Unit I

L2-Definition of Money:

There is much difference in opinions of scholars regarding the ‘definition

of money’. Someone has based the definition of money on the universal
acceptance; whereas someone else has taken its function as the central
issue in the definition. So, for the convenience of study, definitions of
money can be classified as follows on the basis of their nature.

Definitions Based on the Nature of Money:

Definitions on the basis of nature of money can be classified into
following three groups:
I. Descriptive or Functional Definitions:
This category includes definitions of those scholars who stated functions
of money in their definitions.

Some important definitions of this category are given below:

(1) According to Crowther, “Money is anything that is commonly used
and generally accepted as means of exchange and at the same time acts as
measure and store of value.”

(2) According to Prof. Thomas, “It is a means to an end not for its own
sake but as a means of obtaining-other’s articles or commanding the
service of others”.
(3) According to Coulborn, “Money may be defined as the means of
valuation and payment.”

(4) According to Nogaro, “Money is a commodity which serves as an

intermediary in exchange and as a common measure of value.”

(5) According to Hartle Withers, “Money is what money does.”

(6) According to Whitelesy, “If a particular unit is commonly employed to

state values, exchange goods and services or perform other money
functions, than it is money whatever its legal or physical characteristics.”

Although the above definitions are practical, they describe money in place
of defining it. There is radical difference in ‘description’ and ‘definition’.
These definitions don’t claim any universal acceptance or recognition of
governments. So even if these definitions are accepted in practice, they
can’t be given recognition.

II. Definitions Based on Common Acceptance:

It is an essential characteristic of money that it is commonly accepted by
the common people in return for the goods and services. So, some scholars
have defined money on the basis of acceptance.

Some important definitions of this category are given here:

(1) According to Marshal, “Money includes all those things which are at
given time or place generally current without doubt or special enquiry as a
means of purchasing commodities or services and of defraying expenses.”

(2) According to Robertson, “Money is anything which is widely

acceptable in discharge of obligation.”

(3) According to Seligman, “Money is one thing that possesses general

acceptability.”

(4) According to Ely, “Anything that passes freely from hand to hand as a
medium of exchange and is generally received in final discharge of debts.”

(5) According to Prof. Keynes, “Money itself is that by delivery of which

debt contracts and price contracts are discharged and in the shape of which
a store of general purchasing power is held.”
(6) According to G.D.H. Cole, “Money is simply purchasing power—
something which buys things, it is anything which is habitually and widely
used as a means of payment and is generally acceptable in the settlement
of debts.”

(7) According to R.P. Kent. “Money is anything which is commonly used

and generally accepted as a medium of exchange or as a standard value.”

It is evident from all above definitions that a common acceptance is a chief

characteristic of money. But just describing qualities can’t be a complete
definition. On the basis of the above definitions credit instruments can’t be
considered as money since they are not accepted everywhere.

III. Legal Definitions:

Definitions based on state principles have been kept under this category.
According to this principle only such a thing can be money which has been
declared legally by the government. This category includes ideas of Prof.
Knapp from Germany and British Economist Hartle.

(1) According to Knapp, “Anything which is declared money by state

becomes money.”

(2) Hartle has also initially accepted the definitions given by Knapp, but he
has amended this definition saying, “Money should not be defined only in
terms of recognition by the government, but also as a unit of settlement of
transactions.”

Definitions given on the Basis of Expansion:

There are three views regarding the meaning of money on the basis of
expansion:

I. Definitions with Narrow Points of View:

The definition given by Robertson is kept in this category. Robertson and
his associates held that “A commodity which is used to denote anything
which is widely accepted in payment of goods or in discharge of other
business obligations.”
If this definition is analysed, gold is the only thing which is acceptable to
all countries for replacement. In this condition, money formed from gold
or silver alone can be included in the definition of money. So, most of the
economists held, the definition given by Robertson to be narrow.

II. Definitions with Broad Points of View:

Definition given by Hartle Withers can be included in this category!
According to him, “Money is what money does.”

This definition is descriptive as well as universal. This definition can be

termed as ‘everything in something’. According to this definition not only
metals or currencies but also cheques, bill of exchanges, hundies and other
credit instruments are included in money. But some economists consider
that this definition is far more universal (broad) than what is needed.
According to this definition credit instruments are also money, but nobody
can be compelled to accept it for repayment.

III. Proper Definition:

On making a careful study of various definitions, we come to find that
some economists have centered their attention on the acceptance of
money, while some others have based their definitions on functions what it
does.

The have to know the form of money, it can be defined as follows:

“Money is something which is accepted freely and widely as a medium of
exchange; measuring value; final repayment of loans and accumulating
values.”

Definitions Based on Viewpoints of Economists:

Harry G. Johnson has presented four viewpoints regarding the definition of
money.

These include:
(1) Traditional Approach:
According to this viewpoint money is considered according to its function.
So, all those things which act as money can be called money. On this
basis, currencies and demand deposits are included in money. In this
category Hartle Withers, Keynes, Kent, Crowther etc. get place for their
definitions.

(2) Chicago Approach:

Economist of Chicago University has made the definition of money
universal by accepting the traditional approach and at the same time
including fixed term deposits and savings accounts deposits of commercial
banks.

According to this approach:

Money = Currency + Demand Deposits + Fixed Deposits + Saving Bank
Deposit.

c(3) Gurley and Shaw Approach:

This approach includes savings deposits with non-banking financial
institutions, debenture and bonds to Chicago approach.

So, according to this approach:

Money = Currency + Demand Deposits + Fixed Deposits + Saving Bank
Deposits + Saving Deposits with Non-banking Financial Institutions,
shares, debentures and bonds.

(4) Central Bank Approach:

According to this approach all kinds of credits are included in money. That
is why; in the monetary policies of the Central Bank the amount of gross
credit is considered.

Redcliff has also said, “Money means credits forwarded by various

sources.”

Considering all these approaches it is evident that ‘Proper Definition’

which has already been defined is the best.