By Usha Pradhan*
And there I was, a teenager, strolling on the Kingsway – a district with a long road that encompasses high-end shops, restaurants, and hotels on both sides of the road and as the name implies, it literally used to be the King’s way to his palace – when I saw a few street children walking around begging the privileged passersby for mercy-money. Sadly, I observed that the street children were invisible to almost everyone. The fortunes would look straight at them and see right pass through them. I wondered why those shoppers who could afford to spend on high-end designer handbags could not show mercy on those children and spend a few dollars on them. One of the conclusions I reached was that maybe because they were so used to encountering not only those underprivileged children, but also, a lot of other underprivileged people in their daily lives in that society that they were immune to them. This story is of a developing country and as with a lot of developing nations, the income gap between the “haves” and the “have-nots” was pretty high and consequently, inequality persisted in every aspect of life among the citizens there.
By A. Clayton Slawson III*
In today’s economic market, people tend to think excessively about money whether to spend on essential or discretionary goods and services, savings or which investment options to choose, or even the current topic du hour in Washington, whether there is too much or too little money floating around! Many “arm chair” economists, lacking the knowledge of our economic history, stop at these basic thoughts however, and thus never fully understand money in terms of its identity, origin, or even how today’s currencies became of value in the first place. Just as these concerns can vary person to person, so too can the very definition of money and how currency adopts value. In order to better understand the “nature of money,” this paper will utilize the frameworks of both the Orthodox school and the Heterodox schools of thought to provide a basic understanding of money in their respective approaches, which will set up a clear argument for why one approach is more advantageous for guiding economies toward full employment. Undoubtedly, any weekend warrior economists will be better prepared for discussions on money at the conclusion of this paper.
By Brian Hartley*
Modern banks are professional arbiters of financial IOUs secondary to that of the state or issuing authority. Central bank liabilities – reserves – form the most liquid and foundational instrument in the hierarchy of money, with intermediate obligations between banks ranking next, down finally to obligations issued by individuals. Banks facilitate the transfer of IOUs across and between various levels of the hierarchy, allowing transactions between individuals, extension of credit from the liquid to the illiquid, the transformation of maturities and transference of risk. Balance sheet expansion provides the liquidity necessary for increasing sophistication of the credit and payment system.
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.
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)
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.
By Andreas Lückert*
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.
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”.
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.
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.