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On Getting Rid of the Monetary Triumvirate

I really liked this post by JP Koning who calls for us to get rid of the “monetary triumvirate”.  This is the idea that “money” has three elements as a medium of account, a medium of exchange and a store of value.  JP says we should dump the last two and just stick with the first one.  If you read closely you’ll notice that JP didn’t use the term “unit of account” as is more traditionally used when discussing this concept.  Instead, he’s referring to some specific thing as the medium of account.

Now, in order to be properly nerdy here we need to be more specific.  The unit account is just a measuring stick.  In the USA the unit of account is Dollars, in Europe it is Euros and in Japan it is Yen.  But the medium of account is an item that defines the unit of account.  During the gold standard the unit of account was dollars, but those dollars were measured in terms of a quantity of gold.  So gold was the medium of account.  But now that the gold standard is long gone the concept of a medium of account has become much more muddied because there is no single item with which we define the value of a dollar.  Deposits, reserves and physical dollars are all near perfect equivalents 99.99% of the time.  In my view, this makes the concept of a medium of account more confusing than it needs to be and potentially useless.

So I arrive at a rather different conclusion than JP.  If one is to understand the idea of “money” then the medium of exchange is a superior conceptualization.  And I think of money as existing on a scale of moneyness in which items with more moneyness are more suitable as a medium of exchange.  In today’s system bank deposits are the dominant medium of exchange because they are the item with which most transactions are settled at the point of sale.  Something like physical dollars or gold have a lower level of moneyness because they do not meet the definition of a medium of exchange to the same degree that something like bank deposits do.

But even though JP and I disagree on emphasis we agree on one thing – in a world of moneyness the concept of “money” actually has a lot less meaning than most people would think.  While it’s useful to understand how different financial assets are used in the monetary system for specific purposes it’s equally important to understand how those items are convertible into one another which gives them all varying degrees of moneyness.  And most importantly, we both agree that the monetary triumvirate muddies the waters of “money” unnecessarily.

12 comments
  1. Avatar
    Dinero

    A dollar is not a thing in itself, it is a measurement of the quantity of goods a dollar buys. And so the medium of account is a basket of the things that a dollar buys.

  2. Avatar
    tealeaves

    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). [Some might argue that the true productivity of the economy is understated and so perhaps the value of money is actually increasing over time. For example no amount of money 200 years ago would get me the medical, leisure and technological benefits I receive today]

    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. 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. [Though mechanically, TIPs will return the principal if held for duration even under deflationary]. 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 conclude that
    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

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

  3. Avatar
    tealeaves

    The first line should say more stable “medium of exchange” (Euro) rather then medium of account.

    My suggestion though is if we can 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 in the future (and even though the medium of exchange value varies over time relative to the price of homes).

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

  4. Avatar
    JP Koning

    Thanks for the kind mention, Cullen.

    “But now that the gold standard is long gone the concept of a medium of account has become much more muddied because there is no single item with which we define the value of a dollar…In my view, this makes the concept of a medium of account more confusing than it needs to be and potentially useless.”

    That there might be multiple media of account doesn’t mean that the concept is useless (although I’ll grant you your point about it being confusing). During the many bimetallic periods that characterized the medieval ages, no single item defined the value of the £. (Both silver and gold coinage were recruited as the £ medium of account.) However, we can’t tease out how Gresham’s law functioned, and how all the silver left England only to be replaced by gold, without having some notion of these dual media of account. So I maintain that its a useful concept.

  5. Avatar
    John Daschbach

    Physicists worked this out a long time ago. We refer to the Physics understanding as Thermodynamics. There is only one pure measure of Value in Thermodynamics, Internal Energy. However, for most purposes, this is not a practical measure (given that E=mC^2) for much of the everyday world. A chemist, like myself, chooses to ignore the total internal energy and only include chemical (non-nuclear) changes in ions, atoms and molecules energy states. We are left with changes in Energy. But we can only measure this through changes in the observables Heat and Work, and we account for the discrepancy between these in a term we call Entropy.

