The Money Confusion
The always-brilliant J. W. Mason’s response to what in my opinion is a quite befuddled Mike Beggs review in Jacobin of David Graeber’s Debt: The First Five Thousand Years prompts me to tackle a subject that I’ve been worrying at for a long time: Money.
I’ve been worrying at it despite (or because of) endless reading spanning centuries of money thinkers, reading that has brought me to the conclusion that economists don’t have an even-vaguely coherent or agreed-upon definition of what money is. No: saying that it “serves three purposes” — store of value, means of exchange, and unit of account — does not a definition make. Not even close. In my opinion, that fumbling tripartite stab at something vaguely definition-like actually takes us farther from, and obfuscates, any useful definition.
It’s not uncommon to find leading economists of all stripes — even deep money thinkers like Randall Wray — using vague, quasi-technical terms like “moneyness” and “money-like.” They don’t seem to have a tight technical definition that they can rely upon others to understand and use synonymously. cf., Decades, centuries of inconclusive argument on the proper definition(s) of “the money supply,” and the various definitions thereof.
What is arguably the most important word in economics remains undefined or at best variously and inconsistently defined — and used.
We find this “money confusion” in the center of J. W.’s response, where he addresses the theoretical (and historical) tangles surrounding commodity, fiat, and credit money — a quagmire he illuminates nicely, but doesn’t manage to untangle. He continues (emphasis mine):
“It is odd,” Mike says, “that Graeber claims that ‘you can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter’ – because there actually are things called dollars you can touch, carry around in your wallet, and spend.” And, “however far credit may stretch money, it still depends on a monetary base: people ultimately expect to get paid in some form or other.” And, most decisively, “What circulates [as money] need not be a physical thing, but it is a thing in the sense that it cannot be in two places at once: when a payment is made, a quantity is deleted from one account and added to another. That the thing that is accepted in payment may be a third party’s liability does not change this fundamental point.” These are all, quite simply, statements of Friedman’s quantity theory of money, refuted by generations of Post Keynesian economists but still carrying on its zombie existence in the textbooks.
Open your wallet again: Yes, you see things called dollars, but most likely you also see a piece of pallastic labeled Visa or Mastercard. This is money too — you can buy almost anything with t that you can buy with the bills. When you do so, new monetary liabilities are created on the spot, linking you to your bank and your bank to the vendor. Nothing is deleted from anywhere. You do, of course, have a credit limit, but that depends on what you’re buying an who you are buying it from, and it can rise or fall for all sorts of reasons without changes in anyone else’s. This is the fundamental difference between fiat and commodity money, on the one hand, and credit money on the other. There is a fixed quantity of the former but not of the latter. Now if the maximum volume of credit that could be created by banks was closely linked to their holdings of gold or state tokens, it wouldn’t make a difference; and thanks to various regulatory and other constraints, this was more or less true for much of the 19th and 20th centuries. But it is not true today. The idea of money as a “thing” that you “carry around” is fundamentally wrong as a description of today’s monetary system.
This fundamental wrongness (if it is indeed wrong) is inscribed right at the top of the Wikipedia article on money, and in almost every economist’s understanding of the concept (bold mine):
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts…
And the Money Supply entry explicitly acknowledges the definitional problem:
There are several ways to define “money,”
I don’t think Graeber is completely right in his characterizations of money, Beggs completely doesn’t get it, and Mason doesn’t go go far enough. Despite common usage, that idea of money as a “thing” that you can carry around is not a useful technical economic definition for discussing any monetary system. It doesn’t allow us to think about money or money economies coherently.
Imagine if physicists didn’t have a solid definition of energy — if they meant slightly (or wildly) different things when they referred to it, sometimes hewing to some vernacular usage, sometimes silently assuming various technical definitions. Or if one was never sure which definition they were using in any given discussion. Or if two physicists arguing were frequently using different implicit definitions, and often weren’t even aware of it. Or if they shifted their own (implicit) definitions within the course of a discussion, often even within a single sentence?
