Have you ever stopped to wonder how money came to be, how a phenomenon so complex became perhaps the most critical factor in a country’s well being?
Well, this topic has continued to garner its fair share of attention as Kristoffer Hansen, a Ph.D. candidate at the University of Angers, weighs in on three separate theories on the origin of money, and how they intersect to render a plausible historical account of the first money.
It is also noteworthy to see how this narrative relates to bitcoin since financial experts have downplayed its rationality while stressing that it is the latest example of how money originated.
Here, I will dissect Hansen’s paper, extract 9 key insights regarding these convoluted views and their relation to the unconventional money, which is cryptocurrency.
Carl Menger, an economist and founder of the Austrian school of economics, released a publication that questioned an already existing belief that a royal proclamation introduced the concept of money. In essence, Menger argued that he does not think that a state had established a complex monetary system out of the blues and imposed it on a free market, which may or may not has depended on a barter economy.
Also, he cited the unavailability of historical evidence of an economic shift of this proportion as another factor that would render the state theory of money untenable. Instead, Menger contends that money originated when traders used the most marketable goods as media of exchanges until one good emerged as the standard medium of payment.
Ludwig von Mises borrows from the same Austrian school of thought while establishing a theory that explains the pricing of money that would have taken off immediately a good’s marketability is identified. In his publication released in 1912, the regression theorem, Mises argued that the establishment of the value of a good as an accepted medium of the exchange follows a market process that derives the existing objective value of the good that would, in turn, predict its value in the future.
Menger and Mises relegated the state theory on account of insubstantial evidence. Instead, they based their conclusions on actions that are expected from individuals that realize that they can rely on the value of goods and use them as indirect media of exchange in a barter dependent market. For instance, an individual who is looking to trade a basket for wheat but found that there is no demand for baskets has to search for traders that would accept his basket for other universally demanded goods, which he can then conveniently swap for wheat.
Some of these universally demanded goods are what Menger and Mises believe had evolved into official media of exchange.
Gary North, one of Ludwig Von Mises Institute’s Associated Scholar, contends that the theories of money explained above are merely conjectural laws similar to the state theories that they both rejected. North believes that both monetary views have insufficient backings that would fully integrate them into the rest of economic science.
He argues that the supposed origin of money, as illustrated by the Austrian school, is plausible at best since there are no historical shreds of evidence to support such revolutionary economic thoughts. More so, money theorists are beginning to support this assertion.
As earlier mentioned, North and modern theorists’ arguments have somewhat relegated the regression theorem. Therefore, it is vital to discern factors that could reestablish Menger and Mises’ assertions as true economic theories.
For Menger, his opinion did not fully eliminate the role of states in the establishment of the concept of money. Rather, he asserts that kingdoms could have perfected money. He, nevertheless, maintained that the concept emanated from the interest of individuals in retaining their buying power. Likewise, Mises’ regression theorem adopts the same line of thinking, especially on the roles of individuals. And so, they are both economic theories deduced from the rationalistic behavior of humans.
Mises’ regression theorem has indeed come under scrutiny in recent times. However, if you take a look at the core of the law, you would find that it also attains a level of universal acclaim that is found in Menger’s thoughts on marketability. Here, Mises states that the viability of a good as a medium of exchange does not depend on its historical value.
Instead, its viability is derived from its present value and its perceived value in the future. It is only when both valuations are not accessible that it is impossible to reinstate such a good as a means of exchange.
More importantly, Mises asserted that while the value of a good determines its establishment as money, yet, immediately it becomes accepted as money, its apparent value or lack of it in the future does not automatically challenge its status as a medium of exchange.
Recall that I mentioned that Menger thinks that political powers could have influenced the origin of the money to a large extent. As such, Hansen infers that a state might have influenced the emergence of money in three ways:
Some people believe that digital currency contradicts Menger and Mises’ monetary theories. However, this is not the case. Regardless of the mindset of the developers of cryptocurrencies, this new form of digital money would never have emerged as a medium of exchange if there wasn’t a demand for them. While tracing the origin of bitcoin as a form of payment, Hansen highlights that the 2 pizzas that a particular individual traded for 10,000 Bitcoins, which is the first bitcoin transaction, is the commodity which projected that bitcoin is suitable for the exchange of value just as commodity money, representative money, and fiat money.
These points prove that although bitcoin’s technical features connote innovation, yet its ascendancy as a medium of exchange confirms Menger-Mises’ theory of money, albeit with a bit of alteration. It is, therefore, safe to say that these economists would have marveled at its disruptive emergence.