Neha's Writings

I have been doing a deep dive on how money is defined and how it works. I am more focused on fundamental definitions of money, currency, and payments, and less so on monetary policy. Here is my reading list, with some notes. This is not a thorough literature review and I am not recommending all of the ideas put forth. There are probably many important things I’m missing (I’d appreciate you pointing them out – email me at narula@gmail.com). This is what I found interesting and is helping to shape my understanding.

Brief aside on the economics definition of money and its inadequacy

As you probably know, the classical economics “definition” of money is as a medium of exchange, unit of account, and store of value.¹ This seems to have first been put forth in 1876 in Jevons’ Money and the Mechanism of Exchange, which I’ve only skimmed. There is wide debate over which of these three functions is primary, and I put “definition” in quotes because this does not actually describe what money is or how to define money, it only describes three functions of money we have observed over time. The functions are neither exclusive nor complete, and it’s unclear why they all need to be satisfied by the same thing (money). To me this makes for a pretty weak definition, and I think we can do better.

I personally like the way Keynes seems to define money, as the most liquid asset among all assets. However from what I can tell there is a bit of a circular definition here, because liquidity is defined as the ability to convert something into the medium of exchange, which is money.

At some point, the definitions of money start to focus on the state and central banks. This puzzles me because the idea of central banking as it exists today is not that old and money obviously existed and was in wide use before the first central bank.² It seems to me quite likely that there have been and will in the future be widely-used forms of money that do not originate from the state or central banks (perhaps instead from a decentralized network of computers running common software with algorithmic issuance…).

Readings and my thoughts

This is in chronological order.

As introduced above, Jevons wrote a thorough explanation of money in Money and the Mechanism of Exchange, published in 1876. I’ve only skimmed this so I won’t say much, except he talks about both money as various commodities as well as paper money, promissory notes, and banking systems. However, he dedicates more of the book to the properties of commodity money, and he distinguishes money from credit, which he sees as a promise to pay money. I am very sympathetic to this quote remarking on the futility (and I’d add, danger!) of trying to define “money” too simply:

All such attempts at definition seem to me to involve the logical blunder of supposing that we may, by settling the meaning of a single word, avoid all the complex differences and various conditions of many things, each requiring its own definition. Bullion, standard coin, token coin, convertible and inconvertible notes, legal tender and not legal tender, cheques of several kinds, mercantile bills, exchequer bills, stock certificates, etc., are all things capable of being received in payment of a debt, if the debtor is willing to pay and the creditor to receive them; but they are, nevertheless, different kinds of things. By calling some money and some not, we do not save ourselves from the consideration of their complex legal and economical differences.

In 1892, Carl Menger wrote a very nice article “On the origin of money” where he almost defines money as the most liquid commodity, but doesn’t seem to have the word “liquidity” yet (he says “saleableness”). However, he doesn’t discuss debt (arguably the most widely used form of money today is commercial bank liabilities) and focuses on money as arising out of a set of commodities in a market. This is known as the commodity view of money. The story here goes that primitive societies were bartering but it was very annoying because maybe you had three chickens and I had two pigs and I wanted chickens but you didn’t want pigs, you wanted wheat, so we couldn’t trade. This is called the “double coincidence of wants” problem (this originates in Jevons). Those who ascribe to this theory of money think that eventually some commodity (like metal), which was scarce and easy to demarcate and store, naturally arose as the medium everyone converted to and in which they priced their goods.

While a nice story, it seems like it’s totally bunk (see Innes and Graeber below). Historians and anthropologists have later shown that there does not seem to be historical evidence that money arose this way in societies. It is a total fiction. For some reason economics textbooks still propagate this story (IMHO they should stop, it’s confusing).

In 1905, Knapp wrote The State Theory of Money, which I have not yet read but include because it seems influential in MMT; the general idea of Chartalism (which I’m not even sure Knapp espouses fully) is that money only arises by the decree of state authority. This seems demonstrably false to me given historical indications of the use of shells, beads, etc for money, and the way money has evolved in groups of people without states requiring payment in taxes – money does not seem to strictly require a state, even if most of the money we use today (and throughout much of history) is rooted in issuance by the state. That said, money is a social convention, and it seems inarguable that the state has a lot of power in the issuance and management of systems of money.

