Category Archives: Guest Blogger

Essays in Monetary Theory and Policy: On the Nature of Money (9)

By Lukas Kaluza*


“Money is what we use to pay for things.” This quote from Lerner (1947, p. 313) is the simple answer to the question: “What is money?” But in order to get an answer to the question of the nature of money we have to go further into the theory and consider two different approaches: the orthodox and the heterodox approach. In the following essay the answers of both approaches to the questions of the nature of money will be discussed and after that implications for policy making will be made. Therefore, this essay will start with a short excursion in which the two different stories of the history of money will be given.

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Essays in Monetary Theory and Policy: On the Nature of Money (8)

By Ken Yamat*

What is the nature of money?

Money is a medium of exchange, a store of value, and a unit of account as described below:

In an important sense our task throughout this monograph has been to develop a theory of the nature of money. When asked “What is money?”, most people respond – quite reasonably – that money is used to buy something. This gets at money’s use as a medium of exchange, which is of course the most familiar use. If pressed further, most would also say that money is something one can hold as a store of value. Indeed, economists recognize money as the safest and most liquid store of value available, at least outside situations with high inflation, when money’s value falls rapidly. Some people will also mention the use of money to pay something down, debt, with money used as a means of payment, or means of final settlement of contractual obligations. Finally, if we ask people “How much is that worth?” – pointing to just about anything- a common response would be to evaluate with in terms of money, this time acting as the unit of account used to measure wealth, debt, prices, economic value. (Wray, 2013)

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Essays in Monetary Theory and Policy: On the Nature of Money (7)

By Marilynne Meikenhous*

The debate surrounding the nature of money is an impassioned one. Our understanding of money and the policy implementation based on our beliefs differ momentously. Have our policies reflected a true understanding of how money functions in a modern society, and have these policies worked?  In order to answer this, it is first necessary to explore what money is. This typically depends on how you think money came into existence, what money is used for, and how money functions in the modern economy. The way that one incorporates money into a discussion of macroeconomics is arguably what indicates their economic background and beliefs.

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Essays in Monetary Theory and Policy: On the Nature of Money (6)

By Andreas Lückert*

1. Introduction

Money is “what we use to pay things”. In order to be efficient it needs to be generally accepted. (Lerner, 1947) The question arises how this general acceptability gets created. The true origin of money will never be known for sure. (Wray 2005, p. 3) Still, the heterodox and the orthodox view established different explanations for the nature of money.  These theories will be explained in the following and a recommendation for policy making will be made.

2. Orthodox Approach

The orthodox approach goes along with the exogenous theory of money. It sees money as a neutral thing, which evolved out of barter and is not determined by the real economy. This paragraph explores this nature of money from the orthodox view.

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Essays in Monetary Theory and Policy: On the Nature of Money (5)

By Samuel Ellenbogen*

The nature of money has been a discussion entailing ongoing debate between historians, philosophers, and economists for centuries as Bell (2001) wrote. There is no easy solution to the delineation of almost all aspects of money; from discussions concerning the origins of money to discussions concerning the functions of money to discussions concerning the “proper” policy prescription parameters involving decisions about how to spend government money. This is because money has been defined in various different contexts, as Bell (2001) discusses its ambiguousness as “A numeraire, a medium of exchange, a store of value, a means of payment, a unit of account, a measure of wealth, a simple debt, a delayed form of reciprocal altruism, a reference point in accumulation, an institution, and/or a combination of these”.

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Essays in Monetary Theory and Policy: On the Nature of Money (4)

By Kian Lua*

Money is a quintessential aspect of our society, however rarely would someone ponder upon and seek to understand what money really is or how it functions in the economy. There are several stories or theories about the origin, nature and functions of money, and both mainstream orthodox and heterodox have different views of how money work. Understanding the nature and function of money is crucial in shaping effective theories of money as well as sound economic policies. In the traditional mainstream perspective, money is neutral in the long run. It serves as a medium of exchange and measure of value. The central bank controls the supply of money, government obtains money from households and firms to spend and excessive government spending would lead to inflation. In the heterodox view however, money is not neutral. It is a unit of account and always a debt. The government as the sovereign issuer of the currency does not have budgetary constraints. It can spend as much as it needs to achieve full employment and price stability. The nature of money and its implications to policy-making will now be examined.

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Essays in Monetary Theory and Policy: On the Nature of Banking (2)

By  Darren Prince*

There are different views on the importance of banks in regards to what functions banks actually perform and how they interact with other aspects of an economy.  There are two main approaches to the banking industry and also within the two approaches there are different theories.  The orthodox and heterodox approaches to banking have very different views of the banking industry and the different approaches diverge at the very beginning of their theories.  To fully understand the beliefs that are the driving force behind the nature of banking in both approaches a brief description is needed to understand where the theories diverge.  The orthodox and heterodox theories diverge in their beliefs on the subject of “money” or more specifically what the origins of money are and what role does “money” play in a capitalist economy.  This brief description is needed to understand how each theory developed what they believe to be the nature of banking considering the fact that banks and financial institutions deal with money.  The overall purpose of the paper will be to describe the nature of banking within the different approaches and how these theories lead each approach to develop policies and procedures regarding the financial industry that are believed to best serve the efficiency of the United States economy.

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Essays in Monetary Theory and Policy: On the Nature of Money (3)

By Jack Wendland*

Neoclassical economics has largely relegated money to the role of neutral medium of exchange.  A closer, more historical look at money reveals that, from the beginning, money has always been credit offset by debt, not a medium of exchange.  Although the acceptability of money follows a clear-cut hierarchy, the process by which money is created remains the same for all parties.  Running contrary to the mainstream narrative, this vision of money as credit has important implications for the fiscal policy of any state that issues its own currency.

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Essays in Monetary Theory and Policy: On the Nature of Money (2)

By Matthew Berg*


This paper argues that a monetary production credit economy must necessarily have a hierarchy of money (Foley 1983; Bell 2001) in which some IOUs are more liquid and more acceptable than others, and in which default on IOUs is possible. The imposition of a tax liability by the government is a sufficient condition not only to ensure that the government’s IOU is acceptable (Wray 2012), but also to ensure that at least some non-government IOUs will be acceptable to the degree that they can be converted into government IOUs – that is, to the degree that they are liquid.

Banks are institutions which exchange their own IOUs for the IOUs of borrowers who stand lower in the hierarchy of money than banks. Borrowers take out loans from banks for the purpose of buying goods, services, or financial asset from a third party. Banks (and central banks) act as the “ephors” of capitalism – and as the ephors of the hierarchy of money – by deciding which IOUs shall be “validated” and effectively converted into government IOUs, and by deciding when and for how long those IOUs shall be validated.

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Essays in Monetary Theory and Policy: On the Nature of Banking

By Ryan M. Pope*

Hyman P. Minsky said he thought there were as many forms of capitalism as Heinz had pickles.  The same can be said about the different types of banking within the financial system.  The system has undergone a dramatic transformation over the development of the capitalist economy, and Minsky spent a large amount of time studying this transformation.  Many economists feel the same way as Minsky did, that the results achieved by a capitalist economy can be viewed from two fundamentally different perspectives: the Smithian way and the Keynes way.  The Smithian way assumes the presence of an “invisible hand”, and therefore “intervention or regulation can only do mischief.” (Minsky 1991, 5)  In contrast, the Keynes way assumes that the economy is naturally unstable, and “… regulation and intervention can be beneficial.” (Minsky 1991, 5)  When designing economic policies, government leaders must choose between these two perspectives.  This is exactly what policy makers have done over the evolution of the capitalist economy, and their decisions have transformed the banking system in many ways.

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