Money

Mary Ann Dimand amaebi at iwon.com
Thu Jun 29 14:04:51 EDT 2000


Ven wrote:

> One [article] that I remember savaged the idea that there was
> such a thing as "real money" (what we use) as opposed
> to "primitive valuables" (used by primitives?).


Then Paul said:

> Thinking about it, I'm tempted to say that the thing that
> distinguishes "real money" from "primitive valuables" is
> that "real money" isn't really valuable.
(And then some more.)

I'm not contradicting either Ven or Paul, who are writing very sensibly. But
I also can't (okay, won't :D ) refrain any longer from doing a summary of
the intro macroeconomics "What is money?" lecture.

The eminent economist E. A. Robinson famously said (and I paraphrase out of
laziness), "What is money? We don't know, but we use it very nicely, thank
you." This is still the case. There are certain functions and
characteristics that money fills and has, but different object fit the
decription of "perfect theoretical money" to different degrees. That is, the
"moneyness" of different things differs-- or, if you like, there are many
money substitutes.

Money fulfills three functions economists are required to be able to recite
in their sleep.
(1) It is a store of value. That is, basically, you can put it in the
cupboard and still have some of it the next day. Bananas are not a very good
store of value. Pound notes are a much better store of value. Bank accounts
are yet a better store of value, when they pay interest. *Please see next
function for the meaning of value.
(2) It is a medium of exchange. That is, when you want to buy a packet of
chewing gum, money is stuff that the corner store's clerks will accept. This
indicates how llamas are less money-like than coins. *This is generally
acknowledged as the most important function of money, and it is useful to
consider the value of money to be the quantity of goods it can purchase. **
Mind you, something which isn't a good store of value will not be as useful
as a medium of exchange. That's why people substitute away from a currency
which is hyper-inflating.
(3) It is a unit of account. This is a rather conceptual function. It means
that we value things in money, or write prices in money. These days we talk
of 2 million dollar homes and $45,000 a year jobs. Hudson Bay Company used
to post prices in one or two currencies, beaver pelts and wampum.

The ideal characteristics of money are simply attributes which cause it to
fulfill those functions more efficiently.
Portability-- easier medium of exchange.
Perfect divisibility-- easier medium of exchange.
And there are several characteristics which enable money to facilitate
exchange, savings and so on, without it wasting economic resources. If we
use something with an alternative use for an exchange-token, it is being
kept from that alternative use, which is a cost. So perfect theoretical
money has no value in itself and costs nothing to produce. (Gold which is
being hoarded or passed around in the form of coins is not being used to
make dental fillings, jewelery or computer chips, for example.)

I'll shut up now, but I can spout this stuff, including odd examples of
moneys which have been used, at considerable length, and will of course do
so on request.

Mary Ann
fan of Roy Radford's "Economics of a Prisoner of War Camp"

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