In 1913, A. Mitchell Innes wrote “What is Money?”, a very nice piece which I think is the first to debunk the commodity theory of money and the idea that money arose out of barter, and propose the credit theory of money.³ If you want to continue to push for the commodity theory of money, I suggest you read this and provide a convincing argument rebutting his points. However, Innes also says “credit and credit alone is money” which I’m not quite convinced of yet, and he seems overly optimistic about a system of debtors and creditors being able to regulate itself without intervention. He has this somewhat spicy quote at the end: “The governments of the world have, in fact, conspired together to make a corner in gold and to hold it up at a prohibitive price, to the great profit of the mine owners and the loss of the rest of mankind”. Innes would probably feel similarly about Bitcoin today.

In 1930, the formidable John Maynard Keynes released A Treatise on Money. This is a tour de force which is about much more than just defining money. I am still reading this; also there was some back-and-forth with Hayek who was perhaps more rooted in Menger. Here we see money still being defined as a thing which has its roots in the commodity theory of money, even though Keynes goes well beyond that. He says “To-day all civilised money is, beyond the possibility of dispute, chartalist”. I think the word “civilized” is doing a lot of heavy lifting there; part of my frustration with reading about definitions of money by economists is that they seem to switch back and forth between describing a theory of money that can persist throughout circumstance and time, and merely describing some portion of the monies as they operate in their time. I am more interested in the former.

He defines commodity money, fiat money, and managed money; unfortunately he describes fiat money as something in which (1) its monetary value is much higher than its intrinsic value and (2) is created and issued by the state. (1) doesn’t seem quite right to me since gold, a commodity, has a monetary value divorced from its intrinsic value. (2) doesn’t seem right either since the wide variety of cryptocurrencies seems like an existence proof of fiat not issued by a state. I think this is yet another instance of over-categorization. But perhaps this critique is nitpicky and irrelevant to his contributions, I’m still reading.

In 1989, John Hicks wrote A Market Theory of Money, which I have not yet read, but anecdotally heard influenced Mehrling (see below) and came highly recommended. I hope to read it and have more to say about it soon.

Kocherlakota has a really beautiful paper “Money is memory” from 1996. It shows that any allocation with money could be implemented by a system with unlimited memory. This equivalence is cool and thought-provoking.

Kahn and Roberds, in 2009, wrote a paper modeling payment systems and links to monetary systems, “Why pay? An introduction to payments economics”. I like this treatment very much because medium of exchange (payment) is a predominant function of money, payment systems are quite important to the economy, and I think the technological underpinnings of money are underdiscussed. I’m also curious about the difference between “money” and “payments” which generally in the literature seem to be distinguished as “objects” and “rails” for messaging.

They distinguish payments as a system on top of money, which arose because there might not be enough money available to immediately settle all trades, and there might be limited enforcement of pledges about future behavior (I’ll pay you later, promise). They note that payment systems might start to extend and redefine money. They distinguish between store-of-value and account-based systems (and later Kahn writes about tokens and accounts).

I’m not sure I agree with the way they define payments; I think viewing money as an object, especially digital money, is misleading. It seems to me that under their definitions, if you could have a monetary system with sufficiently high velocity (which seems doable with technology these days – what do you need, 10M TPS? 100M?), you would not need a payment system? That’s a weird conclusion. Maybe payment systems are money? If you’ve talked to me you know I also hate the terms “token” and “account” in digital currency and think they have caused a lot of confusion. We will be writing more about that later.

This paper sort of gives me the impression that the study of payments is not necessarily held in the highest esteem in economics; payments are seen as plumbing: necessary but not as interesting, as say, monetary theory. This is unfortunate!

In 2011 David Graeber published Debt: The First 5000 Years, a sweeping account of the history of money and debt. He makes the case that debt and accounting predate cash, coins, and barter (starting with the Sumer in 3500 BC). I mentioned this here because it’s widely known, but so far I think it’s sufficient to read Innes. I’m only about a quarter through it though.

