Thursday, September 11, 2014

Getting rid of the monetary triumvirate

The textbook definition of money is anything that functions simultaneously as a store of value, a medium of exchange, and a medium of account. This is the monetary triumvirate, and we need to get rid of it.

The first problem with this explanation is that all goods and assets function as stores of value, some better than others. Items that can't 'store' value would be be worthless because their lives would be too fleeting to provide any utility. Even an ice cream cone serves as a store of value, at least for a few minutes.

So if everything serves as a store of value, then money must be that peculiar good that functions as both a medium of exchange and a medium of account, right?

Wrong. All valuable things function as media of exchange, or, put differently, they all have a degree of exchangeability. A head of cabbage is a cabbage farmer's medium of exchange, since he uses it exchange with a food distributor, and it also functions as one of the distributor's many media of exchange, since he uses it to exchange with a grocer, and it also functions as one of the grocer's many media of exchange, since the grocer holds an inventory of cabbage in order it to exchange with the public. We can quibble over the general acceptability of any given medium of exchange; a dollar bill is more exchangeable than a cabbage, after all. But a dollar bill, like a cabbage, is not universally acceptable—try buying a house with it, or Microsoft stock.

So if everything serves as a store of value to some degree or other, and everything serves as a medium of exchange to some degree or other, then money must be that peculiar good that functions as a medium of account.

The upshot is that the only binary difference between the various goods and assets in this world is along the medium of account-or-not axis, both the store of value and medium of exchange functions being ranges or spectra, not binary categories. This means that a good is either a medium of account, or it isn't. There's no point in using an umbrella word like "money" anymore, since medium-of-account stands on its own as a useful definition.

A medium of account, if you don't remember, is the good that we use to quote prices. There are only a handful of media of account in the world, with the great majority of things not functioning as media of account. Dollar bills are certainly a medium of account. Credit cards (combined with network fees) also function as a medium of account. There are weird artificial media of account, like whatever is used to define Chile's Unidad de Fomento. Commodities like cloth, or macutes, have served as media of account in West Africa, as have silver pennies in Europe.

So let's retire that tired old triumvirate. The word money is redundant and meaningless; if we really want to divide the world into these and those, the medium-of-account bucket is about all we need. The other two functions, store of value and medium of exchange, are pervasive rather than exclusive (everything has at least a little bit of each), and therefore can't serve as the basis for drawing strict lines between goods.


  1. I prefer the (perhaps older) "standard of value" to your "medium of account". For the U.S. the standard of value was (and remains) the dollar. As such, it serves the same purpose as a "medium of account". But it carries with it the pride of the nation-state that set the standard.

    These days, when there are no longer patriots, people seem to think they can get the same effect from bitcoin...

    1. Yeah, I don't think bitcoin will ever serve as a medium of account. Too volatile. Maybe one day they'll create a stable value crypto coin... maybe one day the Fed will convert the dollar over to cryptocoin format.

  2. JP, what do you think Nick Rowe would say regarding your thoughts on the MoE? I'll guess that he won't entirely approve.

    1. He wouldn't entirely disapprove either. He's the one who wrote this post, for instance, back in 2009. which shows that he can also think in terms of degrees of liquidity, not just either/or.

    2. I disapprove!

      Yes, there are degrees of liquidity. But the most liquid good gets used in a qualitatively different way from the others. Coming first matters, even if you are only a couple of seconds ahead of the second place finisher in the liquidity race. Winner takes all.

    3. Which good wins the liquidity race, a BoC reserve deposit, a BoC paper dollar, a BMO deposit, or a MoF t-bill?

      It could very well be that a BoC paper dollar is more liquid than a Canadian t-bill (who knows until we have a proper measure?). But once the t-bill skips a couple of seconds ahead of the dollar and becomes "qualitatively different", what happens? A thunder clap, a sonic boom? That something that was ranked in a range along with other members suddenly becomes qualitatively different from those members is just too odd of a story. I don't buy it. It works in the vernacular, but not if we want to dig deeper.

    4. Ha!... called it! :D (although what I said was pretty weaselly unfortunately).

  3. Also, an alternative electronic currency proposal you might be intrigued by (hot of the presses):

    This was the key bit:

    "Maybe someone should make info-coin that follows the theoretical path of NGDP vs M0?"

  4. I think the problem is just the use of the term "money", as you have argued extensively before. If people insist on wanting to have a concept of money, they sort of need these three functions to triangulate it.

