Friday, November 9, 2012


Money has always been for me the medium of exchange. What we spend. I was taught also that money is a standard of value and a store of value. Taught in the 1970s.

Store of value, I guess we can let that one go. Marcus says "the store of value function is the least important. There are many substitutes available." Nick says "'Store of value' is not a defining function of money, because my canoe is a store of value too."

I want to say that the "store of value" view of money probably originated in a time when the value of money was relatively stable. Your canoe would get old and leaky and lose value, but your money would hold its value. That's not so much the case any more, so now people say there are many alternatives to money as a store of value.

It is significant that there has been a change in the view of money as a store of value, and this significance is worth remembering. But since the store-of-value function has changed, we can let that one go for now. That leaves us with medium-of-exchange and standard-of-value.

Standard of value, I figured out for myself some years back. It's like a standard of distance measurement, or time measurement, or weight measurement or volume measurement. The foot... the hour... the pound... the gallon... and the dollar.

I remember something about Thomas Jefferson coming up with the name "dollar" based on some word that started with T. Some other kind of money, I think. When the U.S.A. was founded, back in Jefferson's time, they had to invent their own money. It was either that, or use some other government's invention. So they invented the dollar. They set their own standard.

But standard-of-value is a concept that seems to have fallen out of favor. Perhaps again the problem is that the dollar doesn't store value well. If it's not a good store of value, then it's not a good standard of value either, I suppose. These days people speak of the medium-of-account.

I think there may be some confusion here that is not mine.

Marcus says my phrase standard-of-value may be equivalent to his phrase medium-of-account. Nick says "all prices are quoted in terms of money", so money is the medium of account. I think, prices are quoted in terms of the standard of value so, yes, "standard of value" and "medium of account" are at least somewhat equivalent. Again, however, I think there is some confusion here, though I cannot yet put my finger on it.

In an update, Nick says "just to clarify terminology: in my model, gold is the medium of account; and (say) an ounce of gold is the unit of account." Yeah, I got it now. In Nick's model, prices are not simply quoted in terms of gold. Prices are quoted in ounces of gold, or fractions or multiples of ounces. Prices are quoted in terms of the standard of value or the unit of account, not the medium of account.

The unit of account is conceptually the same as the standard of value -- except, of course, that the one originates with government, and the other with men of wealth. So the unit of account is comparable to the standard of value. The medium of account, evidently then, is not.

So now there are four concepts rather than three: Medium of exchange, store of value, standard of value (or unit of account), and medium of account. If I can cut to the chase here, the medium-of-exchange is money that we spend. The medium-of-account is money that we don't spend. And this comes back full circle, to what I said to Marcus: "I always think in terms of two quantities of money: in circulation and in savings."

A medium is a medium. The medium of exchange is our money that we exchange for stuff. The medium of account is our money that we count.

Our concept of money as a store of value changed, because in inflationary times, money is not a good store of value.

Our concept of money as a standard of value changed for much the same reason. But when we were inventing the standard of value, we were creating our government. When we invent alternatives to the standard of value, we are creating alternatives to our government. Dark age alternatives, I suggest.

And our concept of money as a medium of exchange has changed, because now it seems that the medium of account dominates all other functions of money. One must be open to thinking about how this may have happened.

Greg links to Michael Sankowski's The Medium of Account Dominates the Functions of Money at Monetary Realism. Sankowski writes:

Many of our more important transactions in the financial world do not involve exchanging the medium of exchange. They involve the valuation of assets in the medium of account, and promises to provide (possibly) some medium of exchange later in compensation.

He gives several good examples. He says, "My take is the accounting function of money dominates the exchange function." He quotes Scott Sumner, who says, “I argue that money is the medium of account.” Greg says "I might actually agree with Scott". I told Greg, "I seem to find myself tending to agree with Sumner, too."

Money has always been for me the medium of exchange. But now I find myself agreeing with someone who says money is the medium of account. Another change. But it is not I who has changed.

It is not you or I, but the economy that has changed.

How, specifically, has the economy changed? Sankowski provides a clue when he refers to "transactions in the financial world". The growth of finance has brought with it a growth in importance of the medium of account. The decline of employment and output has brought with it a decline in importance of the medium of exchange.

"The accounting function of money dominates the exchange function," Michael Sankowski says. "It’s hard to see when you don’t think about accounting much, but accountants rule our world, because they define it."

No. Not that part. Everything else was good. Not this. Accountants don't rule the world because they define it. Accountants don't rule the world, at all. Men of wealth rule the world. Sometimes they create governments. Sometimes they destroy governments.

Do not be satisfied with "accountants rule our world, because they define it." There is much more going on here, than that.

And there is much at stake.


Greg said...

Well the accountants are hired by the men of wealth and those accountants are paid handsomely to tell the men of wealth just how wealthy they are. Rating agencies, accountants and others all exist to keep reassuring, or reconfiguring if necessary, the "accounts" to make sure Geoffrey Wellington Wadsworth III stays in the lead. MOA is all about scorekeeping as Mosler would say. There is private scorekeeping and then there is the public scorekeeper..... the Fed.

While I do agree with Sumner that MOA function of money has come to dominate, I dont view that positively. Its natural I suppose as money becomes more electronic and everything has a price, but it is still a violation of fundamental market principles to treat an asset with a price tag of 100K$ as equivalent to a 100K$ bill, which is what banks and Sumner are trying to do in the name of liquidity.

One of the flaws in our financial system I think is that our financial institutions take an asset like a stock that has a price or value of 100$, which there may be 1 million shares of, and they treat it in their accounting the same as they do a 100$ bill! So you have a million entities valuing that asset on their balance sheet at 100$ at the same time when in fact there is no way they could all get 100$ for that asset at the same time. Any attempt of ALL OF THEM to get 100$ for that asset would immediately drive that value towards zero. Only the earliest movers could get that price, the later guys are stuck with a 25$ asset ..... or less maybe.

Keep going on this topic Art. I think its THE important one!

The Arthurian said...

Yes, what would happen with the million $100 assets if they all try to sell at once is the same as what happened in the crisis, when asset values fell suddenly, forcing even more people to try to sell their assets. It is an excellent analysis you have here. Reminds me of McCulley's The Paradox of Deleveraging.

RE your second paragraph, I don't view it positively, either. But I do not agree that this is a "natural" change. I see it as the result of bad policy -- policy that favors finance at every turn, at the expense of the productive sector. Literally, the expense.

I have great difficulty accepting economic concepts that I have not seen for myself, like "hoarding" when I read about it in the 1970s, and this separation of MoE and MoA as Marcus in particular writes of it.

(Marcus lived thru it, and he therefore DOES accept it.)

I imagine that other people have the same difficulty I do with such concepts, and therefore see strange developments as "natural". I think we must be careful with that word. (The "natural" rate of unemployment comes to mind.)

I have one more post written on the topic, and thought of another while reading your remarks just now.