    Cullen is correct in that Money is a medium of exchange only. A medium of account is always convertible into any other medium of account. Joules and Calories and Ev and … are all perfectly interchangeable. We choose one over the other based upon convention and convenience.

    Physics is very clear on the distinction between a measure of energy transfer (Joules, calories, Ev, ..) and store of value (Internal Energy). Money is a measure like Joules. It has no value itself. It is only a measure of the transfer from one store of Internal Energy to another store of Internal Energy.

    If everyone understood that “Money” was just a unit of exchange then we would all be better off. Underlying the financial world is the real world. Real production (see the change Cullen) and real consumption and real investment. These all involve the exchange, production, and consumption, of real commodities.

    It’s a unit of exchange. Period.

  6. Avatar
    Dinero

    I think it is self evident . A dollar’s worth is defined by the unit of account by what it traded for in a transaction. It is a simple as that.

  7. Avatar
    Stefan Bichis

    I’m having a hard time taking this post or the original one by JP Koning seriously. Am I missing something?

    If we get rid of money as a medium of exchange, what shall we all do, go back to barter? Without money as a medium of exchange, would the owner of Koning’s cabbage (see the cited post) have to carry it around and negotiate with the owner of every other “valuable thing”? This is Smith’s mythical homo economicus who naturally spends his time bartering and exchanging.

    Koning: “All valuable things function as media of exchange.” I dont disagree with this. Actually I partially do. I certainly agree that cabbage and most other commodities can have value, but in a capitalist society they do not function as media of exchange. If I own a cow, I cannot take it into a store and try to get a new dishwasher in exchange for it.

    In our form of society—i.e., one that is complex and capitalist—hardly anybody gets to keep the “valuable things” that we spend our time producing. Wage labor BY DEFINITION is a contract in which one alienates to another person the fruits of labor: I give you my labor-power for a certain amount of time, you give me a wage, and then you get to keep everything that I produce during that time. Hence the whole operation of capitalists (“entrepreneurs,” etc.) doing everything possible to make the labor-power that they’ve purchased more productive. Sure, there are exceptions, such as farmers (I suspect this is why the cabbage stood out to Koning as a good example of a valuable thing). But farmers are not representative of how most people spend their entire working lives.

    The conceptual “muddiness” surrounding money is only a problem if one cannot accept that behind all money–in ALL of its triumvirate social functions–is productive labor. This is what must be true for Koning’s observation that all things produced are valuable.

    In a capitalist society, money is an abstraction of the socially necessary labor-time that is required to produce all of the value hidden in all of the commodities in the market. It is “social” insofar as complex production lines rarely are carried out by individuals (i.e., it has been a looong time since individuals owned the means of their own subsistence). It’s “necessary” because until the process of circulation of that commodity comes to an end with a successful exchange (via money) for another commodity, its value is under erasure (i.e., things that dont sell have no value yet, despite the fact they’ve been produced by capital and labor). It’s “labor-time” because the bottom-line is the specific length of time required to finish production (and circulate it).

    The history of economic thought is fascinating because it oftentimes moves forward by way of dark blind spots of knowledge and insights from the past that have been forgotten (or banned for political reasons).

    I used to post as marx-reloaded, hence the focus on labor “behind” the money…

  8. Avatar
    Fed Up

    “During the gold standard the unit of account was dollars, but those dollars were measured in terms of a quantity of gold. So gold was the medium of account. But now that the gold standard is long gone the concept of a medium of account has become much more muddied because there is no single item with which we define the value of a dollar.”

    I’m going to somewhat agree with Nick Rowe here:

    https://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/medium-of-account-vs-medium-of-exchange.html

    “Money has two defining functions: it is the medium of account (all prices are quoted in terms of money); it is the medium of exchange (all other goods are only bought or sold for money). (“Store of value” is not a defining function of money, because my canoe is a store of value too.)”

    I agree with the first two. “Money” needs to be somewhat of a store of value too, or people may not use it.

    “[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.]”

