This is something that always bugs me with the textbooks' definition of money.
They start out well. They provide a functional definition of money; "money is what money does". If people in a given time and place use cigarettes as money, then cigarettes are money, in that time and place. Moneyness is not a property of a good; it is a property of how people use that good.
Then they list three functions of money: medium of exchange (we buy and sell all other goods for money); medium of account (we quote the prices of all other goods in money); and store of wealth (or store of value). It's that third function of money that is totally out of place. We should ditch it.
Most goods are not used as a medium of exchange. A good that is used as a medium of exchange is special.
Most goods are not used as a medium of account. A good that is used as a medium of account is special.
(And, with rare exceptions like hyperinflations, the good that is used as a medium of exchange is also used as a medium of account. Because if you are going to be paying with cigarettes it's nearly always a lot more convenient to quote the price in cigarettes.)
But most goods are used as a store of wealth. There is absolutely nothing special about a good that is used as a store of wealth. The chair I am sitting on is a store of wealth. So are the desk and computer in front of me. If I rented them, instead of owning them, my wealth would be lower than it is.
If I were a visiting anthropologist, wanting to discover what Canadians use as money, I would look at what good they use as a medium of exchange, and as a medium of account. That tells me all I need to know. I wouldn't go looking for what Canadians use as a store of wealth. A list of all the thousands of goods that Canadians use as a store of wealth would be an interesting list; but it wouldn't help me narrow down my search for what they use as money.
Now, it's neverthless true that money is a store of wealth. There is nearly always some delay, however short, between receiving money and spending it again. The velocity of circulation is not infinite. If the value of money fell to zero before you could spend it again, it couldn't be used as a medium of exchange. And if the value of money fell too quickly, it would not be a good medium of account either. But being a store of wealth is not what makes it money. That's not part of a useful definition of money.
Money is a very peculiar store of wealth.
How much would I have been willing to pay for my house if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Less than I paid for it, but still a positive amount. It yields a flow of services even if I can't sell that right.
How much would I have been willing to pay for the S20 note in my pocket if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Nothing.
When you buy a good, you buy the option to use it, and the option to sell it again. For most goods, both options have value to the buyer. For a good that is only used as money, the first option is worthless; only the second option has value. Because if I can't sell it again, I can't use it as a medium of exchange.
If the government made it illegal for me to sell my assets, my wealth would drop, but I would still be wealthier than someone who had no assets. I could still live in my house, drive my car, sit on my chair, and use my computer. Even my financial assets would still pay dividends, or might be redeemed at some future point. I wouldn't throw them away. But the irredeemable paper money in my pocket would be worthless to me. I would throw it away. It is only a store of wealth because it is a medium of exchange.
Some people are said to use money for lighting their cigars. But I'm not going to list that as one of the functions of money.
Money is what money does. There are two functions of money that define what is and what is not used as money: medium of exchange; and medium of account. That's it.
This post is a reflection of John Quiggin's post on David Graeber. Here's John:
"So, if we had the kind of disciplinary modesty richly merited by our performance as a profession over the past few years, economists would recognise that we owe an intellectual debt to Graeber. From now on, we can treat money primarily as a store of value, and stop worrying about how it works as a medium of exchange."
I disagree. We need to start worrying a lot more about how money works as a medium of exchange. We need to understand a lot better than we do how money works as a coordinating device in a decentralised economy. And we need to understand a lot better than we do how money can sometimes fail as a coordinating device. Because, outside a very simple economy, people can't barter their way back to full employment if the monetary exchange system fails.
We need to stop thinking of money as a store of wealth, just like all the others. And let's start by changing the textbook definition of money, by deleting that bit about money being a store of wealth. It only serves to confuse visiting anthropologists.
Worthwhile Canadian Initiative 
“It’s that third function of money that is totally out of place. We should ditch it.”
But, but, but what about those huge stones on the South Sea islands? What about those cows in Africa?
😉
The Bank of Canada has a Yap Stone in its Currency Museum. I am always delighted to visit the Currency Museum because it’s free. I always get a chuckle out of visiting a free museum in the Temple of Capitalism.
