Monday, December 26, 2011

Money as Debt

It strikes me that debt is a major aspect of the nature of money (or at least things which function as a means of payment/medium of exchange). We have a descending list of things that are, or could be, used as money, in the sense of a means of payment/medium of exchange or store of value, from the most acceptable and final means of payment to the least acceptable. By the time we get to the bottom of the list, it is rare for the thing in question to be used as money (especially if it is not negotiable). E.g., in a commodity money world, we have the following:
Base commodity money: gold or silver, or banknotes of the central bank
so-called money certificates
demand deposits/fractional reserve current accounts
savings accounts
shares/deposits in other financial institutions (e.g., S&Ls)
promissory notes (private bank notes, other notes payable)
bills of exchange (this sometimes includes the cheque)
cheques (particularly negotiable cheques)
certain term/time CDs (e.g., negotiable CDs)
securities (bonds).
Now I have included bonds in the list because there are historical examples of bonds being used as a means of payment or medium of exchange, although ordinarily they do not function as money in this sense.

Since even in the 19th century gold fell to a small percentage of actual broad money, most central bank banknotes in the 19th century were essentially obligations (debts) of the central banks, where these central banks existed. Triffin (1985: 152) estimates that in 1800 bank money or credit money probably constituted less than 33% of the money supply in the developed world. By 1913, paper currency and bank deposits accounted for 90% of overall currency circulation in the world, and actual gold itself for not much more than 10%.

Behind all of these “money things” listed above is a crucial concept: the abstract money of account (or the abstract unit of money) by which we measure the value of things. Two concepts essential to the definition of money are therefore important:
(1) the abstract money of account or unit of account (which is not physical or concrete), and

(2) the “money things” that function as money which are denominated in the abstract money of account. This refers to things which might be physical (gold, cash, promissory note) or mere accounting records (e.g., reserves at the central bank, bank money or demand deposits recorded in a bank’s balance sheet or transferable debts recorded in written or electronic form) (Wray 2003: 261).
An important additional conceptual division is
(1) the final means of payment (which can be regarded as high powered money), the ultimate “money thing” which can clear all debts or discharge any obligation denominated in the unit of account, and

(2) other debt forms of money which are finally discharged by using (1).
Final clearing of debts of course occurs with the final means of payment: commodity money or banknotes of the central bank. When we withdraw money from our bank, we in fact demand the repayment of the debt instrument that is the fractional reserve account (or demand deposit) in the final means of payment (cash or reserves). Also, when banks settle their accounts with one another, they use the final means of payment.

Furthermore, the property of being able to demand repayment of a debt instrument on demand is by no means confined to fractional reserve demand deposits: it can also be a property of promissory notes and bills of exchange.

If we consider a modern fiat money economy, the following hierarchy is needed:
High Powered Money: cash and base money of the central bank
demand deposits/fractional reserve current accounts
savings accounts
shares/deposits in other financial institutions (e.g., S&Ls)
promissory notes (private notes payable)
bills of exchange (sometimes includes the cheque)
cheques (particularly negotiable cheques)
certain term/time CDs (e.g., negotiable CDs)
securities (bonds).
It is possible to think of high-powered money as the obligations of the central bank, though it is a special type of obligation: it is only convertible into itself (or another currency), not to any commodity. For example, a $10 note is an obligation to convert that bill into another $10 note, or two $5 notes (or some other combination of cash adding up to $10), or $10 of reserves that are merely accounting records.

In a modern economy, high-powered money (or the monetary base, base money, or US M0) is currency in circulation and bank reserves (both required and excess reserves).

M1 is the following:
(1) currency in circulation outside bank vaults (and also excluding bank reserves),
(2) checking/transactions accounts (or demand deposits) and other checkable accounts, and
(3) travellers checks.
Note that M1 excludes vault cash and bank reserves at the central bank, but includes cash held by the non-bank public and the debt forms of money we know as bank money.


Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds), The Gold Standard in Theory and History, Routledge, London and New York. 140–161.

Wray, L. R. 2003. “Money,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Edward Elgar, Cheltenham, UK and Northhampton, MA, USA. 261–265.


  1. The Austrians tabulate an aggregate money supply called TMS, or True Money Supply:

  2. In fact, Austrians have 3 measures of the money supply, as follows:

    (1) TMS 1 = the True Money Supply (TMS), Austrian Money Supply, or the Rothbard Money Supply, which can be found on

    (2) Shostak’s Austrian Money Supply (AMS = TMS 2), and

    (3) Mike Shedlock’s M Prime (M'), which is an alternative measure of (2).

  3. Actually, the "Austrian" money supply aggregate is TMS. Rothbard and Salerno originally conceived of it back in the 1980s, and is the statistic that is considered the "Austrian" money supply.

    Since then, Shostak and Shedlock have made some slight modifications.

    Personally, I think Shedlock's aggregate is most consistent with Mises' definition of money.

    Here is a link that shows a good explanation of TMS1, TMS2: