2 - The United States Money Stock: Changing Definitions

Abstract

This chapter discusses money stock in United States. Money can be defined theoretically in terms of its functions as a medium of exchange, measure of value, standard for deferred payment, and liquid store of value. But the empirical definition must focus upon what serves as money. This definition must, of necessity, vary over time and space, as the things that function as money differ in different places and times. The proper definition of money eludes economists. The a priori or theoretical approach is unable to segregate assets according to the medium of exchange and store of value functions, which overlap in different monetary assets. The empirical approach, which tries to define money according to which aggregate best correlates with general economic activity, is also unable to isolate a single definition that is good for all times and places. As a result, economists and policy makers must exercise considerable judgment in deciding upon which definition to use for the purpose at hand. In a money economy, as distinct from a barter economy, acts of purchase are separated from acts of sale. To be sure, separation of these acts cannot be accomplished without a generally accepted medium of exchange, but it is also true that during the interval of time between a sale and a purchase there must be some liquid asset—some temporary abode of purchasing power, to use one of Friedman's favorite phrases—to serve sellers before they turn into buyers. This feature of money is also one of its essential functions.