That’s supposed to be part of the BoC’s foreign exchange reserves! One of the great things about Yap stones is they are hard to steal.
Yeah Graeber and anthropologists have come to different conclusions about money ergo, the textbook has confused them. That’s not condescending at all…
Money is the most liquid store of wealth. Assets change in value, often sharply. Money does so more slowly, at least if it is to retain its value as money. That house may be worth half what it was, but cash is nearly worth what it was.
Nathan: IIRC (and my memory may be wrong on this) somewhere in the beginning of Graeber’s essay he talks about the economics textbook definition of money. Is it “condescending” to think that an anthropologist might look at an economics textbook definition of “money”? And that doing so might confuse him about how economists view (or should view) money? OK.
Lord: that isn’t true in hyperinflations. But yes, sticky prices (and intertial inflation), because money is nearly always the medium of account too, do tend to make the value of money more predictable than the value of most individual assets.
If we line up all assets in terms of liquidity, then money is at the extreme end of the spectrum. And because of network externalities, the liquidity race is a “winner-takes-all” race. The winner is used in a qualitatively different way from all the other assets.
Money doesn’t depreciate (much) like other capital goods. Real Estate is like money in that it is a good whose value is not strongly tied to its depreciation. On the other hand my car depreciates ever so predictably.
Part of the problem with real estate is that it is used as a store of value instead of depreciating like other consumer or capital goods. That leads to odd impacts in the financial sector. What if we didn’t expect real estate to keep its value and to profit form the sale of residential homes?
But this just isn’t true. Suppose I expect to need to make money payments in the future. i way to take steps today to ensure I am able to make those payments when they come due. Do I buy another desk? No, of course not! What I do is refrain from buying desks, in order to increase my holdings of (or access to) money.
You are talking about the role of money in what is basically a barter economy. Or, I guess as a monetarist, you are assuming the only demand for money is the transactions demand. but once we acknowledge a precautionary or speculative demand for money, it becomes clear that “store of value” is quite central to its function. (“Means of payment” would be more precise, but we can let that go.)
i way s/b I want. (Note to self: type slower.)
Determinant: paper money doesn’t physically depreciate (and if it does, you can swap the note at the bank for a new one), but it does depreciate in price. 2% per year in Canada, and sometimes a lot more in other countries and at other times. Depending on time and place, money depreciates more quickly than some assets, and less quickly than others. Nothing special there.
JW: “Suppose I expect to need to make money payments in the future. [I want] to take steps today to ensure I am able to make those payments when they come due. Do I buy another desk? No, of course not! What I do is refrain from buying desks, in order to increase my holdings of (or access to) money.”
Au contraire. I expected I would need to make money payments. So first I bought a PhD ;-). More recently I have bought stocks. I bought the house to avoid making money payments (rent). It’s only when I need to make a money payment very soon that I stop buying things, and hold money instead.
“You are talking about the role of money in what is basically a barter economy.”
You totally lost me there. I am talking (primarily) about the role of money as a medium of exchange, which is the precise opposite of a barter economy.
Is it a necessary property of money that you can hoard it? Cause you could easily design a medium of exchange that you can’t hoard. Lets say securities trades settle instantly into cash at the ATM, but the cash disintegrates after one hour. Useless as a store of value, can’t be hoarded, but fine as a medium of exchange. Is it money? Can it still cause suboptimal AD?
K: that’s a question I keep trying to wrap my head around, and failing. I wanted to say something about it in this post: to imagine a medium of exchange that could not be used as a store of wealth. I was thinking:
Suppose the market opens once a week, and we have a computerised trading system that lets you buy and sell for computer credits, which net to zero in aggregate, and must be at zero for each individual before the market closes.
Yes, I think we can imagine such a system. But it’s a weird system. And all trades would have to be bunched in time, which isn’t very convenient.
I think it’s better to imagine the credits expiring in short order unless spent. Let’s say you borrow them at cb against liquid securities. The cb will expire them in 10 minutes so you have to spend them and then the seller buys securities from someone who cancels the money by reverse repoing said securities from the cb. That we we don’t need coordinated auctions. And the holding period for money can be arbitrarily short. This is almost like using capital assets as the medium of exchange, but it retains the current method by which the cb fixes the value of the unit of account. I don’t think it would be weird either. The only requirement is instant settlement of securities.
