Money has been defined in a number of ways. Some of the definitions are known as narrow definitions while others as broad definitions. Narrow definitions focus on money as a medium of exchange through which liabilities may be discharged and transactions affected smoothly.
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Broad definitions, on the other hand, expect money not only to serve as a medium of exchange but also to eliminate all the drawbacks of barter that obstructed smoothness of trade and commerce. That way, money, in the broad sense, must serve as measure and store of value as also the standard of deferred payments apart from acting as a medium of exchange.
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According to Harry G. Johnson, there are broadly four approaches to define money. Here is a brief account of these approaches for the benefit of the reader:
1. Conventional Approach:
The conventional approach refers to those definitions of money that are based on certain function(s) money is expected to perform. Some of these definitions are mentioned below:
(a) “Money is what money does”—Withers.
(b) “Money is anything that possesses general acceptability”—Marshall.
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(c) “Anything that is generally acceptable as a means of exchange and at the same time acts as a measure and store of value is money”—! Crowther, Geoffrey.
Definitions (a) and (b), however, make no mention of the essential functions of money in explicit terms. They leave them to the interpreter. Definition (b) refers only to the general acceptability of money while definition (c) makes explicit reference to the functions money has to perform. Definition (c), therefore, is the most comprehensive definition of money and hence is the best one so far.
2. The Chicago School Approach:
In this approach, definitions given by Chicago University monetarists are included. We mention two of them:
(а) Money is “currency plus total commercial bank deposits adjusted”— Friedman, Phillip Cagan, David Fand, David Meiselman and A.J. Schwartz.
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(b) “Anything that serves the function of providing a temporary abode for general purchasing power”—Milton Friedman.
Definition (a) includes quasi-money (near money) in money explicitly while definition (b) does so implicitly. The conventional approach treats money-proper as money while the Chicago approach includes quasi-money too in it.
3. Gurley and Shaw Approach:
Like the Chicago approach, this approach also includes quasi-money in money along with money-proper, but unlike the Chicago approach, it provides a broader definition of money by including the liabilities of non-bank financial intermediaries in quasi-money along with the demand and the time deposits of the commercial banks.
In their work entitled Money in a Theory of Finance, John G. Gurley and Edward S. Shaw state “the concept of money relevant to monetary theory and policy should include the liabilities of non-bank financial intermediaries together with currency (money-proper) and commercial bank demand and time deposits (quasi-money)”.
4. The Central Bank Approach:
The central bank approach has provided the broadest possible definition for money perhaps. It defines money in terms of credit funds lent to borrowers. Thus, currency and all other means of financing the purchases are included in the definition of money.
The approach resembles the Gurley and Shaw Approach in that it includes near money in the definition of money but it differs from the Gurley and Shaw Approach in that it provides much broader definition to money by including credits such as overdraft and loans in the definition of money.
To sum up, Crowther’s definition is the best definition because it forms the core of all the other definitions on one hand and it provides academic tools to understand money on the other. It defines money as something possessing universal acceptability as a medium of exchange and at the same time, serving as a measure and store of value.
No doubt near money constitutes a part of the purchasing power but it can’t possess the attribute of universal acceptability as a medium of exchange. It is in this sense that near money should be treated as such, instead of being raised to the level of money- proper.