Home | Business News | Browse by Publication | A | American Economist

What is (not) money? Medium of exchange [not equal to] means of payment.

Article Excerpt
1. Introduction

What is money? In economics, it is unanimously defined as the medium of exchange. But its interpretation varies from author to author. Some authors refer to medium of exchange as "anything that is generally accepted as payment for goods and services or in the settlement of debts" (Hubbard, 2005, p. 14), (1) while others use it as a synonym of means of payment (e.g., Thomas, 2006, p. 21). These treatments, however, are not only pedagogically troublesome but also conceptually incorrect. For example, almost all students get very confused when told check is not money, in particular, right after they had just learnt that "money is anything that is generally accepted as payment." The standard argument in most textbooks is that "check is not money but the checking deposits are" without explaining why a check is not money. Mumbles from students would often be "A check is indeed generally accepted as payment, by definition, why isn't it money? If a check is not money, then what is it?" To our knowledge, no textbook has directly answered these questions. Therefore, it is necessary to define money correctly so that one can easily judge whether a commonly-used "means of payment" is money, by definition.

This note is intended to provide such a formulaic definition of money. We define money as medium of exchange--the set of assets in an economy that people regularly exchange for goods and services from others. There are two key points in this definition. First, money must be an asset that signifies a part of what its holder owns. Second, people normally convert their assets from other forms to this specific one before exchanging for goods and services, implying that this set of assets are generally accepted in transactions. By definition, currency and demand deposits are money, while checks, credit and debit cards are not. This is because currency and checking deposits are their owner's assets, whereas a check or a credit/debit card is not a part of its owner's assets.

Then, what is check if...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!