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Definitions of Money, What is money?

Updated on November 11, 2013

Definitions of Money

Different economists have given different definitions of money. Let us see what are the definitions given by some of the well known economists.

"In order for anything to be classed as money, it must be accepted fairly widely as an instrument of exchange." -  A C Pigou.

"Money is what money does." - Walker (Very funny as well as accurate)

"Money is anything that is habitually and widely used as means of payment and is generally acceptable in the settlement of debts." - G D H Cole.

"Money constitutes all those things which are at any time and place, generally current without doubt or special enquiry as a means of purchasing commodities and services and of defraying expenses." - Alfred Marshal

By money is to be understood "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." - J M Keynes

"Money can be anything that is generally acceptable as a means of exchange and that the same time acts as a measure and a store of value." - Crowther

"Money is anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations.

Whtat is money?

From the above definitions we can come to the conclusion that "Money may be anything which is chosen by common consent as a medium of exchange or means of transferring purchasing power.  It is widely accepted in payment for goods and services and in settlement of all transactions, including future payments.  It should be acceptable without reference to the standing of the person who offers it in payment.  This is because money contains liquidity, i.e. generalized purchasing power, which can be passed on to others in exchange of goods and services.  Money is received customarily by all without any special tests of quality or quantity."

Evolution of Money

Before the advent of money, the activity of exchange was carried out through barter system.  In barter system people exchanged goods and services in their possession with goods and services available with others.   A farmer exchanged his surplus food grain with the weaver for his surplus cloth.   This system helped the weaver and farmer to satisfy their needs.  It was going well at the time when transactions are limited.  When the transactions increased and the want or need of human being increased, it was felt the need of a single medium of exchange.  This need of a single medium of exchange lead to invention and evolution of money.

Some of the drawbacks of Barter system are:
1. Difficulty in storage of wealth
2. Problems of a common measurement of value
3. Lack of double coincidence of wants.
4. Loss due to sub-division of goods (For example if you subdivide a table, it loses its value.  A person who is making table cannot buy four or five items like food grains, oil, spices etc for his survival from different persons)

It has taken hundreds of years for money to acquire its present form.  Now money consists of coins, currency notes.  During the early part of civilization, money was in the form of commodity like the cow, sheep, wheat, rice, tobacco, tiger teeth, elephant tusks etc.  In cold countries like Alaska and Siberia, animal skins and furs were used as money.  In tropical countries elephant tusks and tiger jaws were used as money.   Due to the lack of their durability, in the passage of time, they given up their usage as money.

With progress of civilization and economic advancement of societies, metallic coins made of gold, silver, copper etc., were used as money.  These coins were of two types:

Standard Coins: or full bodied coins, as they were called because their face value and intrinsic value were the same.

Token Coins: are coins whose face value was much higher than their intrinsic value.

Later on currency notes were introduced to replace metallic coins primarily for two reasons.

1. To economize the use of precious metals and avoid their wastage
2. For the sake of convenience of storage and transportation of paper vis-a vis the coins.

The present day money has also passed through three stages:
1. Metallic Money
2.  Representative Paper Money and
3. Credit Money.

In order to build up the confidence of the public in paper currency, initially the currency notes took the form of representative notes.  These representative notes were simply substitutes for metallic money i.e. convertible into gold or silver coins on demand by the bearer.  With increased use of paper money for transactions (due to expansion in production, population and monetized section of the economy) it became almost impossible to allow such convertibility.  The present day currency notes are, therefore, no longer convertible into gold or silver coins and as such may be termed as flat money.  Now a days a seizable portion of common money comprises this non-convertible paper currency.

Credit money is of more recent origin.  People keep a part of their cash with banks which they can withdraw at any time they like or can transfer to some other person through a bank cheque.  The cheques and drafts, being most convenient form of transferring value, have come to be accepted as bank money, though they are not money proper as their acceptance is optional.  However, they perform the most important function of money, viz. as a medium of payment.

Nature of Money

Money is only a means and no end in itself.  It is demanded not for its own sake but because it helps us in buying goods and services to satisfy our wants.  Money cannot directly satisfy human wants, but assists in production and exchange of goods and services.  Its significances lies in its ability to command goods and services.  Its significance lies in its ability to command goods and services and liquidate business obligations.  Money gives mobility to capital and aids division of labor and specialization thereby making large scale production possible.  It has been rightly remarked that we cannot eat money but we cannot eat without money.


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      Tanaka 2 years ago

      oh wat a journey for money

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      prince sudey 4 years ago

      money is anything which is accepted in exchange for goods and service.