I think you’re right Nick. Money is a store of wealth, but it is a store of wealth mainly because it is a medium of exchange. If you receive some money, and that particular kind of money stops functioning as a medium of exchange, then you are no longer storing wealth, you are storing garbage.
K’s point fits into this picture. If I store some lettuce, I am storing wealth. But lettuce is a rather poor store of wealth because its value depreciates rapidly. Similarly if there were a form of money whose exchange value always depreciated very rapidly, it would be a very poor lettuce-like store of wealth.
One addition to this picture. Money has a legally institutionalized status. By law it is established as a means for final discharge of obligations: both tax obligations and private debt obligations. By law, it is the only thing that an obliger must be willing to accept from the obliged. If I owe someone a cow, and I have no cows but have some money, then a court will require myy creditor to accept the money from me instead. And taxes are explicitly obligations to deliver money. So one of the things we receive in exchange for money is relief or liberation from an obligation.
Money as a store of value? For an individual, perhaps. An individual can save it up and buy things. For a society? For an economy? Money has no intrinsic value. A society cannot take a vault and fill it up with $10 Trillion dollars, and save it for tomorrow.
And it should have no intrinsic value. The more worthless it actually is, the easier it is to keep account of its motion, the more effective it is as a medium of exchange. You don’t have to subtract its ‘intrinsic’ value from what you actually buy with it. Any money with intrinsic worth, that is it had a use, greater than its nominal value, would soon be converted to that use. It was only when silver was worth less than its nominal value as coinage, was it useful as money.
Anyway, the operation of Gresham’s Law has made sure that the money we have is worthless, even to the point of credit, money you have to pay to use, driving out (a lot of) cash.
Double the money supply, you have not made society any richer, but you have enriched the ones you gave the newly minted money to, and impoverished those you did not.
Money is a transaction good: it is used to do transactions. Hence, an economy with three goods (output, money and assets) has two markets. The output market and the asset market with money as the good used in transactions in either (and so both) markets. And anything that can be used as a transaction good is money.
Since money is something used for transactions, you accept payment in money because you can use it in future transactions. It is a store of value in that sense, but, as you say, a peculiar one. For its value is purely due to its potential use in future transactions.
All of which is why fiat money is money in its purest form. It is not “distorted” money or “false” money or “perverted” money: it is money in its purest form for it has no value apart from its value in transactions.
Which leads to lots of interesting questions. Those about what determines the value of money in transactions and what determines the range of transactions money in general (or a specific money) is used for. These are related questions, but not the same question. And the ambit question is not only why US$ works in Red Square (even in the old Soviet Union) but why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.
I haven’t read Debt yet (and I think neither have you?) but I think the point is that Graeber’s critique—from the essay and the CT discussion—is precisely focused on the view of money as a medium of exchange, so if you delete the idea of “store of wealth”, most of the critique would still stand.
It’s hard to overestimate the importance of this issue. If you want to rest the economics intellectual enterprise on a notion of “medium of exchange”, then a view that an exchange-based society is mostly contingent on social history means that economics as a whole is only contingent on our particular social history.
Nick: If we line up all assets in terms of liquidity, then money is at the extreme end of the spectrum. And because of network externalities, the liquidity race is a “winner-takes-all” race. The winner is used in a qualitatively different way from all the other assets.
If that was true we wouldn’t have had all those tedious discussions in the 1970s (and maybe earlier) about which assets should be considered part of the money supply. If you colour-code the assets in your line with red as the most liquid and violet as the least, the arguments about whether the orange and yellow ones count as money will never end.
But there is a grain of truth in what you say nonetheless. Because barter is hopelessly impractical there will always be an asset that is the ‘winner’ for purposes of day-to-day shopping. Usually it will be the stuff printed by the central bank, but in a hyperinflation it could be some hard currency or whatever. Still, I get the sense that you’re putting the cart before the horse. You say money is special because it’s the most liquid asset. Keynes says (GT Ch 17) that the most liquid assets inevitably play the role of money.
Nick, I have to say that on this one you are not just wrong but very wrong.
