"Medium of Exchange" and "Medium of Account"

Two items from The Coinage of Ancient Rome:

During which emperor's reign was nearly all silver removed from Roman coins?

Gallienus. When Gallienus (253 - 268 a.d.) became Emperor, the coinage was already very debased. During his disastrous reign almost all silver was removed. He tried to disguise this fact by issuing copper coins which were silver-plated.

The standard gold coin of the early empire was the "aureus." How much gold did it contain?

About 1/5 oz. Unlike the silver coinage, Roman gold coins continued to be minted from good metal through the history of the Empire, undergoing only minor debasement. The weight of the aureus did tend to fluctuate a bit, but it was usually minted at 60 aureii to the Roman pound, which works out to about 1/5 oz of precious metal.

When wealth is excessively concentrated, little or nothing remains to serve as value in the everyday money of everyday folk. But the gold coins, that's a different matter.

What is Money?

From Economicae, ©2008 EconomicsInteractive.com:

What money is may seem obvious, but how would you respond if asked how much money you have? You could count only the cash in your purse or pocket. More likely, you would extend this to "money" held in checking accounts or savings accounts. You might include the total value of any U.S. Savings Bonds or corporate stocks or bonds you own. But why stop there? Most of your possessions are worth money. How about the values of your other assets---a car, clothes, books, a ping-pong table, or other things you own. Just how much money do you have? Ambiguities in this question arise from failure to differentiate between wealth and money.

I think that's about right: Ambiguities arise because of the failure to differentiate between wealth and money.

MoE is money. MoA is financial wealth. All MoE is MoA, but not all MoA is MoE.

Come to think of it, I find it confusing to think of financial wealth as "money". It doesn't simplify anything. Lowest Common Denominator, money is what we spend. What we earn, and what we spend.

Asymptosis: "Different kinds of dollars could have different values"

From the Asymptosis post:

In the normal course of things, a (physical or electronic) dollar has the same designated, ascribed, agreed-upon value as “the dollar.” But as Miles Kimball points out in what he describes as “the most important thing I have ever said about monetary policy,” this need not necessarily be true. A physical dollar can, conceptually at least, have a different value than an electronic dollar. (Once again I would say that each of these is a financial asset, an embodiment of money or exchange value, with particular properties and characteristics which may be in greater or lesser demand — and supply — at different times.) Different kinds of dollars could have different values, as designated in dollars!

 

From Standard Catalog of United States Paper Money, 9th edition:

Beginning in May, 1775, the Congress of the newly unified former colonies began the issue of Continental Currency to finance its fight for freedom.

The Continental Currency was plagued, though, by increasing public distrust. The Continental paper dollar was able to hold its value at par with a specie dollar only until October, 1777, by which time widespread counterfeiting by British, Tories, and opportunists conspired with the natural inflation of a printing press economy and increasing uncertainty as to the outcome of the war to push the exchange ratio of the Continental Currency to $11 in paper for $10 in specie.

After that point the devaluation accelerated. By the next year, October, 1778, the ratio was 4.66 to 1.

The low point was reached in April, 1780, when a dollar in silver or gold was worth $40 Continental. And these were the official exchange ratios adopted by the Congress...


Issued current with the Colonial and Continental currencies were numerous privately-sponsored paper monies emitted by banks (as early as 1732 in Connecticut), utilities, merchants, individuals and even churches.

These issues continued after the Revolutionary War, and proliferated in the 19th Century...

The tens of thousands of privately-issued bank and scrip notes of the 1800s ranged in denomination from one-half cent to several thousand dollars. While today their collector value depends on a combination of rarity, condition and demand; their value when issued was solely dependent on the reputation of the issuing authority -- be it bank, railroad or Main Street apothecarian.

The Medium of Account relative to GDP

Graph #1: Total Financial Assets as a Multiple of GDP
Click Graph for FRED page

Rising in the 1950s.
Stable for most of the 1960s.
Falling during the Great Inflation
Rising from the end of the Great Inflation to around 1993. Again, 1993.
Sharp ups and downs thereafter.

Before 1993 TFA ranged between 2 and 2.7 times GDP.
After 1993 TFA peaked around 3.7 times GDP -- twice, so far -- but never again fell as low as the previous high.

Something definitely changed around 1993. The uptrend became a shocking uptrend. Anyway, by then, to drive asset values down we'd have needed another Great Inflation or some clever policy designed to discourage debt accumulation.

