DEFINITIONS OF MONEY
Robertson define “Anything which is commonly accepted in payment for
goods or in discharge of other kinds of business obligation.”
Money can be defined as anything which is widely accepted as a medium
of exchange.
It is a legal tender as it is backed by the order/authority in a country. It
holds the same value as the commodity for which it is being used. As a
result, currency functions as a medium of exchange.
It can be saved and used as a value store. It also serves as a standard for
deferred payments.
Primary Functions of Money
These are the functions performed by the money with the elimination of the barter
system.
A. Medium of exchange:
The use of money as a medium of exchange is widespread.
Money, as a medium of exchange, means that it can be used to make
payments for all transactions of goods and services. It is the most essential
function of money.
Money has the quality of general acceptability so; all exchanges take place
in terms of money.
This function has removed the major difficulty of lack of double coincidence
of wants and inconveniences associated with the barter system. (In the
barter system, huge costs were incurred by the people in order to search for
suitable people to exchange their surpluses)
Use of money allows purchase and sale to be conducted independently of
one another.
B. Unit of Account (Measure of Value):
Money as measure of value means that money works as a common
denomination, in which values of all goods and services are expressed. So,
money helps in measuring the value of goods and services.
Money acts as a common measure of value. It is a unit of account and a
standard of measurement.
By reducing the value of all goods and services to a single unit (i.e. price), it
becomes very easy to find out the exchange ratios between them and
comparing their prices.
This function facilitates maintenance of business accounts, which would be
otherwise impossible.
Money helps in calculating relative prices of goods and services. Due to this
reason, it is regarded as a Unit of Account’. For instance, ‘Rupee’ is the unit
of account in India, ‘Pound’ in England and so on.
Thus -Whenever, we buy a good in the market, we pay a price for it in
money. And price is nothing but value expressed in terms of money. So, we
can measure the value of a good by the money we pay for it.
We use money for measuring the value of goods. It makes economic
calculations easy.
Now there is a common measure of value as money acts as a common ruler
by which other values can be measured. For example, ₹500 can be used for
buying a shirt, for buying a wrist watch etc.
Secondary Functions
A. Standard of deferred payments:
Money is used as a standard for future (deferred) payments.
It forms the basis for credit transactions.
Money acts as a standard deferred payment due to the
Value of money remains more or less constant compared to
other commodities.
In credit, since payment is made at a future date, there must
be some medium which will have as far as possible the same
exchange power in the future as at present.
When the borrowed money is returned, payback is possible without
losing its value. The future payments can be done along with an interest.
Business in modern times is based on credit to a large extent.
If credit transactions were to be carried on the basis of commodities,
there would be a lot of difficulties and it will affect trade.
B. Store of value
We can store wealth in the form of money. So, money becomes an asset.
TRANSFER OF VALUE Goods or wealth of a person can be transferred to
another in the form of money. Similarly, money helps to transfer the value
from one place to another.
Money can be stored and does not lose value. The currency notes in our
pocket and the demand deposits in the bank are the examples for stores of
value.
CONTINGENT FUNCTIONS
Besides the Primary and Secondary functions, Money has some contingent
functions. They are
C. Basis of Credit.
D. Liquidity.
E. Distribution of National Income.
F. Guarantor of solvency.
Money progress
Legal definition of money
Money that has a legal sanction by the government behind it is called legal
tender or legal tender money.
Legal tender or legal money means money under the law of land. It is the
money issued by monetary authority or government which cannot be refused
by any person in payment for transactions.
Legal tender money is of two kinds
1. Limited legal tender:
It is the money which can be accepted only up to a certain maximum limit
fixed by law.
For instance, in India, coins are limited legal tender because coins of 5, 10,
20 and 25 paise are accepted up to maximum sum of Rs 1000 as per Coinage
Bill passed on 11th August, 2011.
One could refuse payments in these small coins beyond a sum of 1000. One
can refuse payments by an individual in small coins beyond this limit.
2. Unlimited legal tender:
It is the money for which there is no limit to the quantity of money
offered in a payment at a time.
For example, in India, paper notes are unlimited legal tender because
all currency notes can be used to settle payments of unlimited value.
Functional definition of money:
1. It is defined in terms of its functions. Accordingly, money is that which money
does. It is based on the four functions of money already discussed.
2. Broadly, anything which is generally accepted in payment of debt and as
payment of goods and services should be included in money supply.
Narrow definition of Money (M = C + DD)
It is based on ‘medium of payment function only. Thus, when money is
identified with medium of payment function only
Accordingly money (M) includes currency (C) and demand deposits (DD) of
banks, i.e., M = C + DD. (This is a traditional approach to constituents of
money)
Board definition of Money (M = C + DD + TD + SD):
It is the broad definition of money when scope of money is extended to
include ‘store of value function in addition to medium of exchange function.
These have a high degree of money-ness or liquidity and are widely used as
store of value.
In addition to currency and demand deposits (i.e., narrow money), items like
time deposits (TD) and savings deposits SD) at banks and post offices are
also included in broad money because such financial assets have a high
degree of money-ness or liquidity which can be converted into demand
deposits/cheques on a short notice.
Thus, M = C + DD + TD + SD
Money and Near Money
Money is anything which is used as a medium of exchange and has legal
sanction of the government. It possesses 100% liquidity. Everybody is
legally bound to accept it. For instance, money in India consists of corns and
paper notes.
Near money is a close substitute of money rather than cash and currency It is
as good as money but it is not real money because it has no legal sanction as
money Assets which are close substitutes of money are near money.
Examples of near money are Bonds. Equity Shares, National Saving
Certificates, Commercial Bills etc.
Near money cannot directly purchase goods and services as cash or bank
money can, but it can be converted into ready money easily within a short
period of time. That is why it is called near money.
