What is money? Most people have only a vague idea. It has something to do with the green pieces of paper in one’s wallet; but then again such paper is rarely used in our digital age. The intention of the present article is to give an overview of the different financial instruments that people often refer to as money.
While seemingly a remarkably dry subject, I am convinced that no aspect of economic theory is as important in our time as a correct formulation of money and banking. The reason why understanding the different types of “money” is so vital is because modern phenomenons such as the business cycle, credit collapses, inflation, and the misallocation of resources all revolve around money. And it is only in understand what money is that we can identify where we went wrong.
What follows is, obviously, a view of money according to the Austrian tradition. And more specifically, it is a very Misesian approach and we rely heavily on Ludwig von Mises’ own definitions in order to make our point. But even here we immediately run into an obstacle. The book in which Mises most completely set out his typology of money was his Theory of Money and Credit. It was first published in 1912 with the German title Theorie des Geldes und der Umlaufsmittel. It was the first English edition in 1934 that translated the title as Theory of Money and Credit. But, as Jorg Guido Hulsmann points out in the first chapter of a celebratory collection of essays published in honor of Mises’ great work, the use of the word “credit” here is misleadingly broad, and we will discover why as we proceed. The point, however, is that we must choose an interpretation of Mises’ framework when we adopt our Misesian taxonomy.