What you are suggesting is that money is no more a store of value than any other good, which is true. But value_is_not_wealth. Wealth and value are two different things.
If they weren’t, then people would be paid their wages in chairs. If they weren’t, people would be fully ambivalent between payment in money versus chairs. You are right that money is “special” but you seem to want to reject the common understanding of wealth.
If I add up the value of all my assets, how do I express that number? I’d express it in dollars, wouldn’t you? I’d express it in the denomination of the medium of exchange. This is because if I had to pick up and leave town immediately, I would need to convert a large portion of my assets into value and (AHEM) transfer my wealth from Point A to Point B.
I could theoretically transfer my wealth in chairs, but this would require significant additional monetary expenditure. I would need to pay for a big moving truck and a crew to help me load and unload. This costs me money, i.e. a part of my wealth. It does not merely cost me “value.” There is a value associated with a big moving truck and a crew, but if I choose to spend my money on that, I am no longer transferring “wealth” from money to trucks and crews. Instead, I am consuming my wealth.
I can only transfer my wealth using the medium of exchange. I cannot do it in chairs. Wealth and value are two separate concepts. We should not conflate the two.
K: “I think it’s better to imagine the credits expiring in short order unless spent.”
Then I have to think about credits not being fungible, because you wouldn’t swap one credit for another with a shorter expiry date.
Dan: “If I owe someone a cow, and I have no cows but have some money, then a court will require myy creditor to accept the money from me instead.”
I’ve wondered about this. I thought I remembered someone saying that in some forward contracts, the buyer could insist on physical delivery. And if I buy a car, for example, I expect to see that particular car, with that VIN, and not cash, or any car. I could see a court saying I had to take cash compensation, if the seller were unable to deliver that car. But then cars, and cows, aren’t really fungible. This is part of that whole “legal tender” thing, that I’ve never really gotten my head around.
greg: yes, I forgot to mention that whole wealth to an individual/wealth to society distinction. In one respect though, money is wealth to society, because it makes the economy function better. “Money is none of the wheels of trade, it is the oil that helps the wheels…” Was that David Hume?
Lorenzo: “All of which is why fiat money is money in its purest form. It is not “distorted” money or “false” money or “perverted” money: it is money in its purest form for it has no value apart from its value in transactions.”
I like that. Vaguely remember Georg Simmel saying something similar.
“Those about what determines the value of money in transactions…”
which is the question monetary economists answer (in different ways).
“…why US$ works in Red Square (even in the old Soviet Union)..”
a question we rarely address, but do sometimes try to say something about.
“..why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.”
a question we rarely think about at all, but perhaps should.
Mandos: I haven’t read Graeber’s Debt. I skimmed the Essay. For some reason it didn’t grab my interest (maybe him; maybe me).
“It’s hard to overestimate the importance of this issue. If you want to rest the economics intellectual enterprise on a notion of “medium of exchange”,..”
I only want to rest monetary economics on the notion of money’s being a medium of exchange, not the whole of economics. Money is only a part of economics. Nearly all of micro ignores money. At least half of macro ignores money. Even that half of macro that does sort of include money doesn’t really include it intrinsically (but it should, IMHO). I argue with New Keynesian macroeconomists about whether their models do and should include money as a medium of exchange. Many say it doesn’t, and doesn’t need to.
“… then a view that an exchange-based society is mostly contingent on social history means that economics as a whole is only contingent on our particular social history.”
I’m comfortable with the idea that a society based on exchange is contingent on social history. Other forms of economic organisation are possible. I like to think there is some sort of tendency towards markets, under most conditions (though, if pressed, I couldn’t say much about those conditions), but it’s not inevitable.
Economics as we teach it is mostly (not all) about market economies, because: that’s what we mostly live in; that’s what raises interesting questions; those are the questions we have a comparative advantage in answering. But: some economics applies to all economies, whether market or not; fields like comparative economic systems, economic institutions, economic history, etc., still hang in there. E.g. Frances does work on the economics of the family, and Coase got a Nobel for the internal economics of the firm. It’s not all markets.
It’s tempting to think that economics is all about money. But it isn’t. It ought to be a bit more about money, IMHO.