Even the Crisis of 2008 brought the number down hardly at all.

Asymptosis: "the medium of account is always value — not money"

At Asymptosis, Medium of Account vs Unit of Account: Brazil Anyone?

Also at Angry Bear.

Too Much Money Chasing Too Few Goods?

Milton Friedman said, and Anna Schwartz perhaps as late as 2008 said that inflation is always and everywhere demand-pull inflation. As Schwartz put it:

An increase in the supply of money works [by] stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise...

But inflation which results from increased spending must arise from an excess of the medium of exchange. Not from an excess of the medium of account.

An excess of the medium of account may cause a bidding-up of financial asset values, real asset values, and cost-push inflation. It cannot cause demand-pull inflation.

The change in our economy toward greater finance is associated with the decline of real-sector income, with the concentration of wealth, and with a kind of inflation that will never be ended by demand-side constraints.

Loose Ends, Grand Irony

Re-reading, trying to wrap up this series of posts labeled "Medium of Account".


7 November: Medium of Exchange, Standard of Value

I went out of my way to include two things when I took excerpts from Raymond P. Kent's 1953 book. One was his example of a homeowner valuing his house at $8000. Reading that, my first reaction was Maybe this is a typo?

Nah. That was written in 1953. Prices have gone up, brother. And then there was the housing bubble.

(Also, for Mr. Kent in 1953, "home owner" was two words. How things change!)

The second thing I made sure to include was what I called his paragraph on the word "or". He has it right, certainly. But you never see people go into so much detail on such a simple thing. Even I don't do that!

Well, sometimes, maybe.


8 November: The Medium of Account

I quoted Marcus Nunes from Two kinds of money:

The good kind is “whole money”. That is, it is both the MoE and MoA. Bad money loses its MoA property, but keeps its MoE property.

I didn't exactly agree with that, but I did call it fascinating and I didn't disagree. I have to fix that.

Marcus's "Bad money loses its MoA property, but keeps its MoE property" is a conclusion. Not an observation. I'm still in the observation stage on this, so I cannot just agree with him. Because I don't know yet. But it doesn't sit right with me.

Ah. In a reply to my comment on his post, Marcus wrote, "the MoA function is what gives money (usually viewed as the MoE) it´s 'wholeness'." This is a reference back to his statement "the good kind is 'whole money'," quoted above. I didn't get that till now.

Anyway, Marcus seems to like MoA more than MoE. He likes the wholeness. Well sure, everybody likes wholesome goodness. But again, I'm still in the observation stage.

The words "good" and "bad" imply preference. They imply more than just "this thing works" and "that thing doesn't". Maybe Marcus doesn't mean it that way, I don't know. I can't help but read it that way.

Anyway, again, Marcus seems to like MoA and MoE together because that is good or because it is whole or because it works. He seems not to like them apart because it is bad, or incomplete, or because it doesn't work. But I think, by the time we come to realize that MoE and MoA have separated, we are already in the results stage of economic events.

"After the crisis" thinking. One sees it every day on the internet. But the crisis was a pimple caught in the act of popping. The pimple was there before, and if you want to understand it you have to look at how things were before the pimple popped.

Not a lot of that on the internet.

I think Marcus may be engaging in after-the-crisis thinking on this. He has "good" and "bad" things defined for us. He writes:

Bad money reflects a “sickness” in the economic fabric. Usually this sickness is manifested in very high, rising AND uncertain inflation. In those situations people search for “something” to play the role of MoA. That “something” could be gold, but in modern times the dollar is the usual stand in for the MoA.

He is thinking of what happened in Brazil, something he was "living witness" to. That's okay. That's a big piece of the puzzle, and maybe Marcus should turn his observations on Brazil into a book. This is a problem that needs to be examined from many angles.

Going by Marcus's observations, there is a bout of inflation that awakens people to the need to protect their wealth. So they might want to "separate" their wealth from the everyday price level and from the inflating medium of exchange.

I would suggest that the greater the level of financial wealth, the easier it is to achieve this separation. Wealth is power.

So the inflation leads to a separation of MoA from MoE, and the result is seen as the "sickness" of which Marcus writes.

In Brazil, in the story Marcus lays out, we see a few years of inflation in the early 1990s. Then on 1 March 1994 a new policy is instituted and by 1 July the inflation problem is solved. Four months. "There was no recession," Marcus says, "and no unemployment."