    “During the gold standard the unit of account was dollars, but those dollars were measured in terms of a quantity of gold. So gold was the medium of account.”
    I don’t agree with that. I agree with Nick for once. Gold standard means gold is the MOA, and say an ounce of gold is UOA. If there is a fixed conversion rate to currency, then there is a dual MOA.

  9. Avatar
    Fed Up

    “But now that the gold standard is long gone the
    concept of a medium of account has become much more muddied because there is no single item with which we define the value of a dollar.”

    I agree with Nick. MOA is about what prices are quoted in, not defining the
    value.

    “In today’s system bank deposits are the dominant medium of exchange because
    they are the item with which most transactions are settled at the point of
    sale. Something like physical dollars or gold have a lower level of moneyness
    because they do not meet the definition of a medium of exchange to the same
    degree that something like bank deposits do.”

    “Physical dollars” should
    be at the same level as demand deposits. The degree of usage should not matter.
    Actually in today’s system, I’d say physical dollars and demand deposits are
    MOA and MOE.

  10. Avatar
    SDB

    John Daschbach,

    If money is a “unit of exchange. Period.” …. why do people save in the form of money and not invest all their financial savings in real assets?

  11. Avatar
    Jonah Thomas

    The meaning of moneyh is not determined by rational definition but by how people actually think and behave.

    People are irrational about money, and so as a result money does not have to make sense. Attempts to make sense of it are chancy.

    Think of pirate treasure. The pirates have collected a great pile of gold and so they bury it on a tropical island. Why do they do that? Don’t they want to spend it? If they keep it on their ship where they can keep an eye on it, it at least is available. But no, they instead put it in a river bank, and the captain kills the men who went with him, who know where it is, and returns alone. See what chance he has to get somebody to carry it next time!

    And then the captain dies, and the gold haunts public imagination forever. A giant store of value, waiting for somebody to dig it up and spend it. Blood money, taken at gunpoint from many innocent ship passengers who are then forced to walk the plank. Because ships wear out, and pirates multiply and for both reasons they need new ships. There’s a lot of waste when you prey on the economy that way. Much less waste when you just separate “investors” from their funds and leave them destitute.

    Money haunts people’s dreams. The dream-logic persists when they wake up.

  12. Avatar
    Jonah Thomas

    “why do people save in the form of money and not invest all their financial savings in real assets?”

    Because they are lazy?

    It used to be, this caused problems. Imagine the equivalent in barter.

    Say you agree to a trade with me. I give you three loaves of bread and you give me an apple pie. So I give you the bread, and then I say “I’ve changed my mind. I don’t want this pie now. Whenever I feel like it, I’ll stop by and demand a fresh apple pie and you will then give me the apple pie you owe me.” Would you agree to that? In a way it’s a good deal, I have loaned you an apple pie that you can do whatever you want with, and you don’t have to pay me until later. But it’s a giant inconvenience.

    With money instead of barter, you don’t have to give me a pie on demand. I can demand anything that’s for sale by anybody whenever I want. But all the time I save my money under my mattress, it isn’t available for other people to buy and sell. They are inconvenienced in their own trade.

    One possible way to avoid that is to persuade me to save my money in a bank. Then the bank can lend the money at interest, and somebody else spends my money — and it circulates and circulates — while I imagine it’s safely stored away. Then when I demand it back they call in a loan.

    Another way is somebody else like the Fed keeps track of how fast the money circulates, and “adjusts” the amount. They can try to make sure that prices are reasonably stable over time, which is good for me as a money-saver. They don’t have to track how much money I save, they only have to track the general circulation of money compared to their target, or the inflation rate, or whatever they choose to track. It’s all very complicated, and the complication is caused by people using money as a store of value.

    We might be better off with money that devalued. Like, you pay the Welfare people in June dollars and anything they don’t spend turns worthless in July. No question about them hoarding the money you want them to stimulate the economy with — they can’t. But businesses that sell things that Welfare people buy can turn in June dollars for taxes, and can trade some for July dollars to pay their employees, etc.

    It would lead to its own complications like money-laundering schemes, but I’m not sure it wouldn’t be better than what we have.

Comments are closed.