Physics discussions would be in the same kind of eternally inconclusive mess that economics is in, and has been in for centuries.
I want to suggest a definition in which a dollar bill is not money. It’s a definition that I’m finding to be conceptually useful, tractable, and applicable to much of the good economic thought that has emerged over the centuries (emerging, amazingly, even in the absence of such a definition). Neither is a gold coin money, and neither is a balance in your checking account. Economists have been unable to disentangle themselves from that common, vernacular usage. What they (we) need is a term of art, a technical term that is clearly defined and uniformly deployed. As with many terms of art, such a definition is likely to bear little or at best only a glancing resemblance to everyday usage.
So if a dollar bill isn’t money, what is it? It’s a financial asset, as are gold coins, bank deposits, bonds, stocks, collateralized debt obligations, and so on and so forth, all of which embody or represent money. Ditto bank reserves. (This last is important because reserves are — for sensible reasons, within the definitional vacuum that economics inhabits — excluded from almost all definitions of the money supply. Nevertheless, they’re financial assets that embody money, in a complicated institutional way. They have very special properties, different from other financial assets.)
So what is money? Let’s take a look at the physics definition of energy, and see if it might be a useful guide. Here from Wikipedia (which at least has the virtue of not being widely disagreed with; otherwise it would be rewritten):
In physics, energy … is an indirectly observed quantity that is often understood as the ability of a physical system to do work on other physical systems.
That’s a pretty heady conceptual definition. Does something similar work with money? Try this:
Or a simpler version: money is exchange value.
Like energy, under this definition money cannot exist except as manifested in some embodiment — for energy, a gallon of gas, fields/waves/particles propagating through the void, or a boulder at the top of a hill; for money, some financial asset. Absent such an embodiment, energy and money do not even, cannot even, exist. (Though exchange value obviously can.)
Money in this definition does not exist except as it is embodied in financial assets. But that doesn’t mean that financial assets — even dollar bills – are money.
If you’ve got a battery in your pocket, do you say you’re carrying “energy”? You could, but you don’t because you know that you’re carrying a battery that embodies or contains or holds energy. You understand the conceptual distinction between the battery and the energy.
But when you have a dollar bill in your pocket, you do say, “I have money in my pocket.” You don’t make the distinction — that the bill and the money are conceptually different things.
Ditto with bank deposits: they are legally enforceable claims. They’re not “money” (in this definition). And other financial assets: we commonly say “how much money” do you have? What we really mean is “what is the net value of your financial assets?”
Let’s go back to the key word in the physics definition of energy, and in my definition of money: “quantity.” What does Wikipedia tell us about that word?
Quantity is a property that can exist as a magnitude or multitude. Quantities can be compared in terms of “more”, “less” or “equal”, or by assigning a numerical value in terms of a unit of measurement. Quantity is among the basic classes of things along with quality, substance, change, and relation. Being a fundamental term, quantity is used to refer to any type of quantitative properties or attributes of things. Some quantities are such by their inner nature (as number), while others are functioning as states (properties, dimensions, attributes) of things such as heavy and light, long and short, broad and narrow, small and great, or much and little.
So by this definition, money is a quantitative property. A property of what? I would say: financial assets. Those assets have other properties as well: exchangeability (in different markets), confidence, volatility, etc. All those properties are mutually interrelated in ways that I will not delve into here, and those other properties all affect the quantitative property — money — that is embodied in all financial assets.
It seems to me that economists’ failure to make that conceptual distinction between money and financial assets makes it impossible to discuss the economics of a money-based economy coherently, or understand such an economy properly. They end up talking about things like “the demand for money” and “the market for money” (instead of “the markets for different financial assets”) — which are at best vague and at worst meaningless phrases under this definition — when what they really mean, what they really need to discuss, is shifting preferences/demand for different types of financial assets that have different properties – all of which assets embody “money.” (Also: the forces driving changing substitution preferences among these different asset classes and properties of different asset classes — substitution being the sine qua non of demand curves.)