  5. JP: "A head of cabbage is a cabbage farmer's medium of exchange..."

    No it isn't. Because he does not *buy* cabbages planning to sell them again. He *grows* cabbages planning to sell them.

    Cabbages are a medium of exchange only for the cabbage dealer, who buys them from farmers and sells them to consumers. But even here, he buys and sells cabbages for the same good -- dollars.

    I buy dollars in exchange for lectures, and sell dollars in exchange for cabbages. Dollars are my intermediary between lectures and cabbages.

    Dollars are traded for (nearly) all other goods by (nearly) everyone. Cabbages aren't. Cabbages are (nearly) always traded only for dollars.

    1. There's no such thing as a dollar. In the vernacular we take a short cut and use the word dollars, just like we use the word 'groceries'. But when we dehomegenize both categories we see a myriad number of foods making up groceries, and a myriad of financial assets making up dollars.

      "he does not *buy* cabbages planning to sell them again"

      I hold an inventory of charts I've made in order to sell, and I hold an inventory of BMO chequing dollars to sell. My US distributor also holds an inventory of my charts in order to sell them. I don't think there's a difference between these different inventories, apart from the fact that the odds of selling BMO dollars is easier than selling charts.

  6. Nice job of putting the first two criteria out of the way. I'd say that the last criterion, "serves as a medium of account," is even more problematic, because the term itself is conceptually incoherent. It confutes "dollars" (what we're talking about in the first two "media") with "the dollar" -- which is a *unit* of account.

    It's like saying that "the inch" is a medium of length. Huh?

    1. Often the name of the medium of account and the name of the unit of account are the same. A foot was initially defined as the length of someone's foot, so it was indeed the "medium of length."

      In my post on Angolan money, the unit of the account -- the "macute" -- has a different name from the medium of account - pieces of cloth, or "mbongo." I think this makes it easier to understand why the term isn't incoherent. It serves a very real purpose.

    2. forgot the link:

    3. "the unit of the account -- the "macute" -- has a different name from the medium of account - pieces of cloth, or "mbongo." I think this makes it easier to understand why the term isn't incoherent. It serves a very real purpose."

      Funny, I think exactly the opposite -- makes things hard to understand, leads to endless confusion and downward-spiral discussions out there.

      Notice in your post right next to each other you use "medium of account" and "money of account." A person's gotta be confused by that (just one example), and I think it need not be so.

      There are financial assets out there (including pieces of physical currency*), and there's a unit of account.

      I don't see how conflating the two with "medium of account" helps us think or talk about that. QTC -- muddies the waters terribly.

      I'm guessing that you could say everything you want to say about money without ever using that term. Dontcha think?

      If that's true of a careful money thinker like you, I have to wonder whether the term has any value at all. And I, at least, perceive it having widespread pernicious effects, muddling up the whole discussion.

      * To be precise, I think pieces of currency are most usefully thought of as conveniently exchangeable/transferable physical tokens representing balance-sheet credits. I withdraw a dollar bill from my bank (down credit), give it to you, and you deposit it in your bank (up credit).

    4. Well, the good thing is that we can still have conversations with each other as long as we're aware of each other's unique definitions.

      Examples always clarify: here's one that I think demonstrates why I think medium-of-account is useful. For centuries the English unit of account was the £sd. Sometime in the late 1600s, England suddenly switched from what was a silver standard to a bimetallic standard, and over the the next decades slipped into what was effectively an unofficial gold standard. However, the same unit of account was used throughout these upheavals --- merchants still quoted prices in shillings, debts were expressed in terms of pounds, and taxes payable in pence. But this stability in the unit doesn't properly convey the massive underlying monetary changes that were shaking England. The coin that was used to define the £sd unit had been switched. The English silver penny, which had been the sole standard, began to share its position with the gold guinea, and then lost its position entirely to the guinea when the authorities accidentally mispriced the two coins. The word medium-of-account is a useful term to describe the specific coin(s) that served to represent the £sd unit. We can say that the unit of account £sd stayed constant from 1650-1750, but there were large changes in the medium of account.

      How would you prefer to describe a switch from a gold standard to a silver standard, if not with the word, or at least the concept of, medium of account?

      Anyways, I have a post on the Guinea that I'll be publishing on Wednesdayish. Be sure to tune in.

      (I shouldn't have used money-of-account and medium-of-account in the same post. The former is the term used in the 19th century, it means the same thing as the former).

    5. "How would you prefer to describe a switch from a gold standard to a silver standard, if not with the word, or at least the concept of, medium of account?"

