For example, salary drawn by an individual is not spent simultaneously rather it is consumed gradually for purchasing different goods and services. 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. In practice, time deposits are almost as readily available for spending as are demand deposits or currency since most banks make time deposits available to their customers on demand, although they may require a waiting period of some 30 to 60 days. The conventional approach to the definition of money is the oldest approach. According to this approach, the most important function of money in society is to act as a medium of exchange.
- The interests referred to are typically
taken to be financial interests, so the obligation of the
fiduciary is basically to maximize investment returns. - Initially, the pieces of metals, such as gold, silver, copper, and aluminum, served the purpose of money.
- Increases in the real value of these measures will be followed by increases in the amount of real balances.
Near money is highly liquid and can be easily converted into cash as and when required. Examples of near money are bills of exchange, treasury bills, bonds, debentures, savings certificates, etc. But a cheque is different from a banknote as in a cheque specific sum is made and it expires once the transaction is finished whereas paper currency cannot get expired. However, in the present times, large transactions are made through cheques, and banknotes are used only for small transactions.
This definition has a wider scope as compared to the monetarist approach and liquidity approach as they also added credit from unorganized agencies. Thus the focus of this approach is that it defines money in terms of liquidity. Money can be defined as anything that is generally acceptable as a means of exchange and that approaches to definition of money at the same time acts as a measure and a store of value. The use of the cheque as money is another stage in the evolution of money in the modern world. It refers to means of transferring money or obligations from one person to another. During the same time period, Britain was also struggling with severe inflation.
Interest Rate
The money multiplier has a direct and positive influence on the money supply. With the increase in the size of the multiplier, the money supply increases, and with the decrease in the size of the multiplier, the money supply decreases. Time deposits are fixed deposits of customers for a fixed period in a commercial bank that carries a fixed rate of interest. Money can be withdrawn before the expiry of that period by paying a penalty rate of interest to the bank. If reserve requirements are raised the value of the reserve ratio will rise, reducing the money multiplier and money supply and vice versa. The value of money (I/P) in terms of other goods and services has a positive influence on the monetary base and on money stock.
Chicago Approach
Following this approach, Crowther has stated that money is anything that is generally acceptable as a means of exchange (i.e. as a means of settling debts) and, at the same time, acts as a measure and store of value. Money serves as a medium of exchange as it is universally accepted by the public. This acceptance is for the purpose of the exchange of money for goods and different types of services.
Demand deposits are savings and current accounts of depositors in a commercial bank. They are a highly liquid form of money as depositors can draw cheques for any amount lying in their accounts at any banking time and the bank has to make immediate payment on demand. Time-Deposit Ratio (t) represents https://1investing.in/ the ratio of time deposits to demand deposits and has a negative effect on the money multiplier (m) and on the money supply. The demand for money refers to the money that comes from the general public. The supply of money is made by its producers, i.e. government and banking system.
A third variation of the criticism says that the profit motive signals
the absence of more appropriate motives. Kant argued that actions only
have moral worth if they are performed for moral reasons, or, more
specifically, for the sake of duty. Thus it is not enough that we do
what is right, we must also do it because it is right (Kant
1785).
The word ‘money’ has been derived from the Latin word ‘Moneta’ which represents the surname of the Roman Goddess of Juno in whose temple at Rome, money was coined. Even the primitive man was having some sort of money and in every age, the type of money depended on the nature of its livelihood. In the new Pew study, more than one-third of parents who provided financial help to adult children said that doing so hurt their own finances.
The main reason for the change in the price level is the changes that occur in the aggregate income or expenditure. Therefore, change in quantity of money can only bring changes in the price level when it can change the aggregate expenditure with respect to the supply of output. Keynes was agreed with the concept that changes in quantity of money produces changes in the price levels, as given in the quantity theory of money. We have already discussed the general issue of the ontological status
of money
(section 1.1
above). But there are also significant questions in political
philosophy regarding the question of where, and by what sorts of
institutions, should the money supply be controlled.
Each now has 10.4 weeks’ income in the form of cash instead of the previous 5.2 weeks’. If everyone were to hold onto the extra cash, nothing further would happen. But experience dictates that people will try to spend it to reduce the amount of wealth held as money. Because this is an example of a closed community, one person’s expenditure, however, becomes another person’s income. In the attempt to spend more than they receive, people will simultaneously try to buy more of various services from each other and to sell less. To induce others to sell, they will offer higher prices; to induce others not to buy, they will ask higher prices.
Central Bank Approach
In other words, the value of money (I/P) is inversely proportional to quantity of money (M). Refers to the frequency at which a single money unit flows from one individual to another. For example, if a ten-rupee note circulates through 10 individuals, then the quantity of money would be 100, but not 10. Some of the economists explained value of money as the value of gold and silver in terms of their weight and fineness. In economics, different economists have defined the term value of money differently. A complication here is
that the weaker party, especially ordinary consumers, may have trouble
processing the information sufficiently well to identify cases of
fraud.
1 What is Money?
In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets. Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom.
What Are the Properties of Money?
The International Monetary Fund (IMF) and World Bank serve as global watchdogs for the exchange of international currencies. Governments may enact capital controls or establish pegs in order to stabilize their currency on the international market. Since fiat money does not represent a real commodity, it falls to the issuing government to ensure that it meets the five properties of money outlined above. The total value of the M1 money supply in the United States as of August 2023.
Obviously, a lot has changed since Thales’ times, both in
finance and in our ethical and political attitudes towards finance. This institutional multiplicity is due to
concerted efforts of both private and public agents, as well as
innovations in financial economics and in the financial industry
(Shiller 2012). Monetary theory is based on the idea that a change in money supply is a key driver of economic activity. It argues that central banks, which control the levers of monetary policy, can exert much power over economic growth rates by tinkering with the amount of currency and other liquid instruments circulating in a country’s economy. The traditional approach emphasises the medium of exchange function of money.
It shows how classical theorists saw money as a symbol and an agent of rationalization in modern societies. In particular, it examines the assumed relationship between monetization and quantification, exactness, alienation, discipline, and calculation in modern societies. The paper also discusses how money has been conceptualized more recently not only as a vehicle of rationalization but also as a cultural and cognitive object that is shaped by social categories, values, meanings, and everyday practices. The final section discusses how a relational approach could be incorporated into the sociological analysis of money.
According to the quantity theory of money, the changes in price level of a country occur due to changes in the quantity of money in circulation, while keeping other factors at constant. In other words, an increase or decrease in the price level would occur due to increase or decrease in the quantity of money. Includes the liabilities of non-banking financial intermediaries in the definition of money. The main contributors of this approach were John G. Gurley and Edward S. Shaw. Gurley and Shaw, while explaining the concept of money, highlighted the substitution relationship among various factors, such as currency, demand deposits, time deposits, and saving bank deposits.
Money is valuable because we want it, but we want it only because it can get us a desired product or service. The quantity theory is criticized on a large scale due to its static nature. In quantity theory, most of the factors remain constant, which is not true as real world conditions are dynamic in nature. Therefore, all the factors in this dynamic world keep on changing with time. According to Fisher, in short-run, the values of T, V, and V remain constant. In addition, the proportional change between M’ and M also remains constant.