Then they list three functions of money: medium of exchange (we buy and sell all other goods for money); medium of account (we quote the prices of all other goods in money); and store of wealth (or store of value). It's that third function of money that is totally out of place. We should ditch it.

They start out well. They provide a functional definition of money; "money is what money does". If people in a given time and place use cigarettes as money, then cigarettes are money, in that time and place. Moneyness is not a property of a good; it is a property of how people use that good.

Most goods are not used as a medium of exchange. A good that is used as a medium of exchange is special.

Most goods are not used as a medium of account. A good that is used as a medium of account is special.

(And, with rare exceptions like hyperinflations, the good that is used as a medium of exchange is also used as a medium of account. Because if you are going to be paying with cigarettes it's nearly always a lot more convenient to quote the price in cigarettes.)

But most goods are used as a store of wealth. There is absolutely nothing special about a good that is used as a store of wealth. The chair I am sitting on is a store of wealth. So are the desk and computer in front of me. If I rented them, instead of owning them, my wealth would be lower than it is.

If I were a visiting anthropologist, wanting to discover what Canadians use as money, I would look at what good they use as a medium of exchange, and as a medium of account. That tells me all I need to know. I wouldn't go looking for what Canadians use as a store of wealth. A list of all the thousands of goods that Canadians use as a store of wealth would be an interesting list; but it wouldn't help me narrow down my search for what they use as money.

Now, it's neverthless true that money is a store of wealth. There is nearly always some delay, however short, between receiving money and spending it again. The velocity of circulation is not infinite. If the value of money fell to zero before you could spend it again, it couldn't be used as a medium of exchange. And if the value of money fell too quickly, it would not be a good medium of account either. But being a store of wealth is not what makes it money. That's not part of a useful definition of money.

Money is a very peculiar store of wealth.

How much would I have been willing to pay for my house if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Less than I paid for it, but still a positive amount. It yields a flow of services even if I can't sell that right.

How much would I have been willing to pay for the S20 note in my pocket if the seller had imposed a condition that I could use it as long as I wanted but could never sell it again, or rent it out to someone else? Nothing.

When you buy a good, you buy the option to use it, and the option to sell it again. For most goods, both options have value to the buyer. For a good that is only used as money, the first option is worthless; only the second option has value. Because if I can't sell it again, I can't use it as a medium of exchange.

If the government made it illegal for me to sell my assets, my wealth would drop, but I would still be wealthier than someone who had no assets. I could still live in my house, drive my car, sit on my chair, and use my computer. Even my financial assets would still pay dividends, or might be redeemed at some future point. I wouldn't throw them away. But the irredeemable paper money in my pocket would be worthless to me. I would throw it away. It is only a store of wealth because it is a medium of exchange.

Some people are said to use money for lighting their cigars. But I'm not going to list that as one of the functions of money.

Money is what money does. There are two functions of money that define what is and what is not used as money: medium of exchange; and medium of account. That's it.

This post is a reflection of John Quiggin's post on David Graeber. Here's John:

"So, if we had the kind of disciplinary modesty richly merited by our performance as a profession over the past few years, economists would recognise that we owe an intellectual debt to Graeber. From now on, we can treat money primarily as a store of value, and stop worrying about how it works as a medium of exchange."

I disagree. We need to start worrying a lot more about how money works as a medium of exchange. We need to understand a lot better than we do how money works as a coordinating device in a decentralised economy. And we need to understand a lot better than we do how money can sometimes fail as a coordinating device. Because, outside a very simple economy, people can't barter their way back to full employment if the monetary exchange system fails.

We need to stop thinking of money as a store of wealth, just like all the others. And let's start by changing the textbook definition of money, by deleting that bit about money being a store of wealth. It only serves to confuse visiting anthropologists.