Anything that is widely accepted in payment for goods, or in discharge of other kinds of obligations, is called money. The only essential requirement is general acceptability. Money need not itself be valuable. It must, indeed, be relatively scarce, since it would hardly do if money could be plucked off every tree. But, provided precautions are taken to keep it relatively scarce, money can consist of things as worthless as a scrap of paper or the scratch of a clerk’s pen in a bankbook.
In recent years, there has been a keen controversy on what is and what is not money. This controversy hinges on what functions money is expected to perform, i.e., whether money is to be regarded as a mere medium of exchange, or a store of value. Obviously, when money is to serve as a store of value, other assets besides currency and demand deposits must also be included in term money.
Money supply should be defined as a weighted sum of currency, demand deposits, time deposits and liabilities of non-banking financial institutions, weights being assigned on the basis of degree of their substitutability for currency.
Money is not, however, an unmixed blessing. Money is a good servant but a bad master. When there was no money, savings was not divorced from investment. Those who saved also invested. But in a monetized economy, saving is done by some people and investment by other people. Hence, it does not follow that savings and investment should be equal. When saving in a community exceeds investment, then national income, output, and employment decrease and the economy is engulfed in depression. On the contrary, when investment exceeds savings (i.e., investment financed not by genuine savings but through deficit financing), then national income, output and employment increase and there is a spell of prosperity. Hence, the disparity between savings and investment resulting from the creation of money is said to be the main cause of economic fluctuations.