By this definition:
I’m proposing a very abstract, term-of-art definition here, one that is far removed from most understandings of “money.” But look at the physics definition of energy, above. Does it have the kind of simple, intuitive clarity that we feel when we say “I’m full of energy today” or “I have money in my pocket”? Not even close. The definition is actually quite hard to understand. Nevertheless, it seems to have served its purpose very well over the centuries.
I have a lot more I’d like to say on this subject — for instance on the egregiously sloppy and criminally vague usages of the term “capital” throughout economics writing — but I want to stop here and see if my gentle readers find any value in this thinking, whether they can contribute to my muddled and ever-groping understanding of how (money) economies work. Thoughts?
Cross-posted at Asymptosis.
Highly recommend following the link:
– Money is not an object
– The money of account is abstract
– It is represents a social debt relation
– In any modern nation the money of account is chosen by the national government
Thanks, a good primer on MMT like many others out there, very valuable, but it doesn’t really address the central semantic/technical issue addressed here. Which is why even Randall Wray is left talking about “money-like things”, as if dollar bills were money and t-bills were somewhat less so. Suggesting here that neither is, can be, money-like. That rather, each embodies money, which is a conceptually different thing than a financial asset..
Also the above, I think, confuses money with currency which in its abstract sense is the unit of account. “Currency of account” makes sense to me. “Money of account” doesn’t.
— an abstract, divisible substance
— which is commonly accepted in exchange for real goods, and has no intrinsic value in the absence of that acceptance
— which is numbered, stored and exchanged by rigidly controlled institutions
— which, being abstract, does not decay or degrade (just as numbers do not degrade, though math books do)
— which symbolizes human effort, spread across time.
Remove the human acceptance of money from money, and it collapses like a soap bubble.
So, the essential elements are
It’s a grand invention and works pretty well, but a fleeting glance is enough to show it is vulnerable to sleight-of-hand, cheating and default. The further the span of time it bridges, the easier it is for it to lose its value.
Money, in fact, cannot exist without regulation, beyond the brief time it takes for people to lose their belief in it.
Unfortunately, it’s real hard to talk to people about an “intellectual substance.”
Oh, and it’s gaseous. Not solid, like earth, nor fluid and incompressible like water, but fluid and compressible, like air.
Just today, I was thinking that nobody understands money (seriously.)
I think Steve has taken a first step in a good direction. It’s going to take a while and some hard thinking to wrap my head around it.
Good job, sir!
While much of what you say rings true to me, I don’t think that thinking about money as a substance is useful, conceptually, any more than thinking about energy as a substance is. It’s a quantity, which is a property. I find that hard to understand, but I think it works.
” Unfortunately, it’s real hard to talk to people about an “intellectual substance.” “
I am not so sure about “it does not decay.”
I’m glad you said that.
i have been thinking about this off and on for a longish time.
You may have gotten further than I have, but I wouldn’t get too carried away yet. Instead I would take home the message that we need to be careful when we talk about “money” that we agree – at any one time -about what we are talking about, and keep open the possibility that neither party is right.
That “money” is the dollar bill in your pocket is a servicible enough “definition” for a lot of purposes.
One aspect of money that has struck me is that as a “store of value” it is pretty much deceptive: I may trade a number of dollar bills for a pickup truck today because I have some idea of what else i could trade those dollars for in the near term, and “maybe” in the future. But when I get to the future, the things i might want to trade a few dollars, and how many of them, may… are likely to… have changed a lot. All I have by keeping my “money” in a bank (or stock certificate) is a sense that the more of “it” I have in the future the better off I am likely to be in trading it for what i want then. But even this can be wrong.. I may well have been better off giving my money to the poor and taking up my begging bowl…. one doesn’t know
i think money is an illusion
and while energy is “the ability to do work” it is possible to have energy and no ability to do work (something called entropy needs to be considered.)
i think we may find ourselves with “money” and no ability to to work. the present economic situatioin suggests itself.