In 2012, Mehrling proposed a very nice way of looking at current forms of money in his paper “The Inherent Hierarchy of Money”. He frames money as a hierarchy of credit/debt offered by institutions at different levels. Mehrling doesn’t cite Innes directly but I see this as an extension of that line of thinking. Mehrling’s structure is very elegant and makes a ton of sense to me to describe our current system for money, but I’m not sure it encompasses all forms of money. Perhaps with a slight expansion of the framework, relaxing the pyramid to a directed cyclic graph, it could. Something I’m mulling over.

I found Hull and Sattath’s 2023 article “The properties of contemporary money” useful to think about properties of money and to find older discussions on the definitions of money. They frequently quote Jevons and use his definitions.

Finally, the Bank for International Settlements seems to offer a new definition of the viability of a monetary system in Chapter 3 of their 2025 Annual Economic Report, in which they describe important properties of a monetary system as singleness, elasticity, and integrity, and make the claim that stablecoins do not have these properties. I refer you to the paper for definitions of the properties and discussion. I disagree with this framing as a definition of money (e.g., money has never historically required mechanisms for enforcing integrity, like built-in KYC and AML), and also with their conclusion that stablecoins lack the properties, and thus are ill-suited to be money. But that’s a longer discussion.

Interesting questions

• How do mainstream economists today view Jevons? What do they still agree with, and what do they discount? For example, they seem to have moved beyond the commodity theory of money, yet they still use Jevons’ three functions to define money. Why?
• Is all money credit? Why or why not?
• How can there be such disagreement on the nature of money between different economists who were all educated in overlapping economics PhD programs in the United States? MMT seems fundamentally at odds with the mainstream view of central banking, which seems at odds with free banking. How can members of a purportedly scientific discipline reach such widely varying conclusions? What are the differing assumptions that cause these different conclusions? Are any of them falsifiable, and can they be tested?
• Historians and anthropologists have added important ideas to the discussion of money. What might computer scientists add, if anything? Perhaps something about the operation of payment systems? We seem to be contributing to cryptocurrency. What does that say about money? Is there something more theoretical or fundamental to say about money as a networked system of information?
• I am missing a more math-based treatment of money by economists. My understanding is that often money is just a variable in an equation, and perplexingly, money is not needed in some of the more interesting theories, like Arrow-Debreu. What are the right things to read here?

Finally, what did I get wrong or misunderstand? What am I missing?

Thanks to Dan Aronoff, Jon Frost, Charles Kahn, Josh Redstone, and Lana Swartz for interesting discussions and pointers to readings. I make no claim to represent their views and all mistakes are my own.

Reading list in one place

Jevons, W. Stanley. “Money and the Mechanism of Exchange.” In General Equilibrium Models of Monetary Economies, pp. 55-65. Academic Press, 1989.

Menger, Carl. “On the Origin of Money.” The Economic Journal 2, no. 6 (1892): 239-255.

Innes, A. Mitchell. What is money? New York: Banking Law Journal (1913).

Knapp, Georg Friedrich. “The state theory of money.” (1924).

Keynes, John Maynard. “A treatise on money: the pure theory of money.” In The History of Banking II, 1844-1959 Vol 10, pp. 86-104. Routledge, 2024.

Hicks, John. A market theory of money. OUP Oxford, 1989.

Kocherlakota, Narayana R. “Money is memory.” Journal of economic theory 81, no. 2 (1998): 232-251.

Kahn, Charles M., and William Roberds. “Why pay? An introduction to payments economics.” Journal of Financial Intermediation 18, no. 1 (2009): 1-23.

Graeber, David. Debt: the first 5,000 years. Melville House, 2011.

Mehrling, Perry. “The inherent hierarchy of money.” Social fairness and economics (2013): 394-404.

Hull, Isaiah, and Or Sattath. “The properties of contemporary money.” Journal of Economic Surveys 38, no. 4 (2024): 1132-1155.

BIS Annual Economic Report (2025).

Footnotes