Question

‘Money is what money does.’ Discuss the statement.

Answer 1

The statement “Money is what money does” highlights the functional nature of money. It suggests that the essence of money does not lie in what it is made of (e.g., paper, metal, or digital code), but rather in what it is capable of doing within an economy. 

Meaning of the Statement: The phrase was popularized by economists like Walker, who emphasized that the definition of money should be based on its functions, not on its form or physical properties. If something performs the functions of money, it is considered money, regardless of its appearance.

Functions of Money – What Money Does:

1. Medium of Exchange:

• Money facilitates the buying and selling of goods and services.
• It eliminates the inefficiencies of barter, such as the need for a double coincidence of wants.

2. Measure of Value (Unit of Account):

• Money provides a common standard to measure the value of various goods and services.
• It allows for price comparisons and economic decision-making.

3. Store of Value:

• Money preserves purchasing power over time.
• It allows individuals to save for the future, unlike perishable goods.

4. Standard of Deferred Payment:

• Money enables contracts and agreements involving future payments.
• It supports lending, borrowing, wages, and long-term trade.

Implications of the Statement:

1. Flexible definition: Anything that performs these functions, whether it is gold, paper currency, digital payments, or crypto-assets, can be classified as money.
2. Functional Supremacy over form: Money may change in form (e.g., from coins to credit cards to digital wallets), but as long as it performs these essential functions, it remains money.