As part of our gold project, we've been asking a basic question: What is money?
Occasionally, money is a giant piece of limestone. Very often, it's how much the bank says you have in your checking account. But, as Matthew Yglesias notes, there are rare occasions when what's in your checking account fails to preform as money:
...there are lots of things that have properties closely resembling those of dollars. My checking account with PNC Bank is basically perfectly safe (thanks to the FDIC) and it’s almost as liquid as quarters. The vast majority of stores will accept my debit card and there are ATM machines all over the place where I can exchange electronic checking account commitments for physical dollars. ... A sack containing 10,000 Sacagawea dollars is, in most situations, a less liquid asset than an ATM/debit card linked to a bank account worth $10,000.
But circumstances can change rapidly. I remember a few years ago I was in New York during a giant blackout. That caused everyone's ATM cards to be suddenly, albeit temporarily, useless. 999 days out of 1,000 the guy with the sack of Sacagawea coins is a moron, but when the power goes out he’s everyone’s best friend. ...
The broader context here is the debate over the Fed's quantitative easing program, where it's creating all that new money out of thin air.
The Fed's plans "risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment," some prominent critics argued in a recent letter.
Paul Krugman has countered that there's not much of a link between the money supply and inflation. What's more, Krugman writes, it's tricky to define exactly what money is:
The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply. Intellectually, this isn’t a problem; nor is there necessarily a problem maintaining monetary policy even if there isn’t any single thing you’re willing to call money.