Typography

I like to say that everything is money, which is just another way of saying that all goods are liquid to some degree or other. Whether it be a house, a banknote, or ice cream, each of these items carries a liquidity premium. How large are these liquidity premia? It's difficult to get good measurements, but there are a few venues that offer a glimpse of this rare beast. One of them is equity markets. More specifically, we can use restricted stock studies to tease out liquidity premia. Imagine that your shares in Microsoft, normally so easily exchanged on various stock markets like the New York Stock exchange or NASDAQ, were restricted for a period of time in a way that prevented you from trading them. Apart from this impairment, your illiquid Microsoft shares are exactly like any other Microsoft share: they provide you with a dividend, voting power, and a contingent claim on firm assets should Microsoft decide to wind up the business. The price you'd be willing to pay to own t...

'...the peculiar feature of a money economy is that some commodities are denied a role as potential or actual means of payment. To state the same idea as an aphorism: Money buys goods and goods buy money but in a monetary economy goods do not buy goods. This restriction is - or ought to be - the central theme of the theory of a money economy.' -Robert Clower [ A Reconsideration of the Microfoundations of Monetary Theory , 1967] I started to sell some of my XRP yesterday, and the process of doing so brought to mind Robert Clower's famous quote. Clower's aphorism describes an idealized pure-money economy that exists only in theory. Were we to apply it to the real world, we'd be missing a lot. To begin with, Clower omits "money" for "money" transactions like the XRP trade I'm about to describe. XRP is the cryptocurrency used to pay transaction fees in the Ripple system . In order to arrive at my end goal of holding Canadian paper, I have to ent...

In his broad account of monetary economics, Nick Rowe points out that most modern economies are closer to being pure monetary exchange economies than pure barter economies. I'll argue that we're about half way between the two poles, although it's impossible to say for sure. A helpful way to determine whether an economy is barter or monetary is to look at all trades made over a period of time and count the frequency of occurrence of each good in trade. In a pure barter economy, no good will appear more than any other. We'll see a flat, or uniform, distribution of media used in trade. In a pure monetary economy, a single good should appear in all trades. The distribution will be uneven. Nick describes it a bit differently but it's the same idea: You could make a table, with a list of all the different goods for the columns, and the same list of all the different goods for the rows. So it's a square table, with n columns and n rows, if there are n different goods....

I've been playing the game of Settlers of Catan for ages. Over time I've gotten less cutthroat and more philosophical about the game. What I've come to realize is that Settlers is a great tool for both thinking about monetary phenomena and building different sorts of monetary economies. In this post I'll assume a basic knowledge of Settlers—if you haven't played the game by now, you're living on the moon. 1. Catan isn't a barter economy The first thing worth noting is that Catan is not a barter economy—it's a monetary economy. This might seem like an odd thing to say . After all, the trades that we see in a typical Settlers game are all commodity-for-commodity trades. To see why it's a monetary economy, imagine the case of autarky , or a Catan in which trade is prohibited. Here, players can only build structures using cards earned from tiles on which they have a settlement. The value of a lumber card in an autarkical economy is derived solely from ...

For diligent readers who have trudged through my first two post on Yap stones ( here and here ), I promise this will be my last on the subject. There is an interesting exchange between historian Cora Lee Gillilland, the author of The Stone Money of Yap: A Numismatic Survey ( pdf ), and critic David M. Schneider in the December 1976 issue of the American Anthropologist . Schneider was a well known anthropologist and contributor to The Micronesians of Yap and their depopulation . In response to Gillilland's survy, Schneider issues a warning that: Suffice it to say that traditional Yap does not have “money” in any technical sense of the word. None of the objects listed on page 1 [of Gillilland], like yar, gau, ma, or mbul, are money in any proper sense. It is certainly true that rai has been called “stone money” and that the literature which is cited (all of which is very far out-of-date) calls it “money.” And indeed, the Yapese themselves call rai “stone money.” But to call a “co...

There is a century's old debate between metallists and chartalists on the origin of money. The metallist view is that the first spark of money emerged through barter and matured when the use of precious metals as money was discovered. The chartalists disagree. According to them, the use of credit preceded the use of precious metals as money. At its core, the metallist/chartalist debate is a battle over the definition of the word money. In a moneyness world, there is no such thing as money. All we have are numerous media of exchange with varying ranges of liquidity. Whether moneyness first gets attached to credit or precious metals is really not important. Imagine that a hunter encounters a trapper. The hunter has a deer. The trapper wants the deer but isn't sure what to offer. On the one hand, he can exchange the two rabbits in his belt for the deer. On the other he can offer his credit. In offering to exchange away his credit, the trapper is simply capitalizing his future ear...

The response to the above question will usually be a barter economy. But I want to show you that this is a tougher question than it seems. The answer depends on whether you're starting from a money view of the world or a moneyness view . (See Why Moneyness? in which I explain these ideas). 1. The money view , which is the standard view, begins by classifying all things in an economy into either money (M) or non-money. Any economy that has M in it is a monetary economy. All exchange in a monetary economy is achieved by trading non-money into M and back into a different non-money. When there is no M, then a non-monetary economy is said to exist. In a non-monetary economy, exchange occurs by trading non-money for non-money, our word for this being barter . So a non-monetary economy is a barter economy. 2. Things are different from a moneyness perspective. An isolated household living in a cave values their inventory of goods solely for its use-value—how each good satisfies the hou...