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:

In economics, money is a quantity that is often understood as value that can be exchanged for real-world goods and services.

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:

Money is not a store of value. Financial assets are stores of value, with the value quantity designated in terms of money, which in turn is designated in terms of a particular unit of currency.

Money is not a medium of exchange. Physical currency is a medium of exchange, as are the legal obligations that we refer to as bank balances. Within the financial industry there are many other units of exchange. Though it’s rare for them to be exchanged directly for real-world goods and services, they can be exchanged for things (bank balances) that can be so exchanged, so it’s quite reasonable to view them as embodying “money.”

Money is not a unit of account. Currencies are units of account. (“Currencies” in the conceptual rather than physical or particular sense of that term — “the dollar,” not “dollar[ bill]s.”)

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 Angry Bear.






20 responses to “The Money Confusion”

  1. paul Avatar

    For you and me, the only “money” that matters is the dollars available for spending in the greater economy, generally disposable income held by wage-earners.

    Credit is a sorry substitute for money, since it comes with a liability that destroys future income not yet earned (at least the way we tend to use it).

  2. binve Avatar

    I like that definition. I like it quite a lot.

  3. paul Avatar

    btw Steve, Excellent post.

    This is a creative approach near and dear to my heart as a mechanical engineer. I generally make arguments myself based on principles of thermodynamics. Economics is after all a system and known systems are subject to relationships that re-occur in all similar systems in one way or the other.

    In my view, traditional (read neoclassical) economics is a a farce based on fallcious assumptions has has no value to the vast majority of citizens. 95% of the economics curriculum should be jettisoned and it’s progenitors retired before they do any further damage.

    Keynes was a true scientist of economics and his ideas will always prove to be true, although they can be refined and moved forward like any scientific thinking. Your approach can win the hearts and minds of science-based thinkers such as engineers, mathemeticians, physicists, biologists, etc. and future economists must come from people of that background, just as the great tennis players of today are athletes that just a decade or so ago were playing football or baseball.

    Modern economists are little more than hacks or as Dan Kervick likes to say, shamanists.

    Real world economics is more predictable than shamanism as it is governed by the “tyranny of the arithmetic” as Bill Mitchell would say, not magic.

  4. […] Cross-posted during Asymptosis. […]

  5. Curt Avatar

    I agree strongly with your point that ‘money’ has been very poorly defined. So I like this effort!
    You probably intend this, but I think it is also an important point that not all things with exchange value are money – such as a pig, let’s say. It could have exchange value to someone who wants a pig, but most people wouldn’t want to be paid with a pig!
    Is there something circular about the notion that ‘financial assets’ embody ‘money’? Is it the fact that the asset can be quantified in terms of it’s ‘money value’ using a currency what makes the asset ‘financial’? Just trying to probe these ideas and terms a little!

  6. Asymptosis Avatar


    Yeah, I made the point in passing that exchange value can obviously exist absent financial assets.

    The thing that distinguishes financial assets from real assets, I think, is that financial assets can’t be consumed by humans (either “directly” or through use/time/decay). You can’t derive human utility from consuming a dollar bill or a t bill. Secondarily that their inputs to production are almost zero. Financial assets *only* embody exchange value, have no consumption value.

    I think this might have profound implications for how supply and demand work in the markets for financial assets, compared to real-good markets. Increased transaction volume in real-good markets necessarily involves increased production (perhaps dampened by higher prices). Transaction volume in the markets for financial assets can double with no necessary increase in production, and can be associated with either price increases or decreases.

    So: It doesn’t seem to make sense to model the supply/demand dynamics in the markets for financial assets as if they worked similarly to real-good markets.

  7. Foppe Avatar

    Just mentioning it for the sake of completeness, but you’ve also seen Beggs’s response to Mason at Jacobin?

  8. Asymptosis Avatar


    Thanks! On my way…

  9. Curt Avatar

    Yes, interesting point about the ease of creation of financial assets. Where do you place gold? It does have some use, but is also important in terms of exchange value.
    Might we say that anything that has exchange value can embody money and be quantified in terms of a currency, but that its money value can be impacted by the fact that it also has some consumption value (since storage and transport and maintenance and future sales issues all need to be taken into consideration)? Whereas a pure financial asset in theory at least should have very little of this kind of friction.

  10. JKH Avatar

    “The egregiously sloppy and criminally vague usages of the term …

    Pick your poison.

    I wonder if there is another “discipline” that offers such unlimited optionality in the selection of language – and such a massive proportion of discussion debating the meaning of that language.