@coberly: “we need to be careful when we talk about “money” that we agree – at any one time -about what we are talking about”
I agree completely, and economists’ frequent failure to do so with “money” gave rise to the frustration prompting this post.
It may be too much to hope for any kind of grand definition, as Anonymous pointed out very nicely. But thinking clearly about its general nature still helps, I think, when you come to those particular situations.
As long as there is a functioning government, money is legal tender; it must be accepted by those who are selling. Another has characterized it as a way of keeping score.
Do economists need a theory of relativity for money?
Money has always been an abstraction and it has been becoming more abstract at an accelerating pace since the end of Breton Woods. While most with an education that extends to Econ 103 know money is now based upon debt very very few appreciate what that means. Especially it seems economists.
Money now is backed by debt but the concept of money being backed by anything has become antiquated. To wit, MMT. So we are at the point where money has no meaning.
Operationally on the macro scale what matters is no longer money but rather the ability of the system to expand credit. So in service of that Central Banks ‘print’ money so old debt can be kept current, and that debts ‘value’ at or near par thus allowing the issuance and absorption of new debt. Which begets more printing ad infinitum and thus making the money/debt equation an unanswerable chicken or egg proposition.
My point, being poorly made, is that the abstraction that is money is receding down the rabbit hole at the time in history when everything in our societies, cultures and most certainly our politics is supposedly based upon it.
History will have some laughs over this.
i am not so sure. as long as people exchange (labor for) things, some “medium” seems likely to be needed.
i am reminded of the concept of “half reactions” by which the chemists of my high school years kept track of the electrons in a chemical reaction. money may be similar to those “electrons,” which at the time were somewhat abstract themselves.
how about “anything susceptible of a mutually agreed upon “value” that is sufficiently general that it can function in a broad enough variety of transactions so as to be not itself a “factor” in the exchange”
obviously a first effort.
also obviously i am still thinking of paper dollars, or electronic records. Steves question is more general… if i get that far i suspect that i may decide that “money” in his sense is something like “a record of the quantity of such transactions… as valued in their own terms… maintained by a govenment or recognized central “bank”… for the purpose of assuring a sufficient degree of stability in the general value of the unit of exchange” ?
Re: Rapier’s comment, many of course think of money as things in many minds its the pile of gold coins i.e. specie to use the old fashioned term. (They are the gold bugs, money must be real stuff ideally gold). They want money to really exist and regard the modern theorys as just big frauds perhaps a ponzi scheme bigger than Madoff and world wide.
You are asking the wrong question. Don’t ask “What is money?” Ask “Whose liability is that particular money?” You’ll find that money issued by the Fed is the Fed’s liability, checking accounts issued by Wells Fargo are Wells Fargo’s liability, credit card dollars are AMEX’s liability, Disney dollars are Disney’s liability, etc. You won’t have any problem defining what Fed-issued money is, or bank-issued money, etc. Then, when you want to know what causes Fed-issued money to lose value, you need look no further than the Fed’s own balance sheet, which plainly shows the assets that back its money.
We know money isn’t a substance or a physical quantity. But what happens if we think of money as a “language?”
Accepted? Yes, by all those who speak it. And it can be learned by those who don’t speak it, and translated too.
Abstract? Yes. Aside from “mama,” no word is tied to its object except by common agreement.
Regulated? Yes, mostly by the pressures of common usage, though this regulation is flexible and changes over time.
Shifted in time? Yes, by definition. Language is formulated information which can be pulled from context and shifted in time. Money, too, is “effort” which can be pulled from context and shifted in time.
