4. What is money? MONEY FACILITATES EXCHANGE What is ‘money?’ On its face, this question appears rather trivial. After all, when a friend asks whether we have money, we know exactly what he or she is asking. Or do we? Is, for example, currency ‘money?’ Here, popular terminology happens to serve us well – currency is money. But why is currency money? In other words, what fundamental feature gives currency its ‘moneyness?’ To address this question, let’s consider what else might be ‘money.’ Could we, for example, employ housing units as money? Your immediate answer to this question is probably ‘no.’ After all, we don’t buy groceries by transferring to store-owners a right to consume housing stocks (at least not directly). But before dismissing this question, let’s consider the following (hypothetical!) proposition. Suppose that we attempt to employ you as a research assistant. Suppose further that, in return for your services, we’ll give you either 20 US dollars or a really big, well-constructed house, located in an attractive neighborhood. Holding all else constant, which of the two forms of remuneration would you choose? The house, of course! So, at least in principle, there exist assets other than those that we commonly refer to as money that can act like money. We can think of numerous other examples, but the bottom line for each is the same. For an asset to act like ‘money,’ it must be acceptable as a ‘medium of exchange’ – that is, anything that an...
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