Measuring Money

The definition of money as anything that is generally accepted in payment for goods
and services tells us that money is defined by people’s behavior. What makes an asset
money is that people believe it will be accepted by others when making payment. As
we have seen, many different assets have performed this role over the centuries, ranging
from gold to paper currency to checking accounts. For that reason, this behavioral
definition does not tell us exactly what assets in our economy should be considered
money. To measure money, we need a precise definition that tells us exactly what
assets should be included.
The Federal Reserve System (the Fed), the central banking authority responsible for
monetary policy in the United States, has conducted many studies on how to measure
money. The problem of measuring money has recently become especially crucial
because extensive financial innovation has produced new types of assets that might
properly belong in a measure of money. Since 1980, the Fed has modified its measures
of money several times and has settled on the following measures of the money