What is Money?

Joe Weisenthal, writing for Business Insider has a column entitled Why The ‘Mint The Coin’ Debate Could Be The Most Important Fiscal Policy Debate You’ll Ever See In Your Life. And the reason he says it’s important is because it gets to a central economic question that’s almost never discussed: “What Is Money?”

The background is the idea floating around to have the President circumvent the artificial debt ceiling crisis with the artificial creation of a trillion dollar platinum coin. The rejoinder from opponents is mostly some variation of “that’s silly,” but they can’t quite explain the particulars of why its silly because that requires them to explain their underlying notion of the essence of money; a notion that is most likely vague and quite possibly incorrect.

Money is a symbol of value, not inherently valuable itself. It’s possible that the things we use to symbolize value have inherent value of their own; but, to the extent you’re exchanging goods and services relying on the inherent value of the thing you receive (a gold coin perhaps), you are not getting paid with money so much as you’re bartering for goods.

Weisenthal says that “money is the creation of the state.” In recent history it has been, and that might be the most practical way of creating money; but I don’t think money has to be a creation of the state. Rather, it has to be regulated in some fashion so that the money supply is proportional to the value created by the economy. If that ratio is maintained, then the money retains its ability to store the value of the goods and services you exchange for that money.

I would have liked to see more in the article about the nature of money, but much of the discussion is the process of how governments create it. But, there is a good quote at the bottom:

Remember, money is a fiction. Real wealth is capital assets, our infrastructure, our cars, our houses, and most importantly the potential human ingenuity and cooperation. Money is just something that the government creates to facilitate the trade in all of those things.

In the case of money, it’s easy to mistake the symbol for the thing being represented. Money is a representation of value, a proxy for value, not the value itself. The economic doctrine of bullionist form of mercantilism was premised on this misconception.

Comments

  1. gizmomathboy says

    I think the best theory about money I ever heard was many years ago from some guest speaker at the IUPUI law school.

    Basically money is a trust mechanism. Everyone follows from that.

    The idea that somehow gold is a better “form” of money than paper is ridiculous in my opinion. The value of money is not inherit in its form. Hell, gold is only valuable because we say it’s valuable. The only valuable thing we do/have is labor. Without labor in some form you don’t have much.

    Also, a great discussion about money is also in Douglas Rushkoff’s Life, Inc. Comparing money held/backed by a central back vs. a local currency. Different purposes and aims.

  2. Carlito Brigante says

    This trillion dollar coin meme is, forgive the pun, priceless. And the article you linked is a great discussion of the matter.

    But I think that money must be the creation of the state. Governments that do not issue money create massive inefficiencies in the transfer of wealth, goods and services. Just think of Andrew Jackson in the 1830s. Or go to Conners Prairie to get a real life lesson.

    • says

      That’s not a good article. It boils down to more or less bare assertions that the idea is “crazy,” “silly,” and illegal. It follows in the pattern I identified in my original post:

      The rejoinder from opponents is mostly some variation of “that’s silly,” but they can’t quite explain the particulars of why its silly because that requires them to explain their underlying notion of the essence of money; a notion that is most likely vague and quite possibly incorrect.

      Congress has made the expenditures. The policy question is whether they are willing to pay for them.

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