Right, but it’s hard to deny the effect, at least, that monetary economics and its particular conceptualization has had on the public discourse at the very least. Remember, perhaps, when you recently told me that the language of deserving is very foreign to mainstream economics. (To which I was going to respond but waited too long.) Sure, fine, but the way the apparent underlying assumptions are structured fits very well with the “deserving” thought-template. “Undeserving” is simply the moral valuation of having wants (needs) that don’t doubly coincide…
Kevin: One of these days I must do a post about winner takes all in the liquidity spectrum. Still getting my head clear on it.
“Still, I get the sense that you’re putting the cart before the horse. You say money is special because it’s the most liquid asset. Keynes says (GT Ch 17) that the most liquid assets inevitably play the role of money.”
I see a snowballing effect of 2-way causation. This goes back to Menger. People are more likely to accept a more liquid asset in trade, because they can easily sell it again if they decide they don’t want to keep it. And the fact that more people are willing to accept it makes it even more liquid. So it spirals. When all other goods, no matter how liquid, get traded for one good, the most liquid, there is a qualitative difference between that good and all the others.
ryan: we normally measure both wealth and value in units of money. But we don’t have to. Sometimes we adjust for inflation, and measure both in CPI baskets. I have known farmers measure wealth and value in acres of land, or tons of wheat. We can still talk about both wealth and value in a barter economy. We can even talk about Robinson Crusoe’s wealth, and the value goods have to him, even though he can’t sell anything.
“I could theoretically transfer my wealth in chairs, but this would require significant additional monetary expenditure.”
When people move house, sometimes they move their furniture, and sometimes they sell it and buy again. It depends on transportation costs vs liquidity costs. Yes, money is very liquid and very easily transported.
Nick: “Then I have to think about credits not being fungible, because you wouldn’t swap one credit for another with a shorter expiry date.”
“Expiring credits” was just a thought experiment to motivate the limit of zero quantity. In practice, you would just create the credit at the moment of the transaction, for the purpose of the transaction, and then back to capital assets immediately after the transaction. In such a system, nobody would even think of how much medium of exchange they held, since they’d be holding their liquid assets in the form of securities. Nobody would think of money as anything but an accounting device.
If we were really going to create such a system, we wouldn’t actually have expiring credits. We would have the CB support the entire transaction mechanism directly (like LVTS does for the commercial banks, just faster) and nobody would ever notice the medium of exchange.
Mandos: “Right, but it’s hard to deny the effect, at least, that monetary economics and its particular conceptualization has had on the public discourse at the very least.”
It’s certainly true that “money” is the symbol that represents almost everything economic. But monetary economics is a field in economics that the majority of economists stay well clear of. I think it’s fair to say that the majority of economists don’t feel comfortable with teaching monetary economics even at the first year level. It just feels “weird” to them. And it should. Because the medium of exchange is a very weird good. As John Quiggin said:
“Both as a unit of account, and as a store of value, money appears all the time in economics, from the introductory textbooks to the most advanced work. By contrast, money as a medium of exchange is something of an embarrassment. It doesn’t fit will into standard models, and theoretical attempts to formalize the “double coincidence of wants” idea, while useful as a five-finger exercise for grad students, haven’t yielded much in the way of insight.”
He’s (mostly) right about that. (I think it does yield insight, but it’s hard to formalise to get those insights.)
“”Undeserving” is simply the moral valuation of having wants (needs) that don’t doubly coincide…”
That doesn’t seem right to me. Maybe I don’t understand you.
K: As I think I’ve said before, I think you are onto something there, but I can’t get my head around it to say anything useful in response. Maybe someday I will.
Nick, CPI is an arbitrary government construct specifically designed to conflate the difference between what Ludwig von Mises termed “money” versus “fiduciary media.” As for farmers’ lingo, they are talking about assets, i.e. real wealth. Acres of land and their agricultural yield are real assets, real wealth. The hoe the farmer uses is not an asset, nor is it wealth. It is a good, a dead-end to what we call wealth. The point at which you decide to take your wealth out of storage by exchanging money for a hoe is the point at which you consume your wealth in exchange for an act of speculation. (“If I use this hoe, I will be able to produce more wealth.”) You seem to be obliterating the difference between an asset and a good.
