What is money?

To define money, many economic textbooks start by arguing that if there were no money, we would be reduced to a barter. economy. This is of course a hypothetical assertion that in closer scrutiny may prove to be wrong. This is because money is nothing more than an instrument that transmits signals about the level of "trust". As such, even in the ancient times people were able to create devices for transmitting thoir trust.

In fact, from nine millennium B.C. to present various forms of farm animals such as cows, sheep, camels, and agricultural products; such as wheat, barely, olive or wine, acted as money. Some tribes inhibiting around the Pacific and Indian Oceans, used cowrie shells and some used conch shells. In China, leather money was used in the form of one-foot-square pieces of white deerskin with colorful borders. In Canada Intendant Demeulle printed various face values on playing cards and affixed his seal to them. When the king's ship arrived, he redeemed this "card money" in cash. In Yap, an small island out in the Pacific Ocean huge heavy stone discs, carved in the shape of donut, has acted as money.

So what is money? There are many definitions for money, and yet when one goes beneath the surfaces of those definitions, it becomes quite clear that there is something fundamentally missing. Money is usually defined as anything that can serve as a:

• Medium of exchange

• Store of value

• Unit of account

It has been argued that:

"Credit cards are not money because no monetary value is stored on them, and neither are store cards because they are similar to credit cards, but limited to only the issuing stores but with use limited",
"Money is a financial asset that one may spend - it represent an existing asset that may be used to purchase goods or services. When calculating the money supply, the Federal Reserve includes financial assets like currency and deposits. In contrast, credit card debts are liabilities . Each credit card transaction creates a new loan from the credit car issuer. Eventually the loan needs to be repaid with a financial asset - money . To household, the line of credit associated with a credit card is not a financial asset, only a convenient vehicle for borrowing a purchase."
Since credit cards do not fall under M1, M2 or M3 they are not considered to be ​part of the money supply. According to the Federal Reserve Bank of New York "[M1] consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada."
Obviously, these arguments are flawed. Central banks, including the Federal Reserves, define various kinds of money in terms of their liquidity. Liquidity refers to how fast a financial asset may be soled or used to purchase a good or service. In Canada, for instance , there are many different monetary aggregates based on their liquities, including:

"M1": Currency outside banks + Personal chequing accounts + Current accounts,

"M1-Plus": +Personal chequable savings deposits + Non-personal chequable notice deposits,

"M1-Plus-Plus": +Personal non-chequable savings deposits + Non-personal non-chequable notice deposits,

"M2": +Personal fixed-term savings deposits,

"M3": +Non-personal term deposits +Foreign currency deposits,

etc.

Of course, credit cards are also used as "medium of exchange". If suddenly there is a surge in the credit cards usage in order to purchase goods and services we will see exactly the same impact on the macroeconomic variables including the inflation rate, interest rates, exchange rates, and there will also be an impact on labour market as well. There will be no differences in impact if people used cash or cheques instead.

As a store of value money can be used to defer our consumption. In other words, people can use money to transfer their purchasing power from the present to the future. However, note that:

-- Many objects or assets can act as a store of value. Of course, some assets may appreciate through time and some may depreciate . Even if we keep a $100 dollar bill under our pillow, after one year its purchasing power will decline by the rate of inflation in the economy -- economists call the value of an asset adjusted by the rate of inflation the real value of that asset. For example, if the annual inflation rate denoted by π is 2% , our $100 dollar bill after a year would buy only $100 * (1-π) = $100 * (1-0.02)= $98

Finally, it is argued that money as unit of account provides a common base for prices. However, note that;

• When we go online to pay our bills, we really don't use a common base for various prices, we "trust" that we are using a common base for prices. This would allow for some digits in our bank account get shifted around, along with some digits in the seller's bank account.

Despite the fact that they can fulfill all three criteria for moneyness, Bitcoins are not still used in the composite monetary aggregates.

In reality, I would argue that money is an instrument that embodies the abstract idea of trust. The critical question is how can one measure this trust in any monetary vehicle? I will try to deal with this question in my future notes.