    Regarding money, there’s a continuum of intended meaning, depending on context. It could range from bank reserve balances to all financial assets. That’s a lot of optionality.

    There is no law and order in the land of economic terminology. It’s the Wild West. We’re all on our own.

    Very interesting post though.

  11. Asymptosis Avatar


    Thanks. Nice to hear you found it interesting. I gotta figure that in psychology, “thought,” “feeling,” and “emotion” are pretty tough to define. But still, it just seems like in economics, if only because of it’s own self-admiring self-image as a mathematically based science, there should be some kind of handle on this. (And “capital.” Don’t get me started.)

    I’m not at all convinced that they’ve got a conceptually coherent definition of “supply.” Maybe “demand.”

  12. Oliver Avatar

    Linked to this paper by Sergio Rossi over at Mike Norman’s. If you’re interested in more, there’s a good introduction, alongside others by Wray, Lavoie, Davidson and others, in the ‘Handbook of Alternative Monetary Economics’, in case you haven’t come across that book.

    …the money creation process carried out by the bank only provides the economy with the number of money units asked for by the firm (on the assumption that the firm’s creditworthiness satisfies the benchmark set by the banker). To state it clearly, it is the remuneration of labour that gives a purchasing power to money, which, as such, is a mere numerical form of no value whatsoever. Were it not for the monetisation of the production process, banks would be unable to create purchasing power on their own. So, bank deposits are a ‘liquid, multilaterally accepted asset’ (Chick, 2000, p. 131), because they are the organic result (that is, a stock magnitude) of two intimately related actions (or flows): (1) creation, on the monetary side, of the numerical form of payments (money proper) by the banking system, and (2) production, on the real side, of physical output (money’s worth) by the non-bank public, that is, firms and workers taken together.8 So, the flow of money and the flow of production are complementary aspects of the same (income- generating) process. ‘From the beginning, banking and productive systems thus contribute to the determination of a unique macroeconomic structure’ (Cencini, 1997, p. 276).
    In sum, from this point of view money as such is a flow, whose result is a stock (of liquid wealth) in the form of bank deposits. Contrary to the ‘cloakroom theory of banking’ à la Cannan (1921),
    bank deposits are not a financial asset sui generis, originating in some ‘central mystery of modern banking’ (Chick, 2000, p. 131). According to the theory of money emissions, bank deposits are the alter ego of physical output, and come to light as soon as the latter is monetised via the remuneration of wage-earners by firms. The purchasing power of bank deposits has therefore nothing to do with the agents’ trust and confidence in the banking system. In this framework, let us emphasise it, money balances are net worth because they are output – before final consumption of the latter takes place on the goods market.9 Then, when output is sold on the market for produced goods, an equivalent (some would say identical) sum of bank deposits are destroyed, since deposit holders transform a liquid store of wealth into a physical value-in-use, or, to put it in the phraseology of Fama (1980), they exchange a monetary form of wealth for a real form. This exchange, taking place on the product market, destroys a sum of bank deposits equal to the amount of money wages adding up to the production cost of output sold. In fact, the firm recovers on the market for produced goods the income (in the form of deposits) that the bank did lend to it for the payment on the factor market…

  13. binve Avatar


    I don’t know if you are still watching this thread, but here is another interesting post by Lord Keynes that is related to this discussion and has some very good / interesting ideas:

  14. Asymptosis Avatar


    Yep still watching, thanks for the link. I’ve been thinking that financial assets (embodying money) provide utility to those who *hold* them. Unlike real goods and services, though, financial assets cannot be consumed, so (obviously) cannot provide utility to those who consume them. I’m actually thinking of that as the defining difference.

  15. Motley Fool Avatar

    There is one author, in my opinion, that has nailed the definition of money.

    and there it is. 🙂

  16. […] Or, I would say, all of the above. I’d actually replace all three: there is something wrong with the (nonexistent) definition of “money.” But that’s another post. […]

  17. […] Or, I would say, all of the above. I’d actually replace all three: there is something wrong with the (nonexistent) definition of “money.” But that’s another post. […]

  18. […] admire Steve Roth’s (@asymptosis) blog as one of the best on theoretical monetary issues. His post on the characteristics of money is pretty […]

  19. […] written repeatedly (you could start here or here) about what I consider to be economists’ central, crippling confusion: even some of the most […]

  20. […] written repeatedly (you could start here or here) about what I consider to be economists’ central, crippling confusion: even some of the most […]