Note that although a new car is not currently within my budget – and therefore definitely not a part of my wealth – I value it at exactly the same price as I do when I buy one. Wealth and value are entirely separate economic concepts, as are assets and goods. We use these words for a reason.
When we talk about economic concepts (or any definition at all, really), we list the features that define the concept in question. The fact that both vehicles and Planet Earth transport human beings across space does not mean that “transportation of human beings is a non-unique property of vehicles.” Transportation of human beings is the most important feature of vehicles. That makes all the difference. You can sit in your wealth-transferring chair all day long and still not make it to Columbus, Ohio no matter how far a distance Planet Earth takes you. In order to move across space in an individually meaningful sense, you have to take a vehicle.
Moreover, we would never list “transportation of human beings” among the essential properties of Planet Earth. That characteristic is entirely beside the point.
Whoops! Sorry – forgot to close my HTML tag!
What do people mean by “undeserving” (particularly when they’re referring to poverty)? Someone is undeserving when there is a set of stimuli to which they have the (apparent) capacity to respond in a way that would better their condition, and they don’t appear to be responding to those stimuli. In the current “Western” culture, those stimuli are the wants and capacities of others, and money-as-exchange gives us the ability to barter these wants and capacities without actually directly encountering the stimuli. Therefore, someone is undeserving if they do not appear to be performing the indirect-barter of wants and capacities to improve their status.
Why would someone not be performing this indirect barter? It is either because the things they want are not offered, or they do not want to exchange some apparent capacity for them. The double coincidence is broken. We can view this situation in neutral terms, as what I think some would call a “market failure”. But why would we? It “costs” the rest of us to adjust for this market failure. Because we don’t want to pay the price for this market failure, we view it as an attack on us, and therefore we assign it strongly negative moral rating. “Undeserving.”
Libertarian tag-fail is attacking my socialist screed. I view this as class oppression!
But monetary economics is a field in economics that the majority of economists stay well clear of. I think it’s fair to say that the majority of economists don’t feel comfortable with teaching monetary economics even at the first year level. It just feels “weird” to them.
Yep. I took the graduate monetary theory sequence at both UWO and U of T, and I wrote the comp in the field. But all I really remember is that monetary theory is a nasty, thorny field in which it’s way too easy to get lost.
And yet it’s also the field that attracts the most cranks.
Random thoughts – in reply to Stephen’s comment’s above – actually monetary econ was always one of my favourite subjects, but I couldn’t take real business cycle theory 1980s-style macro, and in lots of places money=macro.
On Nick’s post – whenever there’s a post like this that seems really simple, straightforward and sensible, I always suspect that there’s some deep insight buried there that I’m just not seeing. In this case, it seems to be ” how money can sometimes fail as a coordinating device” – that our confusions about what money is and does cause our confusions about how money fails to do what it’s supposed to do?
Thanks Nick, I was hoping you’d do a response to Quiggan’s post.
Re: money as a medium of exchange, I was imagining that you’d say something like the following. In order to understand how money functions as a medium of exchange in a modern economy, we need to imagine what that economy would look like if there were no money but everything else were held constant. A modern economy without a medium of exchange is a barter economy. So when anthropologists (or Quiggan, relying on the anthropologists) say that, as a matter of historical fact, non-monetary economies aren’t barter economies but rather are based on norms of reciprocity and sharing, that’s simply irrelevant. Asking how money functions as a medium of exchange in a modern economy is a conceptual question, not a historical one. And the historical answer is the wrong answer to the conceptual question, because non-monetary economies don’t just lack a medium of exchange, they also differ from modern economies in other ways, such as being based on norms of reciprocity and sharing.
Is that gloss a correct paraphrase/summary of your response?
Seems like there might be analogies here to social contract theories in political philosophy–most social contract theorists did not claim to be telling a historical story about how ‘pre-contract’ societies became ‘post-contract’ societies. But it’s too early for me to think this through, so this thought could be totally off base.
Nick, You make a very good point, but I’d put it slightly differently:
1. The definition of money is ambiguous, because it doesn’t address what happens if the medium of exchange and the medium of account become separated. That’s probably because they virtually never become completely separated.