In the United States, the big inflation occurred in the 1960s and '70s, drawing down in the 1980s. But the big change came in the 1990s -- see yesterday's graph -- a decade or more after the inflation problem had been solved. Two decades or more after inflation was rampant.

Yes, the U.S. currency is the world's reserve currency, and that makes the story different. But Marcus's Brazil story is very different from what happened in the U.S. I'm not sure his story is relevant to the present situation.

I have to go back to what I said above: The greater the level of financial wealth, the easier it is to separate MoA from MoE. MoA *IS* financial wealth.

MoE is poor people's income.


9 November: Ch-Ch-Ch-Changes

From the start -- from my first read of Marcus's Two kinds of money -- I was absolutely fascinated by the topic. But also, from the start, I was confused by the phrase "medium of account". Marcus and (to my mind) also Nick Rowe equate the phrase with "standard of value". Nick explains that "Money ... is the medium of account" by saying "all prices are quoted in terms of money".

But prices are quoted in terms of the standard of value, just as distances are stated in terms of the standard of measurement, be it inches, feet, centimeters, parsecs or light years. Be it dollars, yen, or ounces of gold.

In our case, the dollar is the standard of value or, to use Nick's phrase, the "unit of account". But Nick's phrase "unit of account" lacks the word "medium". In fact, he goes out of his way to take the word "medium" out of that phrase:

[Update: just to clarify terminology: in my model, gold is the medium of account; and (say) an ounce of gold is the unit of account.]

The medium is gold, or fiat money. The unit is the ounce or the dollar.

The medium of exchange is the money we use for spending. The medium of account is the money we use for purposes other than spending. The word "medium" implies "money" in both cases -- but stocks or flows of money, as opposed to an individual, conceptual dollar or ounce defined as a standard.

// Well, that was like a paragraph on the word "or", wasn't it.

In mine of the 9th I counted four properties of money:

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.

I also said

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.

These properties of money changed because of inflation, I said. And Marcus in his post said that high, rising, uncertain inflation causes people to "search for 'something' to play the role of MoA."

The cause of all these changes in money? Inflation, inflation, and inflation.


And now, the Grand Irony:

People say printing money causes inflation. But it wasn't printing, really. It was the lending and the borrowing and the excessive use of credit that caused most of the inflation since the early 1960s.

All of that credit-use created debt. Debt is a financial asset. Financial assets make up most of the medium of account.

The same credit-use that caused the inflation is the same credit-use that created those financial assets and created the medium-of-account money that now wants to separate itself from the medium-of-exchange like some kind of snob money.

All these changes cause people like Sumner and Michael Sankowski and Greg and me to start thinking of money as the medium of account, and no longer as the medium of exchange. And I think, once we get to this point we had better fix the problem soon or it will be too late.

We had better stop thinking of "more credit use" as the solution to every economic problem. We'd better start thinking that "excessive credit use" has been creating our problems since the end of the Golden Age. We'd better, or soon it will be too late.

The Assets We Hold, and the Money We Spend

TFAABSHNO is "Total Financial Assets - Assets - Balance Sheet of Households and Nonprofit Organizations" at FRED. I'll use that as a proxy for our "medium of account" (MoA). Stuff we value as dollars, even though we don't want to spend it.

M1NS is a measure of the money we ordinarily spend -- our "medium of exchange" (MoE).

This graph shows the ratio of MoA to MoE:

Graph #1... Click for FRED page

Starts out at $10 of financial assets for every circulating dollar. Shows a gradual increase until about 1993. After that, there's no comparison. If the gentle trend before 1993 was natural, the rowdy trend after 1993 is not. A result of tax code changes of the early '90s, perhaps?

Neither trend is natural. Both are results of policy.

PS: The graph shows why people now see MoA as more important than MoE: Because there is so much more MoA now, that's why.

Ch-Ch-Ch-Changes

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.

The Medium of Account

After yesterday's post I conclude that a standard of value is a unit of comparison that gives us a way to make comparisons. Just like "the inch" or "the mile".

I knew that.

The difference between money as a standard of value and money as a medium of exchange? Prices are set in terms of "the dollar"; I pay for things with "dollars".

The reason this comes up is that I came across Marcus Nunes' Two Kinds of Money. Marcus identifies two uses of money: as a medium of exchange (MoE), and as a medium of account (MoA). And he identifies his two kinds of money, good and bad:

The good kind is “whole money”. That is, it is both the MoE and MoA. Bad money loses its MoA property, but keeps its MoE property.

