Q- what are the functions of money and qualities of good money?



The word money is derived from the Latin word “Moneta” which was the surname of the Roman Goddess of Juno in whose temple money was coined. The actual of money can be more accurately defined as:

Definitions of Money


According to Crowther: –

“Anything that is generally acceptable as a medium

of exchange & at the same time acts as a measure

and store of value is called money”

According to D.H.Cole: –

“Purchasing power with which something can be bought is called money”


According to J.M.Kevnes: –

“Money is that by the delivery of which debts contracts

& price contracts are discharged and in the shape of

which general purchasing power is held”

Functions of Money

In today’s complex economies, money performs variety of vital functions. These functions are divided into different categories according to their importance, which are:

Primary functions Secondary functions Contingent functions Other functions

(A) Primary Functions

Primary functions of money are as follows:


  1. The medium of Exchange:-

This is the most important function of money. Money serves as a medium of exchange. Goods are sold to get money and money is used to buy goods.

Goods—————————- Money—————————–Goods


  1. Standard of Value;

The unit of money measures the value of different goods In Pakistan rupee is used as a standard unit for measuring the relative values of different goods.


  1. Store of Wealth:-

Money is also the store of value. It provides early means of storing wealth as compared to other goods. Money can be stored to buy goods in future.


  1. Standard of Deferred Pavments:-

Money is used to make payments at sometime in future also. Money has simplified both borrowing and lending of money. All debts are taken in money.


(B) Secondary Function


  1. Money as Liquid Assets: –

Money is the most liquid form of all assets because it can be used immediately 10 buy anything, which we want to buy.


  1. Money as Guarantee of Solvency: –

If a person or company is unable to meet its obligations, then it is declared as insolvent. In order to assure solvency sufficient amount must be kept in liquid asset form to meet the obligation.


  1. Medium of Govt. Payment: –

Govt. receives payments or dues such as taxes, custom duties etc in the form of money and pays salaries, pensions etc in term of money.


  1. Transfer of Wealth: –

The transfer of wealth from one place to another place ha$ become possible with the help of money e.g. A person may sell his movable or immovable property at some ‘,.   place for money an then use that money to buy property at some other place.


(C) Contingent Functions



  1. Basis of Bank Credit:

Money also provides basis of bank credit. Bank creates credit only when they ,:>’   -posses cash reserves.


  1. Distribution of National Income: –

Money distributes the National Income according to the correct allocation of wealth.


  1. Distribution of Joint Product: –

Money also helps in the distribution of joint product rewards of factors of production in the form of wages, rent, interest and profit are determined paid in terms of money.


  1. Equalizer of Marginal Productivity: –

Money also acts as an equalizer of marginal productivities of various factors. The main aim of producer is to maximize its profit for this he equalize MP with its prices.


  1. Equalizer of Marginal Utilities: –

Money act as an equalizer of marginal utilities of various goods. The main aim of the consumer is to maximize his satisfaction by spending a given amount of money on various goods so money helps to equalize the price of various goods.


  1. Maintenance of Accounting Records: –

Money makes possible the maintenance of accounting records more easily. In this way it is very easy to calculate the profit and loss account or financial position of the business


(D) Other Functions

15 Bearer of Options: –

The bearer of money has many options for using it to get highest benefit with its available resources.


  1. Common Mean of Payment: –

It serves as a common mean of payment because of its general acceptability.


  1. Measures Capacity: –

The lender usually notes the capital position as well as assets offered as security by the borrowers. So the value of capital and assets is measured through money before the loan is granted.


18.One-way Payment: –

Some payments are not made directly in exchange of goods or services directly enjoyed i.e. taxes and rates etc. Such one-way payment is inconvenient without a money system.


  1. Measurement of National Income: –

This is done when the various goods & services produced in a country are assessed in money terms.

These are variety of functions which money performs for us in the modern




If we study the history of money we find that at different times, money consisted of different kinds of material e.g. stones metals, leather and paper however money can perform its functions well if it possesses the following qualities.


  1. Accepted Generally: – This is the most important quality of good money. It must be generally acceptable by all the people as a medium of exchange.


  1. Divisibility: -Good money is that, which is capable of being subdivided and re-united, when needed, without losing its original value.


  1. Durability: – Money, which is durable in nature and can be maintained for longer period of time is

also good money.


  1. Economical: – Good money also includes the quality of being economical because no unnecessary expenditure are required in transforming.


  1. Elasticity: – It should possess the quality of being elastic i.e. it can be extended or contracted according to the needs of the nation.


  1. Homogeneity: – The material used, as money must be of uniform quality: otherwise it will lack

general acceptability.


  1. Indestructibility: –

 Money, which cannot easily be damaged or destroyed, is also good money.


  1. Large value – Small weight: – Money with small weight but large value shows an excellent quality of money.


  1. Malleability: – The material used as money should be capable of being moulded and stamped so that the monogram and value of money can be easily printed over it.


  1. Portability: – Money, which can easily be transported from one place to another, is also a good money.


11 • Stability:- Money should be stable in value. If the value of money fluctuates rapidly then it is useless money.


12- Storability: – Money should be made of such material, which could be stored easily without depreciation.





These are the different qualities of ideal money and only the paper currency fulfills majority of these standards.

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