The Unit of Account Is Special; The Medium Of Exchange Is Not

Leland Yeager’s paper “Essential Properties of the Medium of Exchange” is an attempt to draw a line – practically, if not in principle – between money and non-money. The two categories, he argues, behave very differently in response to excess or deficient demand: non-money will adjust its price or yield, whereas money, with no price of its own, adjusts only with momentous macroeconomic consequences.

Throughout the paper, Yeager seems to think of the medium of exchange as a particular asset or commodity. This is the wrong way to think of money. Many statements he makes about the uniqueness of “the” medium of exchange should be understood – not as if the medium of exchange possesses these qualities by virtue of being a privileged commodity – but as qualifiers for money commodities. To the degree that a commodity possesses these characteristics, it is money.

A statement such as “Nothing is more ultimate than money” is correct if understood tautologically. But if understood as Yeager intends, that “nothing is more ultimate than the money commodity”, the premise is false. There is no privileged money commodity. Rather, money commodities, to the extent of their liquidity, take on the privilege of the unit of account.

Yeager seems to recognize this distinction, acknowledging in a footnote “the far-fetched but theoretically challenging concept of a system in which the two functions [medium of exchange and unit of account] are split”, a possibility he would develop further with Robert Greenfield some 18 years later. But doesn’t this describe our economy now? Our unit of account is the dollar, but we have many money commodities. Checkable deposits and dollar bills, for example, can be represented in the consumer’s mind as more or less perfect substitutes, but they are very different commodities, especially if the former is created on a fractional reserve basis. Yeager argues (citing Newlyn) that, because the exchange of either is neutral (i.e. its exchange disturbs “neither … the total amount of that sort of asset in existence nor … the loan market”), checkable deposits and dollar bills are the same commodity. It is unclear why fixity of supply should be a characteristic function of “the” medium of exchange.

Unlike the medium of exchange and store of value functions, the unit of account function of money is not a service for which we can conceivably speak of a demand, despite commonly being listed alongside them in textbook definitions. The former are properties of concrete monies. When an exchange is made, it is facilitated with some medium, except in the case of direct barter. When value is stored, it is stored in some actually existing asset. Accordingly, we can speak of a demand for these services of monies. Other goods can also be closer or more distant substitutes for goods we call money, along either or both of these dimensions. The unit of account, on the other hand, is a property of money in the abstract. To say a good costs $5 does not inherently commit one to settling the exchange with banknotes, a check, or deposit balances via a debit card.

This, of course, erases the bright line between money and near-money that the paper argues for. And this lack of a bright line is the reason we keep track of different monetary aggregates, M0, M1, etc, starting with base currency and expanding to encompass less liquid monies. In fact, since the advent of credit cards, checkable deposits (not included in M0) may at this point even be more liquid – and more truly money – than base currency for most consumers. Such deposits are usually never presented for ultimate redemption. Indeed, currency is redeemed for checkable deposits!

Granted, media of exchange are usually fixed in terms of the unit of account, and so their function is not entirely separate. This fixity no doubt contributes greatly to the liquidity and close substitutability of money commodities. All the same, Dollars are not a commodity, and not a medium of exchange. Banknotes are a commodity, and checkable deposits are a different commodity, but Dollars are a unit of account. If we really do “seem to have something like the Hegelian-Marxian ‘jump of quantity into quality'” between money and non-money, that does not privilege a particular money commodity, but is a quality of any sufficiently liquid asset with a fixed value in terms of the unit of account.