What Is Money?

What Is Money?
Thomas Allen

In Money and the Mechanism of Exchange, Jevons discusses the difficulty in defining “money.”[1] Jevons was an Englishman, and his comments are directed at England in the late nineteenth century. He states that a full-weight legal-tender gold coin was undoubtably money. Today such a coin is not money in the legal sense although one can buy more with a gold British sovereign from an Indian peasant than he can with an equivalent quantity of today’s British paper money. He is inclined to include legal-tender bank notes converted on demand into gold coins. Should U.S. bank notes, which were never legal tender before 1933 but could be redeemed in gold on demand, except between 1862 and 1879, be considered money? (Between 1862 and 1879, most banks redeemed bank notes into legal-tender inconvertible government notes, U.S. notes, commonly called greenbacks.) Should inconvertible legal-tender government notes like U.S. notes between 1862 and 1879 be considered money? They were a common medium of exchange and used to discharge debt during this era. Should everything used to pay a debt that a debtor is willing to use and the creditor is willing to accept be considered money? For example, if a debtor pays a debt with a stock certificate and the creditor accepts it as payment, does that make stock certificates money?

Gold as a full-weighted coin seems as it should obviously be money although not in the legal sense. Some economists, such as Gary North,[2] argue that today gold coins are not money because one cannot walk into a department store and buy stuff with it. As more stores begin to accept silver coins at bullion value for payment, North’s argument loses its weight. At least one store in Texas refuses payment in federal reserve notes and only accepts silver in payment.

Is gold bullion money? What about Asian gold bullion jewelry, is it money? George, who wrote under the gold standard, claims that they are not. For example, in the United States, a person could not go to the ticket counter and buy a train ticket with a small bullion bar or Asian bullion jewelry. He probably could not even do it with a British sovereign. He would have to use a U.S. gold coin. Yet under the gold coin standard and to some extent under the gold exchange standard, gold bullion was used to settle foreign accounts. It can easily be coined with minimal cost. As Rothbard notes, the material makes the money and not its shape.[3]

As can be seen from the above brief introduction, economists disagree about what is money. They have been debating money and what it is for more than 200 years. They have not yet come to a consensus.

Most people call what they use to buy everyday goods and services and to pay their debts money. This is what money means in the popular sense and, as we shall see, how some economists define it.

In the legal sense, money is whatever the law declares it to be legal tender. Usually, whatever the law declares to be legal tender, a creditor must accept as payment of debt.

Let’s see how some economists define money.

Webster’s New International Dictionary (second edition, unabridged) defines money as “1. Metal, as gold, silver, or copper, coined, or stamped, and issued by recognized authority as medium of exchange; coinage in general. . . . 4. Any particular form or denomination coin or paper which is lawfully current as money;—now chiefly pl. 5. Anything customarily used as a medium of exchanged and measure of value, as sheep, wampum, copper rings, quills of salt or of gold dust, shovel blades, etc.; hence, Econ., anything having a conventional use either (1) as a medium of exchange or a measure of value, or (2) as a measure of value alone. In the latter case, it is often called a money of accounts, and may be any arbitrary amount of property or wealth of any kind, as a flock of sheep of determined size or a lac (100,000) of rupees. 6. Any written or stamped promise or certificate, such as government note or bank notes (often called paper money), which passes currently as a means of payment.”

F.A. Walker defines money as “that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or enjoy it or apply it to any other use than in turn to tender it to others in discharge of debt or payment for commodities.” [4]

Johnson defines money as “that valuable thing or economic good which possesses in any country or community universal acceptability as a medium of exchange or means of payment.”[5]

Ely defines money as “whatever passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debt.”[6] Ely considers this definition to be the popular definition. He defines money in the economic sense as:

Money, according to the economic conception, must first serve directly and immediately as a measure of value; secondly, it must serve as a medium of exchange; in the third place, it must be capable of serving as a means of making payments; and fourthly, it must be a store or receptacle of value.[7]

Mises defines money as “the thing which serves as the generally accepted and commonly used medium of exchange.”[8]

George defines money as “whatever in any time and place is used as the common medium of exchange. . . .”[9]

Hawtrey defines money as “the means established by law (or custom) for the payment of debts.”[10]

Duesenberry defines money as “something that people are willing to accept in exchanges, even if they have no use for the thing themselves. . . . [M]oney is something people accept in exchange for goods, in the expectation of passing it on to someone else in a further exchange.”[11]

Klien defines money as “anything generally acceptable as a means of paying off debt.”[12]

Robertson defines money as “anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligation.”[13]

Gnazzo defines money as “the commodity that has the most stable value, and which can be exchanged in value or kind, for any other commodity, or service in the market place.”[14]

As can be seen from these definitions, money is defined primarily by its functions, especially its function as a medium of exchange. These basic functions of money are a medium of exchange, a standard or measure of value, a store of value, and a payment of debt. These functions are discussed later. Hawtrey remarks, “Money is one of those concepts which, like a teaspoon or an umbrella, but unlike an earthquake or a buttercup, are definable primarily by the use or purpose which they serve.”[15]

Money is that thing that people accept as final payment for their labor and products. It is whatever a community uses to exchange for goods and services and to discharge debts and other monetary obligations. It can be fiat money or commodity money. These two types of money are discussed later.

People use a thing as money for one of two reasons. One is that the markets prescribe its use. (The markets are the people acting spontaneously in their economic activity according to their economic contribution.) The other is that the government forces its use. Market activity leads to commodity money whereas governmental coercion leads to fiat money.

