Money is that Money does

F.A. Walker’s maxim that “money is what money does” is frequently cited within the fairly scanty literature that orthodox economics devotes to the nature of money. (Although in some respects, of course, orthodox economics is all about money).

Walker’s quotation usually comes into play to help join the dots between the question, “What is money?” and an answer enumerating the three or four major functions of money (as a medium of exchange; as a unit of account; as a store of value; sometimes as a standard of deferred payment). Some critics (e.g. Geoffrey Ingham) complain that the functional “definition” actually fails to specify money: saying what money does doesn’t really tell us what it is, and furthermore, doesn’t money do a few other important things that are mysteriously left out of the canonical three or four functions of money?

When Walker’s quotation is invoked, the implication is often that we should be open-minded in definitional matters. Otherwise we risk being blindsided by the dynamism and adaptability of money. If something doesn’t strike us as money, but one day starts acting as a medium of exchange, a unit of account, and a store of value, then we had better sit up and start taking it seriously as money. (A piece of advice that seems all the more pertinent with the rise of cryptocurrency and other forms of digital value). The precision yet flexibility we get from the concentric, increasingly permissive stipulative measures of the money supply (M0, M1, et al.) support the same attitude. It is fascinating, therefore, to see Walker’s words in their original context.

When Walker wrote “money is that money does,” what kind of money did he have in mind?

Walker is arguing for an extremely narrow definition of money by modern standards, distinguishing it from bills of exchange and checks. He would perhaps not think of it as narrow himself, since he was still tacitly tussling with theorists who thought fiat paper money was not really money. Walker is also explicitly leaving out bank deposits, which nowadays are usually held to constitute the bulk of the middling-to-narrower measures of the money supply. For Walker, bank deposits do not perform the function of money, but “save the use” of money.

Walker is not rigidly dogmatic: he recognizes that treasury notes may be more money-like or less, depending on whether they actually circulate (which he suggests, on the next page, in turn depends on whether they are issued in big or small denominations, and whether or not they are interest-bearing). And bank-notes, “from the ill repute of the issuers, might conceivably become of such slow, difficult and limited currency, as to fall out of the category of money” (p.401).

But Walker is certainly not saying, “I can’t offer you hard-and-fast rules for what is or isn’t money; money is whatever fulfills the functions of money.” What he’s actually saying is something more like, “if it discharges debts and purchases things just like money, don’t be hasty! We shouldn’t really say it’s fulfilling the functions of money unless it actually is money.”

So what actually is money? The phrase “from hand to hand” is key for Walker, and he does not count the “mutual cancellation of vast bodies of indebtedness” as something passing from hand to hand (nope, not even invisible ones). Money must not only discharge debts and purchase things, it must circulate. 

This might be pushing it a little, but you might even interpret him to be saying the very opposite of what he is supposed to have said. It is not that money is intricate and multifarious and adaptable and difficult to identify with confidence, whereas the functions of money are abstract and easy-to-identify things, so that anything we find fulfilling those functions has every right to be called money. Rather, it is the functioning of money that is a bit tricky to identify — Condy Raguet and Amasa Walker seem to have got it wrong — whereas there is at least some money that is very easy to identify: the coins that everyone knows and uses. To determine if some borderline phenomenon is actually functioning as a medium of exchange or merely ‘saving the use’ of a medium of exchange, we compare it with what we already know is money. (Of course, this isn’t mere morphological fetishism: coins that came in huge denominations, and were interest-bearing, just like treasury bills with those features, would presumably be less valid as money for Walker).