8/20/2019 What is not money? http://slidepdf.com/reader/full/what-is-not-money 1/5 WHAT IS (NOT) MONEY? MEDIUM OE EXCHANGE MEANS OF PAYMENT by Bill Z. Yang* Abstract This note attempts to provide a formulaic defmition of money and discuss the distinction between medium of exchange and means of payment. The former refers to the set of assets in an economy that people regularly exchange for goods and services (a concept of what ), while the latter is a method that facilitates delivery of money from one to another (a notion of how ). It suggests that money should be exclusively defined as medium of exchange, rather than means of payment. With such a distinc- tion established, one can uniformly explain why currency, demand deposits and smart cards are money (because they are a medium of exchange), and why checks, money orders, or debit and credit cards are not money (because they are only a means of payment but not a medium of exchange). 1. Introduction What is money? In economics, it is unanimously defined as the medium of exchange. But its inter- pretation varies from author to author. Some authors refer to medium of exchange as anything that is generally accepted as payment for goods and services or in the settlement of debts (Hubbard, 2005, p. 14),' white others use it as a synonym of means of payment (e.g., Thomas, 2006, p. 21). These treatments, however, are not only pedagogi- cally troublesome but also conceptually incorrect. For example, almost all students get very confused when told check is not money, in particular, right after they had just learnt that money is anything that is generally accepted as payment. The stan- dard argument in most textbooks is that check is not money but the checking deposits are without explaining why a check is not money. Mumbles from students would often be A check is indeed generally accepted as payment, by definition, why isn't it money? If a check is not money, then what is it? To our knowledge, no textbook has directly answered these questions. Therefore, it is necessary to define money correctly so that one can easily judge whether a commonly-used means of pay- ment is money, by deflnition. This note is intended to provide such a formula- ic definition of money. We define money as medi- um of exchange—the set of assets in an economy that people regularly exchange for goods an services from others. There are two key points this definition. First, money must be an asset th signifies a part of what its holder owns. Secon people normally convert their assets from oth forms to this specific one before exchanging fo goods and services, implying that this set of asse are generally accepted in transactions. By defin tion, currency and demand deposits are money while checks, credit and debit cards are not. This because currency and checking deposits are the owner's assets, whereas a check or a credit/deb card is not a part of its owner's assets. Then, what is check if it is not money? Why is generally accepted in transactions? ChecJcs well as debit cards, credit cards and money order etc., are a means of payment, referred to as a ge erally accepted (institutional) arrangement o method that facilitates delivery of money from one to another. For example, a (signed) che essentially serves as a standardized permit th authorizes the recipient to claim a certain amount o checkable deposits from the check writer's ban account, but the check itself does not signify an part of the writer's assets. That is, a check is means of payment and hence generally accepted i transactions, though it is not a medium of exchang Conceptually, medium of exchange should NO be used as a synonym of means of payment; th medium of exchange stands for what (is paid School of Economic Development, Georgia Southem University, Statesboro, GA 30460-8152, E-mai
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