Meaning of Money

Money is an important and indispensable element of modern civilization. In ordinary usage, what we use to pay for things is called money. To a layman, thus, in India and Nepal the rupee is the money, in England the pound is the money while in America the dollar is the money. But to an economist, these represent merely different units of money. It is very difficult to define money in exact sense. This is because; there are various categories of assets which possess the attributes of money. Many things such as clay, cowrie shells, tortoise shells, cattle, slaves, rice, wool, salt, porcelain, stone, gold, iron, brass, silver, paper and leather etc. have been used as money. Traditionally, money has been defined on the basis of its general acceptability and its function aspects. Thus, anything which performed the following tree functions (i) served as medium of exchange (ii) served as a common measure of value and (iii) served as a store of value, was termed as money.

Modern economists or empiricists, however, the crucial function of money is that it serves as a store of value. It thus includes, not only currencies and demand deposits of banks, but also includes a host of financial assets as near money, distinct from pure money which refers to cash and chasuble deposits with commercial banks. The empiricists argue that whether a financial asset should be included in money should be decided on the basis of empirical investigation of the financial asset. To them, money is what money does. While clustering financial assets as money they have laid down certain criteria: (i) stability of the demand function, (ii) high degree of sustainability, and (iii) feasibility of measuring statically variations in real economic factors influenced by the monetary policy.

As a medium of exchange, the fundamental role of money in an economic system is to serve as a medium of exchange or as a means of payment. In the barter system goods are exchanged for other goods. This system prevailed throughout the world in the olden times. This system suffered from many shortcomings, the prominent being that it necessitated double coincidence of wants. For exchange of goods, persons desiring to exchange goods must specifically want those goods what others offered in exchange. Money has removed this difficultly. Now a person A can sell his goods to another person B for money and then can use goods he wants from others who have these goods.

As a unit of account, money is a common measure or common denominator of Value. The value in exchange of all goods and services can be expressed in terms of money. We can say that it is the general language we use to quote prices and compare them. It would be possible to use any goods as a unit of account mobile phones. 

This would mean that the prices of tables, chairs, books and groceries would all be quoted in terms of the number of mobile phones required to buy them. In theory it sounds possible, but in practice who would want to carry around mobile phones to pay for everything they buy? Moreover, since there are different types of mobile phones which are available, the problem of developing an exchange rate relationship where the purchasing power of the phone would be quoted relative to another will arise. Even if prices are quoted in more basic unit, say gold, the problem of carrying gold will still remain. Moreover, some dishonest persons may shave off some of the good from the gold coins and thus devaluing them. Since we are generally not willing to accept commodities such as good or phones as units of accounts, we require another alternative. This alternative is Fiat Money.

Fiat money exists where paper with no intrinsic value itself fulfils the functions of money, and government legislation ensures that it must be accepted for transaction. For example, rupee is the fiat money. A hundred rupee note is capable of buying goods and services worth 100 rupees, although as such the note of hundred rupees is nothing but a price of paper. In fact, it acts as a means of calculating the relative prices of goods and services.