      Great question. Could just call it (them) currency peg(s)? Does that work? Seems way clearer and easier to understand. eg:

      "The unit of account is often pegged (by fiat and/or consensus) to a unit of currency."

    6. Another sitch: a unit of account can be pegged to another unit of account. eg:

      The Yuan is pegged to The Dollar.

      In this case, currency doesn't come into it as it did in your England example.

      Call this a Unit of Account Peg??

      Be nice to have two clear terms distinguishing those two kinds of pegs...

    7. Oh wait realizing: need to distinguish between the currency peg you described, and a gold/silver standard with no coin involved.

      Just call that a commodity peg?

    8. "Great question. Could just call it (them) currency peg(s)? Does that work? Seems way clearer and easier to understand. eg: "The unit of account is often pegged (by fiat and/or consensus) to a unit of currency.""

      Sure, we can describe it as the unit of account being "pegged" to a unit of currency, although a peg in its conventional sense refers to one currency being moored to another via convertibility, say the yuan to the dollar. I prefer the words "defined in terms of," where the unit of account is defined in terms of some specific item. And that specific item is different from all the other things in an economy, since those other things don't describe or define the unit. We can give a name to that one special thing --- I like to use medium of account --- but whatever name we choose is not that important, as long as we can agree on the concept.

      "...a gold/silver standard with no coin involved."

      In what sense?

  7. This is a difficult topic but I'd offer some thoughts.

    In the reserve system isn't the USD the international medium of account for most countries? That is, more competitive countries have what appears a more "stable" medium of account (Euro) whereas less productive countries have a "unstable" medium of account (argentina peso).

    Second, I'd argue that money is also a store of value but just not a very good one. Certainly, in the domestic economy the USD is a medium of exchange. Yet, in general the Fed (and most central banks) have a price stability mandate with a small inflation target meaning they view money as declining store of value. That is, each year "money" will store approximately 98% of its present value (assuming a 2% inflation target).

    Therefore, money behaves as a convertible bond issued by the government with perpetual duration that generally pays a negative real yield. Effectively, the currency user pays the floating "inflation rate" to the US government (the bond issuer) for the right of holding and using the currency. Only with price deflation or economic prosperity that outpaces inflation does the currency appreciate in value (when real yield increases).

    Finally, a hard money convertible system stores value. That is, it stores our current production for future consumption at current costs. Regardless of inflation or deflation one can buy the same amount of "goods" in the future as they can today. Under a hard money system, with inflation the medium of exchange depreciates whereas with deflation (or economic growth) the medium of exchange appreciates. The fiat system is a credit based growth model where new debt begets growth (be it real deflationary growth or inflationary). The medium of exchange depreciates with inflation (low real yields) and appreciates with deflation and productivity improvement (high real yields). In a fiat system, TIPS are a more pure "store" of value though they are imperfect because they rely on market expectations of real yields. They compensate for inflation before tax and like hard money they don't reward one for deflation or productivity improvement but keep a constant store of value with respect when they were purchased. [Though mechanically, TIPs will return the principal if held for duration even under deflation]. And so what is the medium of account in a fiat sytem? I'd argue that real yields somehow influence the medium of account?

    I probably made a few mistakes but this is not a trivial subject in my opinion. I'm probably wrong but even if money is not the triumvirate, there exists
    1 the medium of account is some function of real yields (and perhaps globally real yield spreads)
    2. medium of exchange = USD both globally and domestically
    3. the dollar ability to store value is impacted by real yields (I'm not sure Tips are the store of value but perhaps)

    Compared to a hard money system where
    1. medium of account = gold
    2. medium of exchange = domestic currency
    3. gold was the store of value at a fixed convertibility

    1. The first line should say more stable "medium of exchange" rather then account.

      My suggestion though is if you identify what is the medium of account, medium of exchange and store of value in a fiat system that might shed some light on the what is money topic. And allow one to make better comparisons to a hard money monetary system.

      How I rationalize this, is that in a hard money system the real yield of the medium of account (gold) is 0%. That is, the real yield is fixed at zero and you don't get richer or poorer in terms of how many homes or loafs of bread you can buy (and even though the medium of exchange varies over time ).

      In a fiat system the real yield on the medium of account floats. The medium of account is something (the reserve currency or real yield spread differential or??). The medium of exchange is something (maybe local currency). And the medium of storage is something (maybe inflation protected bonds)

    2. "...medium of exchange = USD both globally and domestically"

      I live in Canada. I tried to buy my lunch yesterday with US dollar deposits, they weren't accepted. And if I try to buy a car tomorrow with US dollar paper bills, they won't be accepted either.