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Money is any item or medium of exchange that symbolizes perceived value. As a result, it is accepted by people for the payment of goods and services, as well as for the repayment of loans. Economies rely on money to facilitate transactions and to power financial growth.

As a medium of exchange, money is a value that buyers give to sellers when they buy goods and services. Money is accepted by sellers because they know that they can use it to buy other goods and services.

According to G. Crowther, "Money can be defined as anything that is generally accepted as a means of exchange and at the same time acts as a measure and a store of value". 

Functions of Money

Functions of money are as follows: 

  1. Medium of Exchange – Money is serving as a medium of exchange. It facilitates all transactions and it acts as a common medium of exchange. It helps in buying and selling commodities. It is also acceptable as a means of payment for any transaction.
  2. Measure of Value – The value of various goods and services can be expressed in terms of money. Hence, it is called as a measure of value. This function has helped in overcoming the problem of barter system, which lacked common measure of value. Now money is a common measure of value in exchange, also in dispersal of rewards and different factors like rent, wages etc.
  3. Store of Value – Money is referred to as store of power. It is a generalised purchasing power and it can be used in present as well as future. People save and store money for all types of transactions. Barter system had difficulties in storing of value but money has helped in overcoming this problem by its rise as an efficient store of value.
  4. Standard of Deferred Payments – Money acts as a standard of deferred payments. Modern economic transactions are widely based on credit transactions and money has helped in future payments and receipts. Borrowing and lending activities have become simple even for future activities.

Classification of Money

Money can be classified into four forms: 

  1. Fiat Money – Money that is issued by order/authority of the government. It includes all notes and coins which people in a country are legally bound to accept as a medium of exchange.
  2. Fiduciary Money – The money which is accepted as a medium of exchange because of trust between payer and payee. For eg.: cheques fall in the category of fiduciary money.
  3. Full Bodied Money – Unit of currency whose face value is equal to its intrinsic, or commodity value. This means the value of the metal or material the money is made from is the same as the value it represents in exchange of goods and services. For eg.: silver rupee coin from British era.
  4. Credit Money – Money created through the lending and borrowing process, where its value is based on a future obligation or claim to repay, rather than a physical commodity. For eg.: bank loans. 

Types of Money Supply

There are 4 types of Money Supply: 

  1. M1 (Narrow Money) – It includes currency with public (coins, currency notes), Net Demand Deposits held by the public with commercial banks and other deposits with RBI. It is the most liquid portion of a country’s money supply. M1 is called "narrow money" because it represents the most liquid forms of money, meaning the assets that are readily and immediately accessible for transactions, such as cash (notes and coins) and demand deposits in bank accounts. The term "narrow" emphasizes the restricted and limited scope of these highly spendable assets, differentiating them from broader measures of the money supply that include less liquid forms like savings or time deposits. 
  2. M2 (Narrow Money) – It includes M1 + Post Office Savings
  3. M3 (Broad Money) – It includes M1 + Time Deposits with the banking system (such as fixed deposits). M3 is called "broad money" because it represents a comprehensive measure of the total money supply in an economy, encompassing a wider range of assets than "narrow money" (M1). It includes less liquid forms of money, like time deposits, along with the more liquid components found in M1, such as currency and demand deposits.
  4. M4 (Broad Money) – It includes M3 + all deposits with post office savings organisations, excluding National Savings Certificates. It is the least liquid portion of a country’s money supply.