Background
Outside money refers to money that acts as a financial asset to its holder but doesn’t correspond to a liability for any other entity in the economy. This differentiates it from inside money, which is issued by banks and represents both an asset for the holder and a liability for the issuer.
Historical Context
The concept of outside money harks back to a time when economies used commodities such as gold as money. Gold coinage was widely considered outside money because it represented intrinsic value without corresponding to a debt. In contrast, banknotes and deposits (inside money) emerged later as money that reflected an obligation of the bank or institution issuing it.
Definitions and Concepts
- Outside Money: Money which is an asset to its holders but is not a liability for anyone else within the economy. Examples include gold coinage.
- Inside Money: Money that has a corresponding liability, typically issued by banks, such as deposits.
Major Analytical Frameworks
Classical Economics
Classical economics acknowledges the distinct roles of commodity money (historically regarded as outside money) and bank-issued currency.
Neoclassical Economics
Neoclassical frameworks emphasize the liquidity and neutrality of outside money compared to inside money, often focusing on how each impacts overall economic stability.
Keynesian Economics
Keynesians might not make a sharp distinction between the types of money, but they do consider the broader implications of money supply and demand, often embedding both forms into models of economic output and inflation.
Marxian Economics
Marxian economics focuses on money as a commodity, and outside money’s role might be viewed critically in terms of commodity fetishism and the social relations it reflects.
Institutional Economics
This framework examines the legal and regulatory environments that classify and manage types of money within financial systems.
Behavioral Economics
Behavioral economists would interestingly analyze the perceptions and psychological considerations stakeholders attach to outside versus inside money.
Post-Keynesian Economics
Post-Keynesians emphasize monetary production economies and distinguish between various forms of money in their theories on inflation and economic cycles.
Austrian Economics
Outside money is crucial in Austrian economics as it typically regards natural or commodity money like gold as more stable and less prone to governmental manipulation.
Development Economics
Focuses on how different types of money impact developing economies, including the roles of outside versus inside money in fostering economic stability.
Monetarism
Monetarists scrutinize the supply of money, considering outside money crucial for controlling inflation independently from political pressures compared to inside money.
Comparative Analysis
Outside money tends to be seen as more stable and less influenced by policy manipulation than inside money, making it attractive for economies in uncertainty or pursuing a metallic standard. In contrast, the flexibility of inside money allows it to respond quickly to the needs of economic growth and dynamism yet makes it potentially more volatile.
Case Studies
- Gold Standard Era: Historical application of outside money exemplified in economies operating under the gold standard.
- Banking Systems: Comparative models of economies relying predominantly on inside money.
Suggested Books for Further Studies
- “Money, Bank Credit, and Economic Cycles” by Jesús Huerta de Soto
- “Gold and Liberty” by Richard M. Salsman
- “Modern Money Theory” by L. Randall Wray
Related Terms with Definitions
- Inside Money: Money whose issuance is accompanied by a liability from the issuing bank, such as deposits.
- Commodity Money: Money that has intrinsic value, such as gold or silver.
- Fiat Money: Money that has value primarily imputed by government decree.
This entry introduces outside money, defining its key components within the broader financial system’s framework, offering historical references and indicating further resources for deeper exploration.