The search for moneyness in an era of financial innovation

The paper contributes to the ongoing debate on monetary theory by focusing on the question whether some financial instruments produced by recent financial innovations can be regarded as money (‘shadow money’). The question is answered by looking at past contributions to monetary theory and the fundamental functions that an instrument must play to be regarded as money. We look at the Menger-Jevons tradition, according to which the essential function of money is to to be the economy’s medium of exchange, and an alternative view, as mainly expressed by Hicks, for which the essential function of money is to be the economy’s standard of value (unit of account). We regard this latter approach as more satisfactory and capable to give account of the economic and social nature of money. The emergence of money in human societies is the result of complex social and economic processes that cannot be reduced to the solution of the problem of the double coincidence of wants. On these grounds we argue that those instruments that have come to be called ‘shadow moneys’ cannot be regarded as money in a proper sense. Neither are they the economy’s standard of value nor are they a means of payment universally accepted in the economy. The liquidity of such instruments can be high but this is not sufficient for them to be qualified as money.