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Source link: http://archive.mises.org/4742/what-money-is-not/

What Money is Not

February 28, 2006 by

With the possible exception of international trade, no topic in economics contains more myths than monetary theory. Here I address four popular opinions concerning money that suffer from either ambiguity or outright falsehood, among which that the purchasing power of money equals the supply of real output divided by the supply of money, that deflation is undesirable, and that money represents a claim on goods and services. FULL ARTICLE

{ 60 comments }

Frank Z March 3, 2006 at 8:39 am

And while I am here…..

A “dollar” is also not a piece of paper except under common usage. Technically it is a specified weight of gold or silver.

The removal of the contractual obligation on the US currency making it irredeemable effectively took gold deposits out of the hands of the citizen and placed it directly into the hands of bankers.

Previous to that money was offered “as” a legal tender it was decreed by “fiat” to “be” a legal tender. Refusal to accept it being a legal tender would result in forfeiture of payment.
I would call that being forced to use it.

The debate rages because some economists have entered the informal defintion and I might add partial definition of money into their textbooks.

There is no debate in the public’s mind. “Money” is what is in their wallet. Dollars are those pieces of paper. Nevertheless, they are formally a “fiat currency”.

Don Beezley March 3, 2006 at 12:29 pm

Paul, perhaps it’s that sweet but thin Rocky Mountain air I breathe all day.

Paul Edwards March 3, 2006 at 1:02 pm

Don,

That sounds truly awesome. I took a trip through the Rockies once and the views were far more amazing that i ever could have imagined. It would be cool to live around them.

Wes Bertrand March 3, 2006 at 6:49 pm

Since epistemological clarity seems to be the crux of this debate about the meaning of money, I offer the following definitions, which may or may not be “textbook,” commonly accepted or understood, or for that matter earn me points on the professor’s test. Refine as you like, but I believe they express the necessary distinctions:

MONEY: A commodity, such as gold or silver, generally recognized and accepted in the marketplace as a universal medium of exchange (typically shaped or organized for accurate assessment and ease of transfer, e.g., minted). Monetary properties such as being scarce (relatively difficult to increase supply), portable, durable, equally divisible, non-counterfeitable, and esthetically or culturally appealing contribute to it being widely accepted. Money that also has non-monetary, e.g., industrial uses (thus providing additional value in the marketplace), may contribute to its favorability over other types of money—though non-monetary uses are not necessary for its continued use as strictly money.

CURRENCY: A note or coin (or digital representation thereof) that may or may not be redeemable for money, but is nonetheless recognized and accepted as a universal medium of exchange for use in non-barter transactions. Money backed currency, such as paper receipts or certificates, facilitates transactions in which physical transfer of the money they represent (historically, gold and silver stored in banks) proves burdensome.

FIAT CURRENCY: Governmentally controlled currency that is issued monopolistically and prohibited from being redeemable for money. Because of its coercive character, fiat currency exposes two facts: It has not been recognized and accepted voluntarily by the marketplace; and, any voluntarily chosen market money and/or redeemable currency would otherwise drive it out of existence. Thus, fiat currency requires a legalized monopoly in order to prevent its own demise as well as to promote its recognition and acceptance as a universal medium of exchange. Unfortunately, for numerous reasons, fiat currency tends to be seen by the citizenry as synonymous with money. “Money,” after all, can be an all-inclusive conceptual category for any media of exchange, but it is unwise—vis a vis statism—to overlook its important subcategories. Over time, few people understand the voluntary roots of money and its natural selection by the marketplace, and few acknowledge the various negative economic consequences of fiat currency.

AMERICAN DOLLAR: The basic unit of fiat currency in the United States of America.
Originally, it was a governmentally regulated money coin that designated a specific quantity (typically silver) or a currency note redeemable for a set quantity of either silver or gold (under governmentally controlled bimetallism).

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