What is money? Don't ask a banker who has to count it

Ask the man on the street, ''What is money?'' and he will have no problem replying. Possibly he'll open his wallet and show you some. But if you ask an economist the same question, prepare for an earful. To economists, money is something more than merely cash. It is also demand deposits , NOW accounts, and practically anything else you can use to buy something with. Indeed, money is something economists can talk a lot about, and that is just what Anthony M. Solomon, president of the Federal Reserve Bank of New York, did this week.

Speaking to a joint luncheon of the American Economic Association and American Finance Association here, Mr. Solomon devoted 12 pages, single-spaced, to examining the problems of, in effect, counting money. It may sound ridiculous , but this important central banker was dead serious. So was Henry C. Wallich, a governor of the Federal Reserve System, when he spoke of the same problem in a panel discussion an hour or so later.

The fact is, economists know that money is important, that too much of it causes inflation and too little can create a recession. But they are having an awful time trying to decide what is the best definition of money for measuring out just the right amount to keep the economy going at a good, steady pace. That idea assumes there's a reasonably stable and predictable relationship between the supply of money fed to the economy and broad economic conditions.

The complaint of Messrs. Solomon and Wallich is that a current wave of financial innovations is fouling up the numbers. The changes, said Mr. Solomon, seem to be producing ''major effects'' on the relationship between money measures and the economy. And these effects seem likely to grow larger over time , he added.

Indeed, Solomon went so far as to talk monetary counterrevolution. The revolution - or at least a final stage of it - came in October 1979 when the Fed decided to pay closer attention to the growth of bank reserves and the money supply than to interest rates when determining monetary policy. It would try more seriously to stick to its targets for growth in the money supply.

Now Solomon was saying, ''Perhaps in the longer run, even the very viability of money stock targets is at stake.''

One immediate problem for the Fed is the divergence between narrow measures of money (such as M1B) and the broader measures (such as M2). M1B includes currency and checking accounts. M2 takes M1B, and adds overnight bank borrowings , money market funds, and savings accounts of less than $100,000. M1B would indicate that monetary policy is ''quite tight;'' M2 and M3 make it look ''quite easy,'' noted Solomon.

So what's a poor central banker to do?

The large gap between M2 and M1B in 1981, said Solomon, ''represents an extremely unusual if not actually unique situation that has complicated the task of setting policy as the year has proceeded.''

One technical problem in measuring the money supply this year was the introduction on a nationwide basis of NOW accounts - savings accounts paying a modest, regulated interest rate, against which checks can be written.

The money-measuring problem has been further complicated by the growth of money market funds (against which large checks can be written) and repurchase agreements (''repos''). Such an agreement involves the sale of securities on a temporary basis, with the seller agreeing to buy them back after a specified time.

Now - here Mr. Solomon sounds more solemn - two more innovations are fast approaching:

1. Procedures whereby an institution can in effect offer a customer the ability to write a check on fixed maturity time deposits by opening a line of credit at the time the funds are deposited.

2. Credit card companies and mutual funds are getting together, offering an account where money is swept into a higher-interest money market fund or ''repos'' whenever the balance rises above a specific level. When the account drops below that level, the money swept back out of the fund and into the account.

Governor Wallich also spoke of how the much wider availability of individual retirement accounts and Keogh accounts in 1982 under the new tax law could complicate the job of calculating M2.

''At the end of this process of innovation and deregulation,'' said Solomon, ''one could imagine a world in which ultimately all but the smallest accounts pay market-related rates, a world in which depository and perhaps other institutions offer a wide array of instruments with varying mixes of transactions and investment characteristics.''

These innovations may make it more difficult to determine which accounts are actually used for transactions - which function of money makes the economy move. They may prompt individuals or businessmen to shift funds from accounts which are part of M1B to accounts which belong to M2.

Whatever, Mr. Solomon foresees problems for monetary aggregate targeting.

In the transition phase, he expects the Fed to rely mainly on controlling the narrow money measures in its operation of monetary policy. These targeting procedures continue to be ''workable and useful, provided they are used flexibly.''

Some economists have suggested the Fed concentrate its targeting on the so-called ''monetary base,'' which includes currency and bank reserves. But both Solomon and Wallich saw problems with that proposal.

Another possibility, Mr. Solomon said, would be to replace the money targets with a measure of credit, perhaps bank credit. Here too he saw some difficulties. Or the Fed could spell out its targets for growth in gross national product - the total output of goods and services in the nation - and specify some broad constraints on real interest rates (interest rates after subtracting the inflation rate.)

Policymakers should certainly benefit from continued research in the monetary area, he added.

''My own instinct,'' he concluded, ''is that there is no single approach to monetary policy that is best for all times and places. As conditions change, the approach will probably have to change, too.''

That sounds suspiciously like the old British approach of ''muddling through.'' It may be the best one possible.