There, that’s all settled.
at the risk of going backward here
“money” is debt.
at first…according to imaginary history… it is debt as it exists in the minds of the person who “gave” and the person who “feels some pressure to give back.”
then it may become a public statement of debt, which now exists in the minds of all who hear the public statement.
then it may become a written record of such debt.
then become generalized, transferable, “evidence” of debt… as ounces of gold or difficult to counterfeit pieces of paper,
obviously i am still at the lower end of the question.. not really having answered what it is when the “Fed” creates it. I think the answer may be the same : “debt”… the government can issue a “certificate of debt” which it will honor by accepting it for payment of taxes, and because it is transferable, “everyone” will accept it in exchange… i’ll give you this “iou” from the government in return for that bushel of wheat..
so the problem becomes not “what is money” but how does a goverment control the amount of “debt” it has issued so as not to exceed the economy’s ability to produce without a rise in prices … don’t think i am being circular here… no more than debt is circular… just short cutting my ramble
i think in the end maybe the only “definition” you can give of money is to describe what “it” does in any given transaction. but i also think that in the end that may be the only definition you can give of anything.
It is very easy to define money; one just has to ask, what is the definition supposed to accomplish?
consider real estate appraisals. There are times when a real estate appraisal + title = money (or so close to money that policy makes must consider such as money)
comparison to physics is meaningless, for no universal “rule” flows from “money.” For example, no definition of money yields a velocity of money that is constant.
I think what is missing in your use of physics/energy as a means/example to properly define money is that energy is also a “potential”. The observation of energy is expressed as “work”.
A rock resting on a hill has a potential to expend energy. It is stored energy. It has the potention to accomplish work.
If we are going to talk of money as a quantity, we have to include “potential” and “work”. That gets us to the concept of “labor”.
And we’re off….
It’s a good analogy, and the historical parallel is interesting too. The idea that energy took different forms that were exchangable was a Really Big Thing. Before Joule’s experiments, the prevailing scientific paradigm had heat as a fluid, as a thing. It wasn’t easy to wrap minds around the idea that energy could be a quantity, but not a substance, per se.
This is actually pretty funny, considering that modern economics (as I understand anyway), intentionally robbed quite a lot of concepts from thermodynamics, what with the equilibria and all. In that light, it’s really something that the caloric theory of money still has legs.
I would say it only goes so far though. I like to think of money as, in its essence, an agreement (and by extension, financiers are more like lawyers than engineers). It’s really clever of us humans to make such a thing fungible and exchangeable, but it’s also a caution about pretending too much precision and detachment from the rest of human affairs. One thing I liked about David Graeber’s book was that he brought money right back into the social sphere.
“The idea of money as a “thing” that you “carry around” is fundamentally wrong as a description of today’s monetary system.”
This disjointed statement demonstrates part of the problem. Words, and money as well, depend for their meaning on general acceptance. Theorists and economists and wannabe economists may be all in a muddle about what money is, but the general public is pretty sure that money, whatever else it may be, is the stuff in yer wallet.
The quoted statement objects that physical money is not ‘a description of a system”. That’s true, but also silly. A baseball is not a description of baseball, the game. Physical money is not a description of a monetary system. Who the heck ever said it was. Money is, however, the stuff in our wallets. It’s a lot of other stuff, and it takes a certain silly insistence on making things mean what you need them to mean to say otherwise.
If yer argument doesn’t work if you allows that a dollar bill is money, then you need another argument.
I agree with you. Asking people — including economists — to talk like a dollar bill isn’t money is ridiculous.
In response to this very valid point, and the discussion here and at Asymptosis, I’m starting to think that the answer, since economists don’t know what they mean when they say “money,” is for *economists* to stop talking about money — much as Nick Rowe and Scott Sumner have, to my great approbation, suggested that they stop using the word “saving”.
If they only talked about financial assets — some of which are vernacularly called money but who cares — and concentrated on the many properties of those various types of financial assets, they might have more success.