2. That which is used as the medium of exchange is generally defined as money.
3. Economic models of the macroeconomy also implicitly define money as that which is used as the medium of account. If the medium of account and medium of exchange ever became separated (theoretically possible), then we’d have to rethink the definition.
4. That which is the store of value is not defined as money. That’s the point you are making.
5. I’d prefer the definition of money be reduced to “that which is the medium of account.” But I know you see the medium of exchange as the essential characteristic. Since money always seems to do both functions, I don’t think it’s a disagreement that is currently of much practical importance.
6. Imagine the dictionary definition of canoes was “a. Small narrow boats used in rivers and lakes, and b. A store of value.” Most people would consider that a silly definition. So you are absolute right that it’s insane to define money in terms of it’s role as a store of value. However many textbooks list three “roles of money” and it’s perfectly fine to call “store of value” one of the roles of money. But the definition should be either the medium of account, or medium of account and medium of exchange.
7. If the medium of exchange and account ever became separated, I’d strongly oppose defining money as the medium of exchange. That’s because the assumption at the heart of monetary models is that price level changes are equivalent to changes in the value of the medium of account, not the medium of exchange.
K: “Is it a necessary property of money that you can hoard it? Cause you could easily design a medium of exchange that you can’t hoard.”
Nick Rowe: “I wanted to say something about it in this post: to imagine a medium of exchange that could not be used as a store of wealth.”
What about Gesell’s Free-Money?
Gesell: “Money is an instrument of exchange and nothing else. . . .
“Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.
“So we must make money worse as a commodity if we wish to make it better as a medium of exchange.” (“The Natural Economic Order” at http://www.silvio-gesell.de/en/neo/part4/1.htm )
Free-Money self destructs at a rate of about 5% per year (although that rate could be adjusted, OC).
On whether money is the most liquid good or the most liquid good becomes the one use as money, Kiyotaki and Wright (1989?) seems pertinent.
About the different functions. Whether or not money is a store of wealth, that function is key, not to its definition, but to what makes it interesting. The defining function of money is the medium of exchange one. Another function that is typically unique to money is the unit of account function. The final conventional function, store of wealth, is mentioned because it is thought to be why we have a field called monetary economics.
Without it (store of value fn), it would be difficult to make sense of variations in velocity, which seem closely tied to business cycles. Given the disruptive effect of business cycles on society, we wish to understand them. So, we list the store of value function not as a defining function but as an important one, along with unit of account (which is also not defining) and medium of exchange (which is).
We can imagine a situation in which all exchange had to involve cash/currency (pieces of paper) but this had neither unit of account or store of value functions.
1) Unit of Account: Prices could be quoted in heads of cattle, and before each exchange, it was necessary that the 2 parties check the price of money (in cattle) so they could determine how much cash was needed for the exchange.
2) Store of Value: Each day, people have to go to the bank and get cash. The person withdrawing it must endorse it with a thumb print that is matched to the account owner’s for verification, and it is stamped with the date. In the course of the particular exchange for which specific pieces of paper are used, the two transactors must endorse the paper with their thumb prints, and the buyer’s is compared to the original one from earlier in the day. Any cash that is not returned to the bank before midnight loses all value. If it is not returned by the seller in the exchange, it cannot be returned, and when returned the depositor’s thumb print is compared to the seller’s. If the 2 thumb prints of the buyer and the one who originally withdrew the cash do not match, it cannot be returned. When returned to the bank, the depositor can choose which of a variety of assets (accounts) to put it in. Cash/Currency/Money is not a store of value.
Very artificial, but it does allow for us to separate the functions. Store of value is mentioned only because it is thought to be central to what makes money interesting to monetary economics (or, as Lucas tried to rechristen it (I think), the study of business cycles).
I just noticed that Scott Sumner made related points just before me. I disagree with him about his point 7, since I think the concern with inflation (price level changes) stems from the aggravations it caused both to calculations (unit of acct) and savers (store of value).
Stephen,
I think you mean therefore it attracts the most cranks.
Scott: “I’d prefer the definition of money be reduced to ‘that which is the medium of account.'”
