Money isn't only what you think it is

When most ordinary people think of money, they think of the coins and banknotes that are increasingly becoming redundant. Maybe they think about the virtual balance in their bank account (it's virtual because the bank isn't physically storing that amount of money for you). However, when economists think of money they think of much more.

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875 [*]:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services;
2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and
3. It is a store of value - you can keep it and it will retain its value into the future.

Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

The surprising thing is that we accept coins and banknotes as money even though they have no intrinsic value - we only value them because they can be used as money. They are used as money because the government has decreed that they have value - they are called fiat money because they are given value by government fiat. That distinguishes them from gold or silver, which were previously used as money, and had intrinsic value - gold and silver are forms of commodity money.

In some ways, commodity money is more interesting (to me, at least), because of the variety of ways it can arise. You might have heard of prisoners of war in POW camps using cigarettes as money, or the giant stone wheels (Rai) used as money on the Micronesian island of Yap. Or, my personal favourite, beaver pelts used as money by the Hudson Bay Company in Canada in the 18th Century.

I was interested recently to read this article in The Guardian by Richard Davies, who has a new book Extreme Economies: Survival, Failure, Future. The book looks interesting (expect a book review from me, but not for a while as I have a long backlog to get through first), but in the article there was a focus on money:

The use of dollars inside the prison is a puzzle. Anyone running a major drug operation is going to need to shift large cash balances, but dollar bills are something sniffer dogs can detect, and any digital transfers can be traced. It turns out that drug traders and smugglers face none of these risks, because Louisiana prisons have a remarkable new currency innovation. “Cash is contraband, but people have got cash,” the former prisoner explained, “but it is not cash like cash in hand. It is untraceable. It is all based on numbers. People pay each other with dots.”...

The name of the prisoners’ new currency comes from the popular Green Dot brand of these cards, which carry the Visa or Mastercard logo and can be used to make purchases wherever regular credit and debit cards are accepted. Some users have found ways to set up an account for the card without using their true identification details. They then buy a second card, this one a single-use scratch card called a MoneyPak, which is used to load the debit card with credit of anywhere between $20 and $500. Both cards can be bought pretty much anywhere: at Walmart, at CVS or any other pharmacy. Scratching away the back of a MoneyPak reveals a 14-digit number. This number, the “dots”, is the vital link, carrying up to $500 of buying power. The user goes online, logs in to their account and enters the number, and the credit appears, instantly, on their debit card.

The person buying the Green Dot card can pay in cash, as can the person buying a $500 MoneyPak, so there is no trace of who owns them. The beneficiary of the credit does not need to see the MoneyPak itself – all they need are the numbers. Texting someone the 14-digit “dots” using a contraband phone, sending them a photo or letter with the numbers, or simply communicating the numbers over a telephone call will do. The dots are a currency close to cash: an instant, simple and safe transfer of value over long distance.

To make a large cash payment, a prisoner asks a friend on the outside to buy a MoneyPak and to pass on the dots once they have done so. These 14 digits can then be exchanged with a guard or another prisoner for something in the prison, including drugs.

Are "dots" money? They are certainly a medium of exchange (that is their main function). Because they are dollar-denominated, they can be used as a unit of account. And because they can be stored and used later, they are a store of value. There is great variety in the forms that money can take, and technology is helping to identify new forms.

[HT: Marginal Revolution]

*****

[*]  Jevons noted a fourth function, a standard of value (a way of valuing debts), which we now consider to be much the same as a unit of account.