It might be more useful to analyze the supply and demand for those various *properties,* clearly defined, than to discuss the supply and demand for “money,” or for some undefined (undefinable?) property called “moneyness.”
Is this the same Keifus I know from Slate???
steve, i had a question i was going to ask you, but robert asked it first…
Easy: I’m a Democrat. I don’t belong to any organized school of economics. (Interesting that Noah included the ‘Pubs but not the Dems…)
No truthfully, I guess I gotta go with All Of The Above. Everything that is wrong with all of them is wrong with me.
dont think i could go with all of the above, steve, cause some just rub me the wrong way…
ie, even though i find zero hedge particularly useful, i sure couldnt buy the rest of what noah IDs as austrians…
Money is perfectly analogous to one hand clapping.
I was always partial to Lame Dear’s description of money, Green Frog Skins.
My very first statement in my previous post was that “money is an absstraction”. I hold this to be true. Therefore money is nothing. It is an idea, a product of the human mind. It is nothing.
Money is a human system of, let’s say, trade and account. Any system must serve people. Any call for people to serve a system is Utilitarianism and is evil.
Nicely done Steve.
Steve: I’m a bit surprised that you attribute to me “money-like thing”. I doubt I’ve ever used that. As you should know, I’ve always insisted on separating money as a measuring unit (money of account–related to but I think better than your “exchange value”); and the financial liability (or debt; what you call financial asset–the other side of the coin so to speak).
And to finish: I do use the term “money thing” to refer to the “record” of the financial debt (what you call financial asset) that might be carried in one’s pocket, or might be kept as an electronic entry on a balance sheet. You can call that “thing” money if you like–but then you’ve reintroduced all the confusion of the measuring unit (foot) with the thing being measured (your foot).
Thanks for replying. “Money thing” was the phrase I was (incorrectly) remembering. Shoulda confirmed.
But I also find this:
“What we are getting at is degree of “moneyness”.” … So, unless you’ve got Uncle Sam standing behind you, your IOUs will be “less liquid” and thus inferior “money” in comparison to bank deposits.”
I realize where you’re going in this piece, just pointing out the difficulty that economists face due to the lack of any standard definition or understanding of “money.”
Again, I’m starting to think now that economists should stop talking about money *except* in the vernacular sense, talk about financial assets (including dollar bills) instead.
“Again, I’m starting to think now that economists should stop talking about money *except* in the vernacular sense, talk about financial assets (including dollar bills) instead.”
I’ve been saying this for years, by the way. “Money” is always a liability on someone’s balance sheet–best to be specific about whose and which one.
Yeah. One of the big Ahas in my thinking was thanks to JKH, when I realized that all (financial?) assets are assets *against* something/someone else. Double entry and all that.
This has even led me to the loopy notion that if you have an apple on your kitchen counter that you “own,” or an unencumbered deed to your house, each is a claim against the rest of the world — they “owe” you the right to use it, and you’re holding that “credit.”
Which relates to Randall’s excellent point that all money is credit, and the only way to store money is to “lend” it.
This gets sticky when you “store” your money in real assets like apples and land. cf. the above. More on that anon.
Very nice post. I’m right now plowing through Frederick Soddy’s 1934 The Rôle of Money. In very Victorian language as hard to read today as very Victorian language can be, he is raising exactly the same concerns and definitions you explore here. One passage that resonated:
“What has been termed ‘the moral mystery of credit,’ meaning credit-money, might just as well be termed the immoral mystery of debt. For there is no credit without debt any more than there is height without depth, East without West, or heat without cold. The two are related, and although it takes only one to own wealth it takes two to own a debt, because for every owner there is an ower. Money, of course, is an entirely peculiar form of the credit-debt relation, if only because whereas all other forms are entirely optional, the creditor at any rate being a free agent to enter into this relation or not, money is a credit-debt relation from which none can effectually escape.
If you like, I can distill a bit of your post and give you page numbers to his book where he expounds on the topic.