Money: a unit of accounting and medium of exchange?
Historical records show that no reasonably organized society can do without a unit of account—that is, a means of measuring what is produced, exchanged and owed—and a means of payment and exchange —that is, a means of paying all those transactions. However, the important lesson that we need to draw from the historical evolution of money is that whatever we use to make payments (either of debts or for goods and services) need not be, simultaneously, what we use to measure the value of these payments.
Amato and Fantacci give the following illuminating example: “When I ask for a metre of material, I want a piece of cloth of one metre long, not a metre made of cloth. The same holds in economics, and still to a much larger degree. The money in terms of which debt is denominated is not necessarily the money in which it must be paid. In order to serve its requisite function as a public tool, money only requires the relationship between the two functions of measure and means to be established publicly and in due time.”
John Maynard Keynes himself stated this idea in his 1930 Treatise on Money: “perhaps we may elucidate the distinction between money and money of account by saying that the money of account is the description or title and the money is the thing which answers to the description. Now, if the same thing always answered to the same description, the distinction would have no practical interest. But if the thing can change, whilst the description remains the same, then the distinction can be highly significant. The difference is like that between the king of England (whoever he may be) and King George. A contract to pay ten years hence a weight of gold equal to the weight of the king of England is not the same thing as a contract to pay a weight of gold equal to the weight of the individual who is now King George. It is for the State to declare, when the time comes, who the king of England is.”
A money that definitely and institutionally combines these two functions becomes necessarily a store of value. Store of value refers to the possibility of putting aside a means of exchange with the institutionally guaranteed certainty that it will preserve its value in terms of the unit of account. Not surprisingly, mainstream monetary theory argues that this is a precious function that money has to perform. This intertemporal cost-free transferability makes store-of-value money the absolute form of every asset and instrument of credit.
If store-of-value money is an asset, it has, by definition, a price. The price of money is the rate of interest. Apart from entailing a cost for those that need credit, the existence of the rate of interest implies that the price of money can change, which hinders the unit of account function that societies need money (of account) to perform. If the price of the money of account changes continuously so will the prices of the goods that the unit of account measures. A metre is a good standard to measure lengths because it is invariant. That does not happen with contemporary money of account because what has been chosen to perform that function is at the same time given a (variable) price.