In the last few years there has been a issue that what is money and what is not money. There are four main schools of thought on the definition of money and money supply.
1. Conventional Approach:- The economists having this view define money only on the basis of its function as a medium of exchange. They include in the term ‘money’ currency and demand deposites in the banks. As they think that medium of exchange is only primary function, they include only currency and demand deposits because they are perfectly liquid and are generally accepted as a medium of exchage. Hence,
Money Stock= Currency + Demand deposits. And this is called ‘M’
Under this approach all other assets like time deposits, post office savings, bank savings etc are excluded from the definition of money.
2. Chicago Approach::- Professor Milton Freidman is leader of this school of thought. This school says that money is not only a medium of exchange but it is store of value as well. They extends money and includes other assets like time deposits and saving deposits in the banks.Hence,
Money stock= M + time deposits+ saving deposits. And this is M2
3. Gurley and Shaw Approach:- His school of thought is led by Gurley and Shaw. They emphasize the implication of velocity of circulation of money and the existence of substantial volume of liquid assets closely substitutable for money like short-term government securities, liabilities of non-banking financial institutions, time deposits in banks, post office and saving deposits etc. thus definition of money is to be broadened and includes all other assets mentioned above.
4. Credit Approach:- This group wants to replace concept of money by general liquidity situation of the economy. They say that credit can be substituted for money without any limit. They reject all three approaches mentioned above and substitute the general liquidity position of the economy
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