The Definition of Money

Lecture 1
 Introduction
This lecture examines the definition of
money.
What is meant by money?
Why is it important that we define it
correctly?
What are the problems associated with
measuring money
 Financial Innovation &
Deregulation
• Global markets have seen financial
innovation and deregulation.
• This has led to the breakdown in the
traditional relationships between the
measures of money and economic activity.
• This has raised the issue as to what is meant
by money.
 Definition - a procedure
• One of two procedures.
• Attach labels to real world objects -
Nominalist.
• Attach labels to concepts and then search
for the corresponding real world entity -
Empiricist.
 Characteristics of Money
• Medium of Exchange - (concrete)
• Unit of Account - (abstract)
• Store of Value.
• “Nothing is more ultimate than money.
Instead of going out of existence, unwanted
money gets passed around until it ceases to
be unwanted” Yeager
 Artificial historical
framework
• Commodity money - problem of jointness
• Localised issue - reputation
• Government issue - legal tender
 Forms of money
• No generalised market for titles - (Paul
Davidson)
• Legal restrictions - (Neil Wallace)
• Means of Final Payment - (Charles
Goodhart)
 Liquidity
• Separation of money from other assets is its
superiority in liquidity
• potential to liquidate - use in transactions
• term to maturity - low capital risk
 Pesek and Saving -1
• Money is contrasted with debt. Debt pays
interest while money does not. Debt is
Inside money
• Non-interest bearing deposits are an asset to
the holder but a liability to no one, while
interest bearing deposits are a debt like a
bond
 Pesek and Saving - 2
• Interest payment on deposits loses its
property of ‘moneyness’
• Demarcation between ‘money’ and ‘debt’
• moneyness measured by (rd-rm)
• debtedness measured by rd
 Critique
• Friedman & Schwartz - transactions
services have become a ‘free good’,
available without cost to the holder
• ‘moneyness’ is a joint product with
‘debtedness’
• Newlyn suggests - criterion of ‘neutrality’
 Conclusion
• The definition of money has become
important for 2 reasons
• 1 Trends in financial innovation have
blurred the distinction between money and
non-money
• 2 measuring money is important for policy
How can the emergence of
money be explained?
• Money must emerge as an optimal
exchange system from a world of barter.
• What are the specific properties of money
that make its use general?
• Money is a social phenomenon - exists only
in societies where exchange takes place.
 Classical View
• Money exists on efficiency grounds.
• The problem of double coincidence of wants
• The search for a trading partner involves
costs. The longer the search time the lower
the transaction cost.
• But the longer the search time, the higher the
waiting cost