Chapter 2: The Nature and Functions of Money: A Re-Examination
INTRODUCTION Standard textbooks on money and banking invariably include a chapter with a title similar to that above, in which the objective is to deﬁne money at a conceptual level, primarily with reference to the functions it is supposed to perform in the market economy. This is thought necessary because of the diﬃculties standing in the way of any comprehensive empirical deﬁnition. Historically, a very broad range of physical commodities and ﬁnancial assets has been acceptable as money at diﬀerent times and places. In an era of rapid ﬁnancial innovation, such as the present, the evolution of the payments system becomes apparent even to the most casual participant in the process, to the embarrassment of econometricians estimating demand for money functions, or policy makers inclined to conduct monetary policy with reference to one or other of the arbitrarily deﬁned monetary aggregates. The same textbooks provide long lists of the diﬀerent items which have (actually or reputedly) served as money at one time or another, ranging from the ubiquitous cattle and cowry shells of ancient times, tobacco in colonial America, the stone money of Uap, coins minted from the precious metals such as gold and silver, bank notes and bank deposits, inconvertible paper money, deposits at non-bank ﬁnancial institutions, and so on, up to and including the ‘e-money’ (electronic money) of the present day.1 The point of deﬁning money in terms of the functions it performs is (presumably) to cut through the problems posed...
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