What is "Money"?

Almost exactly four years ago, economist Paul Krugman wrote the following explanation of the difficulty in defining the money supply for purpose of monetarist analysis. I think it is worth the resurrection.



Surely we don’t mean to identify money with pieces of green paper bearing portraits of dead presidents. Even Milton Friedman rejected that, more than half a century ago. For one thing, a lot of those pieces of green paper are pretty much inert — sitting outside the United States, in the hoards of drug dealers and such. For another, checking accounts are clearly a close substitute for cash in hand.

Friedman and Schwartz dealt with this by proposing broader aggregates –M1, which adds checking accounts, and M2, which adds a broader range of deposits. And circa 1960 you could argue that those aggregates were good enough.

But now we have a large shadow banking system, in which things like repo serve much the same function as deposits; M3 used to capture some of that, but the Fed discontinued it, in part I think because it wasn’t clear which repo belonged there, and data on repo not involving primary dealers is scattered. Whatever.

The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply....

But if you’re determined to view economic affairs through a sort of paleo-monetarist lens, focused on the evils of “printing money”, you’re going to have a hard time in the modern world, where the definition of money is increasingly vague.


Some of Krugman's polemical vices show through there. For example, the phrase "even Milton Friedman," which suggests that Friedan was reluctant to abandon the cartoonish view that Krugman starts with. I don't believe he deserves the implications of that "even."




Still, if we understand that it is a cartoonish view, an expositor can legitimately start with it and use it to move forward to other possible understandings on money, as Krugman does here.




He makes a good point, and the rise of bitcoin and its imitators in the four years since he wrote have made it a better point. "Money" is a tricky concept. Unfortunately, Krugman himself isn't always consistent with that point, himself employing simplistic notions of money when they serve his politics.




Case in point: here.