The thing that the markets choose to be money is (or becomes) the most marketable or saleable thing in that economy. The more marketable or saleable that a thing is the less it changes value when it changes hands. For example, when one buys a car and immediately tries to sell it even without moving it from the dealership, he cannot sell it for the price that he paid just moments earlier. An immediate sale results in a noticeable, and possibly significant, drop in price (value or purchasing power). Likewise, with stock, when one buys a stock, he pays the higher ask price. When he sells it, he sells it at the lower bid price. However, when a person sells (exchanges) a product for money, he can immediately use that money with no noticeable loss in value or purchasing power. Thus, one can buy money by selling his labor or goods and immediately sell it by buying another’s labor or goods with no risk of a noticeable loss in value. That is because of the marketability or saleability of money. It is so marketable that it can change hands without a loss of value. With all other items, a person risks a noticeable loss if he immediately sells that which he has just bought.

Money has only one real utility and that is its exchangeability. People want it because of this utility. Like a hammer, money performs a specific service, and people want it because it performs that service. They can easily exchange it for goods and services that they want to consume. People want money not to consume it, but to exchange it for things that they want to consume.

Money has no inherent value in and of itself. Its value lies within the goods and services for which it can be exchanged. It represents purchasing power and is a receipt for value. It represents the value of the thing for which it is exchanged. Because money is only useful for buying and selling goods and services, the more that a given amount of money can buy, the greater its purchasing power.[16]

According to Alchian and Allen, “Money is a device that lowers costs of exchange and enlarges productivity via specialization.”[17] Rothbard states, “[Money enables] goods and services to travel more expeditiously from one person to another.”[18] George writes, “. . . [money] may be passed from hand to hand in canceling obligations or transferring ownership. . . .”[19] George adds, “. . . the use of money, no matter of what it be composed, is not directly to satisfy desire, but indirectly to satisfy desire through exchange for other things.”[20] Duesenberry remarks, “Unlike most things, money isn’t used up when it is used.”[21] People acquire money not to consume it or to employ it in their own productive activity, but to exchange it in the future for goods and services.

In conclusion, money is whatever a community accepts as payment for goods and services and as payment of debt. It is also the standard by which the values of goods and services are measured and compared. It can vary with time and place. What a community uses for money at one time may differ from that used at another time. What one community uses for money may differ from that which another community uses.

Some commodities possess characteristics that other commodities lack giving them an advantage in the use of money. Such commodities become money when the markets are left free to choose their money.

Money should not be confused with wealth. It is not wealth; it is a tool to acquire wealth. Things like food, cars, houses, and factories are wealth. Money can reduce wealth to a single number, price.

Nevertheless, because gold and silver are desirable in themselves, they are part of wealth even when in the form of coins. Gold and silver coins can be thought of as wealth in circulation. Being merely legal claims, paper money, whether redeemable or irredeemable, is not a part of wealth.

Fiat money adherents mistakenly believe that money creates wealth. They believe that inflating the money supply increases wealth. The opposite is true. Inflation destroys wealth. Inflation drives down the purchasing power (value) of money.

Wealth causes an increase in the value of money. If productivity increases faster than the money supply, the purchasing power of money increases. With commodity money, as wealth increases, general prices decline, and the value of money rises. This increase in money’s value gives the incentive to search for more of the monetary commodity.

Endnotes
1. W. Stanlely Jevons, Money and the Mechanism of Exchange (New York, N.Y.: D. Appleton and Co., 1896), pp. 248-250.

2. Gary North “What Is Money? Part 2: Precious Metal Coinage,” Oct. 1, 2009, http://www.goldseek.com/tools/print.php, Nov. 26, 2009.

3. Murray N. Rothbard, The Case for a 100 Percent Gold Dollar (Washington, D.C.: Libertarian Review Press, 1974), p. 12.

4. C.F. Bastable,“Money,” Encyclopedia Britannica, R.S. Peale Reprint (1890), XVI, 720.

5. Joseph French Johnson. Money and Currency: In Relation to Industry, Prices, and the Rate of Interest (Revised edition. Boston, Massachusetts: Ginn and Company, 1905), p. 7.

6. Richard T. Ely, An Introduction to Political Economy (Revised edition. New York, New York: Eaton & Mains, 1901), p 177.

7. Ibid., p. 178.

8. Ludwig von Mises, Human Action: A Treatise on Economics (3rd revised edition. Chicago, Illinois: Henry Regnery Company, 1963), p. 401.

9. Henry George, The Science of Political Economy (1897; reprint. New York, New York: Robert Schalkenbach Foundation, 1962), p. 494.

10. Ralph George Hawtrey, Currency and Credit (London, England: Longsmans, Green and Co., 1919), p. 17.

11. James S. Duesenberry, Money and Credit: Impact and Control (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1964.), p. 6.

12. John J. Klein, Money and the Economy (4th ed. New York, New York: Harcourt Brace Jovanovich, Inc., 1978), p. 3.

13. D.H. Robertson, Money (Chicago, Illinois: University of Chicago Press, 1957), p. 2.

14. Douglass V. Gnazzo, “Honest Money: What It Is and What It Isn’t,” part 1, 2006, http://www.honestmoneyreport.com/archives/2006/0312.php, Jan. 1, 2007.

15. Hawtrey, p. 1.

16. Douglass V. Gnazzo, “Honest Money: What It Is and What It Isn’t,” part 2, 2006, http://www.honestmoneyreport.com/archives/2006/0319.php, Jan. 1, 2007.

17. Armen A. Alchian and William R. Allen, University Economics: Elements of Inquiry (3rd edition. Belmont, California: Wadsworth Publishing Co., Inc., 1972.), p. 572.

18. Murray N. Rothbard, What Has Government Done to Our Money? (Santa Ana, California: Rampart College, 1963), p. 11.

19. George, p. 483.

20. Ibid., p. 484.

21. Duesenberry, p. 3.

Copyright © 2010 by Thomas Coley Allen.

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