Published on RWER Blog, by Merijn Knibbe, September 25, 2012.
Jens Weidmann, boss of the Bundesbank, held a speech about money. The subject was highly interesting: money and inflation in Goethe’s ‘Faust’. The speech was interesting too – but for the wrong reasons. What’s the matter?
Economic statisticians basically use three different definitions of money:
- A modern neo-classical one, the divisia definition;
- An Austrian one;
- And an economic-statistical definition, used by central banks (see graph 14 of the September 2012 issue of the ECB Monthly bulletin).
I like the last one, as it uses double entry accounting which enables you to show where the money came from and where it went: different kinds of loans create different kinds of deposits. It also clearly shows that banks plus borrowers together create money out of thin air – money creation as a social act. This enables you to bring all kinds of social, legal and economic changes like the deregulation of mortgage markets into the analysis of money. But the modern neo-classical one (‘divisia’ money) and the Austrian one are consistent, too, in the sense that they are based upon a spelled out concept and sound operationalisation.
The concepts behind these definitions focus on ‘money as a means of exchange’, ‘transaction money’. As a consequence, ‘base money’ (liquid reserves of banks), which is not used for exchange is not included in the operational definition. For geeks and teachers of economics: see for the concept and a very recent change in the operational definition of the economic-statistical definition of money ‘Box 3′ of the September 2012 issue of the Monthly Bulletin of the ECB linked above … //
… What would this Goethe guy by the way have thought of all this? Well, we know. He clearly stated that double entry accounting was one of the most beautiful inventions of the human mind ever, “Welche Vorteile gewährt die doppelte Buchhaltung dem Kaufmanne! Es ist eine der schönsten Erfindungen des menschlichen Geistes, und ein jeder gute Haushalter sollte sie in seiner Wirtschaft einführen”!
Meta: Box 3 of the September issue of the Monthly Bulletin in fact accepts the Austrian idea of excluding MMF/CCP’s (Money Mutual Funds/Central Counterparties) shares from the operational definition of transaction money.