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The Meaning of Money

Study Objective: Learn about the significance and role of
money in macroeconomic analysis.
Skills: Define money as a means of payment.
Skills: Show the logic why money must be an
intermediated MOP.
Keywords: MOP, intermediation, necessary and sufficient
conditions
Theoretical issues: What is the significance of money in
macroeconomic analysis?
Questions for discussion:
What is money if it is not a means of payment?
Can money arise spontaneously?
Can money arise without intermediation?
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The puzzle and the paradox of money
Money is the most puzzling phenomenon in economics. It
occupies the oldest and the largest segment of the economic
literature, but it remains a big mystery.
Fiat money is intrinsically worthless, and yet nearly all
people are eager to get it. It is extremely hard to find
somebody who will take a real good in payment for some
real good. But it is easy to find one who will take money.
Again though everybody wants to get it, nobody wants to
keep it, but wants to spend it sooner or later.
The absence of money aborts production of real good.
The perfect money such as e-money has no physical
existence at all,
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The Significance of Money

The practical significance of money is that it is the only
possible vehicle to transmit the effect of one agents action
on the other agents through a transmission process that
spreads the effect of money across the entire economy.
Macroeconomic events are impossible without money, as
there is nothing else to propagate the events.
The theoretical significance of money as a MOP is that it
recognizes the agent to agent relation of reciprocal claims
and obligations. Old ideas about money did not recognize
this relation and hence missed out on the complete
specification of the equilibrium of the market. In macro
theory, if there is no money, there is no meaning.
The analysis of the necessary function of money as a MOP
changes economic theory completely.
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A Proper Definition of Money
A logically proper definition must have two parts: the genus and
the differentium. The genus identifies the class to which the
entity belongs, because anything must be something. The
differentium identifies the unique properties of the object or
entity to show how it differs from other members of the same
class.
Following this logical dictum, consistent economics defines
money as an intermediated means of payment.
First, the genus is MOP. A MOP is anything that satisfies the
buyers obligation and the sellers claim. There are three genuine
types of MOP:
1. barter as a real good paying for another real good;
2. money as a device allowing transfer of claims and
obligations of specified value,
3. a bond as a promise to pay in the future.
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Definition of Money Contd..
No matter whatever else money may be, nobody will
call it money if it fails to serve as a MOP. Something
that nobody accepts in payment for a real good is
something, but not money.
The differentium is the qualifier intermediated. Money
is the only MOP that is intermediated. It is passed by an
intermediary from one agent to another. Thus an
ordinary agent becomes an intermediary between two
strangers. The intermediary takes the money from his
customer, and then gives it over to his supplier, even as
the customer is usually totally unknown to the supplier.

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Definition of Money Contd..
The mystery of money is that it is a device to transfer
claims and obligations. An intermediary as seigneur must
bear the risk that the device will serve its function. Money
cannot be created without an intermediary taking up the
responsibility of managing the claims and obligations of
agents who do not trust each other, and most often who
never even meet each other.
Previous economics could not define money because it
never learned about the reciprocity relation of payment
between agents. Without a theory of payment, there was
just no way of seeing money as a MOP.
Indeed, the most difficult part was to see the
intermediation in the circulation of money.
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Showing how money acts as a MOP
The relation between a real good and money is one of reciprocity.
Let a first subscript denote the seller and a second denote the
buyer. A minimal case of indirect trade needs at least three goods
and three agents. Suppose that agent A sells food qAB to agent B,
who then pays back with money mBA. Next, agent A buys real
good qCA from agent C, and pays with money mAC. Then between
two real goods (qAB|qCA) money enters in the interim as the MOP.
IT may be shown as B C
{(qAB| mBA): : (mAC | qCA)}

Agent A takes money from agent B and gives money to agent C.

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Money implements reciprocity
A social rule of exchange is the rule of reciprocity. If agent A gives
some good (say food, qAB) to agent B, then A earns a claim on B
while B incurs an obligation to A. That is, B and nobody but B
must pay A. Hence there must be a payment from B to A. B may
pay with a real good (qBA) or money (mBA) or bond (fBA).
Reciprocity is seen in the juxtaposition of the subscript order
(AB|BA).
Under indirect trade with money, there is no reciprocity between
real goods (qAB, qCA) with (AB|CA), but there is two-step
reciprocation. First, between A and B, (qAB |mBA) has reciprocity
(AB|BA). Secondly, between A and C, there is reciprocity (mAC |
qCA) with juxtaposition (AC|CA). Note that the same money is
denoted by (mBA = mAC) to show the concerned agents who give
and who take the money. The inner agent A in (BA|AC) is the
intermediary between the outer agents B and C.

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No Intermediation, No Money
It is clear that money cannot arise without an
intermediary.
Even the ordinary agent who does not intend to act as an
intermediary must act as one between his customer from
whom he takes money and the supplier to whom he gives
money.
At a greater depth, nobody would take money if they did
not expect others to take it from them in exchange for
the desired kind of real good. For money to be generally
acceptable, there must be a deliberate act of
intermediation by the original issuer of money, who
must lend the money and then take it back in repayment
of the loan.
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Money cannot arise spontaneously
Carl Menger, the founder of the Austrian School, argued
that money and other social institutions arose
spontaneously. Consistency analysis disproves this. It
claims that money must be created deliberately by a
seigneur who must bear the risk of managing the claims
and obligations of people who on their won do not trust
each other.
The key problem is that issuer of money must assume
the risk of recovering the loan. It is a common mistake to
suppose that if people trust the banker, he can issue
money. It is just the opposite. If the banker trusts the
people, he can issue money as loan, because a banker
cannot issue money excp0et as a loan.
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