This fascinated me. In part, I must admit, the fascination arose because the concepts felt just slightly beyond my grasp. Thus yesterday's post, and this follow-up.

In comments on Marcus's, said I had trouble understanding the "Medium of Account". Marcus said, "I interpret your 'Standard of value' as 'Medium of Account'." That helps.

At the end of his post, Marcus provides links to four other posts on the "MoE/MoA". I printed 'em all out and started reading.


The post that "got the ball rolling," as Marcus says, is Sumner's What is money? What is inflation?. In it, he says money is the medium of account, not the medium of exchange. "Let’s take an example," Sumner says, "to illustrate this confusing issue:"

Imagine Zimbabwe uses gold as the medium of account. Then they have budget problems because their economy crashes when the government tries to take too much wealth from the top 1%. So they decide to print money. But the president (who is a madman) tells his treasury minister that he wants to stay on the gold standard, and will not tolerate any inflation.

Not sure if he stuck that line about taking too much wealth from the top 1% in there as a joke or not; but we can just ignore that part for now, and concentrate on "medium of account".

In this example, gold is the medium [of] account and Zimbabwe dollar is the medium of exchange.

It might make economists shudder, but I will offer a real-world example: the price of gasoline. Sometimes there is one price for cash, and a different (higher) price if you pay with credit. Remember when they used to do that? Nowadays, the price of gasoline is different (higher) no matter how we pay for it.

I want to make economists shudder more now, and say cash is the medium of account, and credit is the medium of exchange.

And I want to reiterate the opening of Marcus's post: There are two kinds of money -- good money, and bad. Good money is "whole" -- it is both the medium of exchange and the medium of account. Bad money loses the MoA property.

I think that's about right. But in order to think about it, I have to think about it in terms of the world I know -- the world where we buy gas on credit, but "money" is still the dollar in the wallet.

Medium of Exchange, Standard of Value

Been trying to understand the notion of money as a standard of value, separate from money as a medium of exchange.

From Money and Banking by Raymond P. Kent, 1953:

What is Money?

Though money is much in our thoughts and though it conditions many of our actions, we encounter great difficulty in attempting to state precisely what it is. Definitions of money are legion, and they vary markedly with the divergent points of view of their authors. Some authorities believe that the term money should be restricted to whatever serves as a standard or measure of economic value, and that mediums of exchange should be described by some other term such as currency; others do not make a terminological distinction between what serves as a standard of value and what serves as a medium of exchange, but they narrow their definition of money to include only a few instruments; and still others classify as money numerous instruments which serve as standards of value or as mediums of exchange. The indiscriminate use of such terms as cash and credit adds to the confusion.

Definition

Remembering, then, the tentative nature of a definition which seeks to differentiate a complex concept such as money from all other concepts, we shall, for the purposes of this text, regard money as anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.

Kent then examines his definition of money. He dedicates one paragraph to the word anything, one to the phrase "commonly used", and one to the phrase "generally accepted". And then, one on the word or:

In the fourth place, money, according to our definition, is used as a medium of exchange or a standard of value. Thus we classify as money something which is commonly used and generally accepted as a medium of exchange even though it does not serve as a standard of value, and we recognize as money something which is commonly used and generally accepted as a standard of value even though it is not employed as a medium of exchange.

Kent then considers money as a medium of exchange, and as a standard of value.

So closely intertwined are the functions of money as a medium of exchange and as a standard of value that it is often difficult to determine where one leaves off and the other begins. As a matter of fact, money is not used as a medium of exchange until the goods involved in a transaction have been evaluated in terms of money. Thus money usually functions as a medium of exchange and as a standard of value more or less simultaneously. But on many occasions money is used as a standard of value though no exchange of goods for money takes place. If a farmer wants to exchange some eggs for sugar at a grocery store, the value of each commodity is expressed in terms of money and the exchange is made, although no money passes from hand to hand. Again, people continually evaluate goods in terms of money when there is no interest whatever in exchange. A home owner may say that his house is worth $8,000, yet he may have no intention of selling it...

Money and Banking by Raymond P. Kent, Professor of Finance, University of Notre Dame. Revised Edition. Reinhard & Company, Inc. New York and Toronto. Copyright 1947, 1951. Fourth Printing, August 1953.