Four Different Approaches To The Definition Of Money

With regard to the definition of money, there are broadly four main schools of thought. Harry G. Johnson and Edgar L. Fiege have indicated four important approaches to the definition of money. These are as follows:

1. Conventional Approach
2. Chicago Approach
3. Gurley and Shaw Approach
4. Central Bank Approach

1. Conventional Approach

The Conventional Approach is to define money as currency plus demand deposits in commercial banks.

2. Chicago Approach

The Chicago quantity theorists (Milton Friedman and others) define money as “a temporary adobe of purchasing power” which comprises currency plus total commercial bank deposits. They take money in the sense of being an asset whose capital value is safe. They will include in money time deposits, savings deposits or even such far-fetched items as borrowing power on life insurance policies. Time deposits and other such are not directly spendable and therefore do not function as a medium of exchange. The economics of the Chicago school, however, argue that time deposits can be converted into currency or demand deposits and should, therefore be treated as money. The case with which time deposits can be converted into currency or demand deposits together with the universally held notion that a savings deposit account is “Money in the bank” lends credibility to the close substitutability argument.

3. Gurley and Shaw Approach

J.G. Gurley and E.S. Shaw in a series of contributions culminating in a major theoretical work “Money in Theory of Finance” 1960 have held that money should include the liabilities of non-bank financial intermediaries as well, because they also constitute liquid assets closely substitutable for money. Gurley and Shaw approach includes in the list of close substitutes for the funds of payment the deposits of and the claims against all kinds of financial intermediaries, of which commercial banks are only one variety. They emphasise the close substitution relationship between currency, demand deposits, time deposits, saving bank deposits, credit institutions shares, bonds etc. They define money supply as a weighted sum of all these assets, weights being assigned to each item on the basis of the degree of substitutability.

Gurley and Shaw have drawn an important distinction between what they call inside money and outside money. Outside money comes from outside the private sector and represents wealth to which there corresponds no debt. It is an asset for someone without being a debt for anyone else. Gold coins and currency notes may, thus, be considered as outside money. Inside money, on the other hand, is created against private debt. It is typified by bank deposits and other assets created by financial intermediaries, the assets on the one side corresponding to liabilities on the other side of the balance sheet.

The Gurley and Shaw approach based on the close substitutability argument like Chicago approach differs from the latter in its coverage as well as analysis. It includes in the list of close alternate for the funds of payment the deposits of and the claims against all types of monetary on the basis of the degree of substitutability or closeness to the means of payment.

4. Central Bank Approach

The forth approach, specially interested in monetary policy, takes money as a means of financing purchases in much broader concept, measurable or unmeasurable.
In the measurable sense the Federal Reserve Board takes the total amount of credit outstanding.
The unmeasurable sense is exemplified by the Redeliffe Committee’s concept of the liquidity of the economy. This broader concept of money implies that the economy is able to economise on money by substituting credit for it without limit.

Reference Book: Money Banking and International Trade.