Definitions of Money: Legal, Functional, Basis of Liquidity, Basis of Scope!
Over a period of time, different definitions of money have evolved.
Let us discuss the definitions of money under the following heads:
(A) Legal Definition of Money
(B) Functional Definition of Money
(C) Definition on the Basis of Liquidity
(D) Definition on the Basis of Scope
(A) Legal Definition of Money:
According to this definition, money is what the law says is money. So, anything which the government declares as money is money.
On the basis of legal recognition, money is of two kinds:
(i) Legal Tender Money:
Money which can be legally used to make payment of debts or other obligations is termed as legal tender money. A creditor is obliged by law to receive such money in payment of debt due to him.
Legal tender money is of two kinds:
(a) Limited Legal Tender:
It refers to that form of legal tender money, which can be paid in discharge of a debt up to a certain limit. Beyond this limit, a person may refuse to accept the payment and no legal action can be taken against him. In India, coins are limited legal tender.
(b) Unlimited Legal Tender:
It refers to that form of legal tender money, which can be paid in discharge of a debt of any amount. Legal action can be taken against a person who refuses to accept this money. In India, paper notes are unlimited legal tender.
(ii) Non-Legal Tender Money or Optional Money:
It refers to that form of money, which is generally accepted, but legally, one is not bound to accept it. For example, cheques, bank drafts, bills of exchange, etc. do not have legal backing and their acceptance is totally optional.
(B) Functional Definition of Money:
According to this definition, money refers to anything that performs the four basic functions of money: (a) Medium of exchange; (b) Measure of value; (c) Standard of deferred payments; (d) Store of value. In the words of Crowther, “Money may be defined as anything which is generally acceptable as a medium of exchange and at the same time acts as a measure and store of value”.
(C) Definition on the Basis of Liquidity:
On the basis of liquidity, money can be classified as:
(i) Money or Liquid form of Money:
Money has the quality of general acceptability which makes it the most liquid asset. By liquidity, we mean the speed and certainty with which an asset can be converted back into money. Coins, currency notes and bank money are the most liquid form of money.
(ii) Near Money:
It includes those financial assets, which are not as liquid as coins and currency notes, but can be easily converted into money for paying debts. For example, National saving deposits, fixed deposit receipts, bonds, etc. They are as good as money, but are non-legal tender money. Near money cannot be used directly for purchase of goods and services. But, it can be converted into cash within a short span of time.
(D) Definition on the Basis of Scope:
According to the scope of money, it has been defined in two ways:
(i) Narrow Definition of Money:
It includes only those things which function as money. It includes currency notes, coins and demand deposits of banks as they perform the following functions of money: (a) Medium of exchange, (b) Measure of value, (c) Standard of deferred payments, (d) Store of value.
(ii) Broad Definition of Money:
In addition to narrow money, it also includes time deposits in banks and post offices. Time deposits are included as they have high degree of moneyless and can be converted into chequeable deposits within a short span of time. Broad Definition of Money = Money Assets + Near Money.
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