Agreed, since it’s easy to imagine a system without any quantity of medium of exchange. All we need is capital assets assets as a store of wealth, instant settlements, and a unit of account to avoid n^2 exchange rates, i.e. a classic pure exchange economy like Lucas ’78. But without any relevance for the quantity of the medium, then what is the meaning of “monetarism”?
Min: I was, in fact, thinking about Gesell.
On the matter of disappearing currency: Before the American Revolution, a number of colonies had their own fiat currencies. Pennsylania created its money by lending it. Could something like Gesell’s Free-Money be created by 0% 20 year loans?
Gesell, btw, had good instincts, but I don’t think his idea would have actually done anything. Interest rates would just have risen 5% compared to gold standard money. His idea, in fact, is just Friedman’s 5% rule, which is just a constant velocity version of Scott’s 5% (NGDP) rule.
The problem with money, IMO, has nothing to do with with its medium of exchange properties. It’s inherent in the unit of account. The paradox of thrift, and its dual, the consumption/asset bubble, is every bit as aggravated by nominal debt (and other nominal rigidities) as it is by nominal currency. (I’m just reiterating the standard Keynesian/NK view here). Eliminating the medium of exchange has a lot of desirable properties, but restoring Say’s law, in my opinion, is not one of them.
K: wouldn’t you want to add ‘equivalent of a printing press’ to your list? Money is also special in that the CB can make more of it whenever it wants, and people (within limits) still think of it as ‘wealth’. I have a hard time imagining a the equivalent of a printing press for capital assets.
Jeremy: “Seems like there might be analogies here to social contract theories in political philosophy–most social contract theorists did not claim to be telling a historical story about how ‘pre-contract’ societies became ‘post-contract’ societies. But it’s too early for me to think this through, so this thought could be totally off base.”
That is exactly on base. At least, you are on exactly the same base as me (oops, I think my baseball metaphor just backfired). See my old post here
“Is that gloss a correct paraphrase/summary of your response?”
Yes. Except:
“So when anthropologists (or Quiggan, relying on the anthropologists) say that, as a matter of historical fact, non-monetary economies aren’t barter economies but rather are based on norms of reciprocity and sharing, that’s simply irrelevant.”
Actually, it is relevant, but in a different way than they intended. If he’s right about the history, it suggests to me that barter exchange is so very difficult that it’s rare. It suggests to me that exchange is only workable in practice if it’s monetary exchange, so that money is even more important than I thought it was. If we don’t have monetary exchange, the practical alternatives are non-exchange economies.
Damn! I’ve forgotten how to embed links AGAIN! Can somebody please help me?
Nick, I’ll send you the info via email, the code doesn’t show up when I post it here. F.
<a href=http://worthwhile.typepad.com>best website ever</a> should show up as best website ever
Shoot, sorry, Nick, that should be href not ref. Please edit!
Thanks Frances! edited (mine and yours). How the hell do you remember this stuff? Plus, what you did in that comment above, where you managed to rig it so the href stuff appeared as written??
I’m feeling like I should retire, and take up a simpler life.
Nick wrote, referring to pre-modern economies not using money as a medium of exchange:
“Actually, it is relevant, but in a different way than they intended. If he’s right about the history, it suggests to me that barter exchange is so very difficult that it’s rare. It suggests to me that exchange is only workable in practice if it’s monetary exchange, so that money is even more important than I thought it was. If we don’t have monetary exchange, the practical alternatives are non-exchange economies.”
Good point.
Nick, I remember how to do it the same way I remember how to bake a cake – that is, I don’t remember, I just follow the recipe. Which, in this case, I found by googling ‘how to display html code’.
You, on the other hand, are capable of making a cake without using a recipe, which is a truly awesome and amazing accomplishment.
Nick wrote, re: the analogy with social contract theory:
“See my old post here”
That old post is exactly what I had in mind. I really should quit being so lazy and start using the search function before I comment. 😉 Because half the time I am effectively just asking you to point me to an old post.
Nick also wrote:
“At least, you are on exactly the same base as me (oops, I think my baseball metaphor just backfired).”
Snort! You are on fire today, Nick!