The endogenous definition of money (business accounting view ...

What?s money? According to Hyman Minsky (emphasis added):

?Modern capitalist economies are intensely financial. Money in these economies is endogenously determined as activity and asset holdings are financed and commitments of prior contracts are fulfilled. In truth, every economic unit can create money ? this property is not restricted to banks. The main problem a ?money creator? faces is getting his money accepted?

Does everybody agree? No. According to a very recent ECB study about international liquidity (emphasis added):

The concept of monetary liquidity attempts to capture the ability of economic agents to settle their transactions using money, an asset the agents cannot create themselves. Money is typically seen as the asset which, first, can be transformed into consumption without incurring transaction costs, and second, has an exchange value that is not subject to uncertainty in nominal terms, rendering it the most liquid asset in the economy. Strictly speaking, these characteristics apply only to currency. The question of which other assets can be defined as money depends on the degree of substitutability between currency and these other assets. In practice, the definition of money in an economy generally includes those other assets which can be easily converted into currency: short-term bank deposits are an obvious example.

Who?s right? According to business accounting: Minsky.

Main stream economists define money as a combination of a

* unit of account (which by the way existed long before currency)
* means of payment
* store of value

Which means that the ?receivables? on the balance sheets of companies are money, too.

An example: company A buys stuff from company B and promises to pay within six weeks (which happens all the time and provides the liquidity which make markets work). According to the law, according to business accounting and, last but not least, according to the the tax man this is a legal and binding transaction ? even if the debt is not settled you will have to pay taxes and you have to add it to your turnover data. The unit of the ?receivable? (might be Euro 15,79 but that?s a unit, too) enters the balance sheet and the profit and loss account (as it?s a store of value) and was used as a means of exchange. It?s money. Temporary money, yes, but that?s money too. So, Minsky is right, according to business economics ? and the fact that transactions create payables (the debt which serves as the collateral of the receivable) means that transactions lead to money creation. Minsky is right and the ECB isn?t, which makes these ECB economists misunderstand the deeply financial nature of our economy. Money is an social act, not a good.

And this is not a measly amount of money. I?ve checked the balance sheets and profit and loss accounts of five large Dutch companies, ?receivables? alone are 90 billions of Euro?s and sometimes over 20% of total sales.

P.S. ? the idea that using money does not involve transaction costs is bonkers. Last time I checked interest on my mortgage was still 4,6%, money which I have to pay as I once needed money to use money to buy a house. And see also this recent ECB study, which estimates that making retail transactions alone cost us about 1% of GDP, not counting transport costs to and from the shops (those are market and not paying transactions costs).
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Source: http://rwer.wordpress.com/2012/10/21/the-endogenous-definition-of-money-business-accounting-view/

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