4 Different Approaches to the Definition of Money Explained!

For example, trying to use a good that’s difficult or inconvenient to carry as money could require physical transportation that results in transaction costs. In order to be most useful, money should be fungible, durable, portable, recognizable, and stable. These properties reduce the transaction cost of using money by making it easy approaches to definition of money to exchange. Not everyone agrees that boosting the amount of money in circulation is wise. Some economists warn that such behavior can lead to a lack of discipline and, if not managed properly, cause inflation to spike, eroding the value of savings, triggering uncertainty, and discouraging firms from investing, among other things.

  1. For example, if a man owns a fixed time deposit receipt worth Rs. 2000 in commercial bank and wants to use it to buy a TV, he must first exchange his time deposit for currency or demand deposit which can be used to make payment for the purchase of TV.
  2. This is a structural problem in finance that has no easy fix,
    because financial products are often abstract, complex, and difficult
    to price.
  3. Taking more money from paychecks is a deeply unpopular policy, particularly when prices are rising, meaning that many politicians are hesitant to pursue such measures.
  4. Many countries require that the seller of a financial product (such a
    company issuing shares) must disclose all information that is
    “material” to the product.
  5. Gold and silver can be used as jewelry and for some industrial and medicinal purposes, so they have value apart from their use as money.

For example, it is now possible to transfer money from your savings account to your checking account using an automated teller machine (ATM), and then to withdraw cash from your checking account. We can understand the significance of a medium of exchange by considering its absence. Because no one item serves as a medium of exchange in a barter economy, potential buyers must find things that individual sellers will accept. A buyer might find a seller who will trade a pair of shoes for two chickens. Another seller might be willing to provide a haircut in exchange for a garden hose. You would need to load up a truckful of items the grocer might accept in exchange for groceries.

Functions for Money

A root cause of the
financial crisis of 2008 was widespread speculation on very risky
derivatives such as “synthetic collateralized debt
obligations” (see
section 1.2). When the value of such derivatives fell dramatically, the financial
system as a whole came to the brink of collapse. In this regard, the question of risk imposition becomes important too
(Moggia 2021). An alternative account holds that the creation of money need not be
intentional or declarative in the above sense. Instead money comes
about as a solution to a social problem (the double coincidence of
wants) – and it is maintained simply because it is functional or
beneficial to us (Guala 2016, Hindriks & Guala 2021). Thus what
makes something money is not the official declarations of some
authority, but rather that it works (functions) as money in a given
society (see also Smit et al. 2011; 2016).

In the 17th century, Great Britain was determined to keep control of both the American colonies and the natural resources they controlled. To do this, the British limited the money supply and made it illegal for the colonies to mint coins of their own. Instead, the colonies were forced to trade using English bills of exchange that could only be redeemed for English goods.

When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy. The magnitude of the monetary base is an important determinant of the size of the money supply.

Confidence in Bank Money

In modern times, metallic money has been replaced by currency notes and checkable bank deposits. The function of the central bank is to control and regulate the flow of money in an economy. Therefore, the central bank formulates and implements a monetary policy to achieve its goals and objectives. Refers to a secondary function that has been derived from the medium of exchange function of money.

Approaches of Money Supply

We may ask whether
societies that are highly financialized can ever be true democracies,
or whether they are more likely to be “post-democracies”
(Crouch 2004). This
is similar to the problems of conflicts of interest raised above (see
4.2.2). Money can be in various forms, such as notes, coins, credit and debit cards, and bank checks. Traditionally, economists considered four main functions of money, which are a medium of exchange, a measure of value, a standard of deferred payment, and a store of value. The Chicago School led by Milton Friedman includes in money supply currency plus demand deposits plus time deposits. Time deposits are fixed deposits of the banks which earn a fixed rate of interest depending upon the period for which the amount is deposited.

Refers to the demand for money to fulfill the present needs of individuals and businesses. Individuals require money to fulfill their current requirements, which is termed as income motive. On the other hand, businesses need money for carrying out their business activities, which is known as business motive. Deposit money is considered as entries in the ledger of the bank to the credit of the holder.

Philosophy of Money and Finance

If there is no rise in the expenditure, then the demand for goods would not rise and consequently, the price level would not increase. In case, the expenditure rises but the supply of output is fairly elastic, then also the price level would not rise. Such transactions are either discarded or considered to increase the quantity of money. An increase in the use of credit instruments, such as bank cheques and book credit, would lead to an increase in the quantity of money.

A Store of Value

So, when people exchange items for money, that money retains a particular value that can be used in other transactions. This ability to function as a store of value facilitates saving for the future and engaging in transactions over long distances. Some of the tenets of monetarism became very popular in the 1980s in both the U.S. and the U.K. Leaders in both of these countries, such as Margaret Thatcher and Ronald Reagan, tried to apply the principles of the theory in order to achieve money growth targets for their countries’ economies. However, it was revealed over time that strict adherence to a controlled money supply did not provide a solution for economic slowdowns. John Maynard Keynes was a British economist who developed this theory in the 1930s as part of his research trying to understand, first and foremost, the causes of the Great Depression.

Thus the definition includes a traditional view of money supply plus time deposits of commercial banks in the supply of money. The most common view is in line with traditional and Keynesian thinking which considered money as the medium of exchange. As per this view, money supply is defined as currency with the public and demand deposits with commercial banks. When money supply is viewed at a point in time, it is a stock and on the other side, when viewed over a period of time, it is a flow.

But as the price of gold began to increase, instead of using them as money, people start melting them in order to earn more by selling them as metal. There is a direct relation between the monetary base and the size of the money supply. The monetary base is affected by the change in government policy and hence influenced the money supply. Money comes in various forms, including precious metals, currencies, and money substitutes. At this time, though cryptocurrencies have some of the properties of money, they function without a central authority and aren’t backed by governments.

On the other hand, modern view on demand of money given by Keynes, demand for money is the demand for money to hold. Refers to the form of money printed, authenticated, https://1investing.in/ and issued by the government of a country. Paper money is regarded as the most common form of money and constitutes a large part in the money supply of a country.

M1, the narrowest definition of the money supply, includes assets that are perfectly liquid. M2 provides a broader measure of the money supply and includes somewhat less liquid assets. Amounts represent money supply data in billions of dollars for October 2010, seasonally adjusted. The exchange of goods and services in markets is among the most universal activities of human life. To facilitate these exchanges, people settle on something that will serve as a medium of exchange—they select something to be money.

This is a prime example of how certain financial
activities, when run amok, can have devastating effects on third
parties and society in general. Probably the most well-known ethical problem concerning fairness in
finance, and also perhaps the one on which philosophers most disagree,
is so-called insider trading. Put simply, this occurs when an agent
uses his or her position within, or privileged information about, a
company to buy or sell its shares (or other related financial assets)
at favorable times and prices.