Money Versus Currency

http://www.newyorker.com/magazine/2009/04/13/i-o-u

The first thing to be understood about money is that itís always in reference to the value of property and services. Itís for the two aforementioned purposes (exchange and store of value) as they relate to property and services that we need money at all. With no property or service, then we have no need for money. For this discussion, the definition of value is important, so please see on my views on that.

Dictionary

Merriam Websterís Dictionary defines money as ďsomething generally accepted as a medium of exchange, a measure of value, or a means of paymentď.

Merriam Websterís Dictionary defines currency as ďsomething that is in circulation as a medium of exchangeď.

Medium of exchange

Being a medium of exchange in the barest sense is just a means to exchange one piece of property for another. Depending on the logistics of a particular market, there can be a number of reasons to not want to deal with the property itself, so a proxy is beneficial. Money in this sense would be just the stand-in for the property itself, so itís only money for as long as the trade is in progress. Upon the completion of the trade, the money would cease to exist. However we donít normally think of money as ceasing itís purpose, but thatís because a market is an endless cycle of trades. So in actuality, money ceases when the market ceases.

Being a means of payment is an addendum to the concept of a medium of exchange. This is mentioned because services are not generally thought of as an exchange of property. One person is giving property and the other person is giving a service. They are in essence an exchange of one personís value for another personís value, itís just that one side of this exchange comes as a service and not as property.

Measure of Value

Being a measure of value means to be able to quantify it it in a meaningful way. We might wish to quantify value for our own purposes, so as to determine if there is a change to our property over time or perhaps we want to quantify value, so as to convince others to trade with us.

A related concept is a store of value. It doesnít so much mean to store something as it means to measure something consistently over time. So while we might be able to measure something in an instant of time, itís the passage of time that determines itís store of value. For example, if the measurement changed every instance I measured my shoe size, then I would have no way of conveying this measurement to the salesperson at the shoe store. My measurements therefore must last throughout time sufficient enough to convey meaning. Ultimately this is just a critique of the measurement scale as a valid form of measurement. So just like I donít want my shoe size changing from day to day, I donít want the value of my property changing either simply because of the measurement scale changing.

Generally Accepted

The definition also says that money is generally accepted. This means that what is money to one person might not be money to someone else. For example, I might bribe my dog with a gold coin, but since he doesnít accept that as money, it doesnít have the same effect as if I bribed a human. This doesnít mean that something isnít money because one person rejects it, but rather that it has to have an audience.

One thing to note is that what makes money good for one situation might not be good for another situation. The circumstances of one situation might favor one form of money over another form of money. So while itís easy for us to laugh at what other people once thought of as money, itís important to remember that for them it served their purpose and was therefore entirely within the definition. We simply can not deny someone elseís money because we might have a superior one. If it was either of the aforementioned criteria (medium of exchange, a measure of value), then it was money to them.

For these reasons, I donít think itís relevant exactly how widely accepted something is to act as money and therefore should not be considered as part of the definition.


Money Supply

The M nomenclature seen when talking about money supply is the acronym of the word money. Itís more properly called the statistical money aggregates. These are statistical computations meant to help people understand what trends are happening overall and between various elements in society.

M0 is also called the monetary base. This is the currency that was officially authorized to be in circulation, either by government or a central bank. Without a fractional reserve system of banking, then the only money that would exist would be M0. Thats not to say that there wouldnít be other things of value within society, like gold and silver, but rather this is the printed currency. When separate states and sometimes in the past separate banks, print their own currency, each is tracked by a separate recording of M0. So there could potentially be a lot more ďmoneyĒ in circulation than is reported by a single M0 statistic. Foreign currency and silver rounds are not counted and yet clearly represent money.

M1 is tracked because this is what makes a fraction reserve system different than a full reserve system. As currency gets passed from one bank account to the next, banks get to loan out the currency to new people each step of the way. Itís this process that creates the ďmoney multiplierĒ, which is inversely proportional to the reserve ratio imposed by the issuing authority. For example a 0.10 (10%) reserve ratio would lead to a 1/0.10 (10x) multiplier. This isnít an automatic calculation, but rather a theoretical maximum.

M2 is a further additions of currency that is held by the public and has some liquidity restrictions to them. The tracking for these is done because there is no reserve requirement associated to them. Supposedly the removal of the reserve requirement is justified by the liquidity restrictions.

M3 is the final statistic tracked to add in institutional savings that have liquidity restrictions applied to them. The distinction between the M2 and M3 is determined to be a currency amount placed into a single vehicle that is generally outside the range of the average person. For example, the M3 for US dollars is currently defined as $100k, meaning anything below this amount goes into M2 and anything above into M3. Itís assumed that only large institutions would bundle such large amounts into a single vehicle, while individual people would typically break these into several smaller vehicles.

US Federal Reserve statistics of M1 and M2.