Secondary Functions of Money: Derived from its primary functions, the relatively less important roles of money are termed as secondary functions. These functions are also known as derived functions. The secondary functions of money include
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Secondary Functions of Money
Standard of Deferred Payment:
Money serves as a unit for settling debts and future transactions, encompassing loans and contractual agreements. It acts as the standard for deferred payments, applicable to interests, rents, salaries, pensions, insurance premiums, and more. Expressing lending and borrowing in monetary terms is straightforward due to money’s stability, widespread acceptance, and durability, making it the preferred medium for such transactions.
While credit transactions were feasible in the barter system, they were inconvenient and uncertain due to the variable nature of commodities, some of which were perishable. A rapid increase in the prices of goods and services diminishes the purchasing power of money. Consequently, money loses its status as a reliable store of value, leading to a loss of faith in its reliability.
An illustrative example is the situation in Germany in 1923, where contracts were often made in Swiss Francs or U.S. Dollars instead of the national currency, the Mark, due to the public’s waning confidence in the latter.
Store of Value:
Money, as a constant repository of purchasing power, exerts control over goods and services both in the present and the future. It serves as a convenient method for holding surplus income that is not immediately spent, allowing for its exchange when needed for goods and services. In this way, money functions as a store of value.
This fourth function of money involves its role as a store of value, applicable in both the short and long run. By serving as a store of value, money provides individuals with a sense of security to address unforeseen contingencies and to settle debts denominated in monetary terms.
In contrast to the limitations of the barter exchange system, where commodities couldn’t be stored effectively for extended periods, money possesses unique characteristics of durability and stability in value. This makes it suitable for long-term storage, prompting people to develop a trend of saving income for future needs.
However, it’s essential to note that serving as a store of value is a necessary but not sufficient condition to classify something as money. While money fulfills the store of value function, not all items that serve this purpose can be considered money. For example, items like diamonds and jewelry may act as stores of value, but they do not fulfill the primary functions of money and are therefore not classified or used as money.
Transfer of Value:
Money facilitates the transfer of value or purchasing power between individuals. People transfer value by selling and buying commodities or property. Money’s role in transactions has eased the exchange of goods across distant locations, making it a crucial function in facilitating trade.
Secondary Functions of Money FAQ
Money serves as a unit in which debts and future transactions can be settled. It acts as the standard of deferred payment for interests, rents, salaries, pensions, insurance premiums, etc.
Money, being a permanent holder of purchasing power, acts as a store of value. It allows individuals to save surplus income for future use and provides security for unforeseen contingencies.
The store of value function of money is essential for long-term storage, providing durability and stability. However, it alone does not classify an item as money; it must fulfill the primary functions of money.
Money facilitates the transfer of value or purchasing power. People transfer value by selling commodities or property and buying goods and services. It simplifies transactions, especially in distant locations.
Yes, if there is a rapid rise in the price of goods and services, the purchasing power of money can fall. Loss of faith in money can lead to its inability to function as a standard of deferred payment.