions of money as a store of value and as a means of payment, both current and deferred, are inseparable. To serve as a good medium of exchange and to be a good standard of deferred payment and to serve as an efficient store of value, the value or purchasing power of money must be stable.

Since the purchasing power of money depends on the price level, it is essential to maintain the stable value of money. If money shrinks in its purchasing power or its exchange, value over a period of time, as happens during inflationary periods, people may lose confidence in cash balances as an efficient store of value.

However, the use of money as a store of value is not without drawbacks. Value of money never remains stable, so that the hoarder of money suffers a loss when its value deteriorates and gains when it appreciates. Moreover, the variation in the use of money as a store of value is liable to be disturbing to the functioning of the economic system.

It follows, thus, that all the functions of money are due to money being a medium of exchange the middle term in the exchange of goods and services for each other.

Goods are exchanged for money, and then money is exchanged for goods. Hence, in a money economy, wants are satisfied through indirect exchange.

Further, the price system on account of the use of money becomes the fundamental characteristic of money economy. In a free capitalist system, economic choices are facilitated through the price system.

Moreover, in a money economy, since most transactions are settled in money, it is obvious that most incomes are received in the form of money, because the receipt of an income is itself a transaction.

It is also an important feature of a money economy that incomes are received and measured in terms of money. Introduction of money, thus, changes the characteristics of barter economy altogether.