Menger versus Mises and Rothbard on how money works

A reading of this article on Youtube )

Through Hans Sennholz, I was pointed to the appendix of Menger’s Principles of Economics. I didn’t know about the statement he makes there before, so I’m happy to have found it. Note that the following is in complete contradiction to Rothbard (who followed Mises on money):

Adam Muller discusses the desire of men for the state and thinks that the precious metals bring about this union, giving this as his theory of the origin of money (Versuche einer neuen Theorie des Geldes, Reprint Edition, Wien, 1922, pp. 78ff.). Johann G. Hoffmann (Die Lehre vom Gelde, Berlin, 1838, p. 10) attributes the origin of money again to a contract between men. Michel Chevalier (La monnaie, in Cours d’économie politique, Paris, 1866, III, 5) does the same thing. Samuel Oppenheim’s monograph, Die Natur des Geldes, (Mainz, 1855), is of greater interest, although its importance does not consist so much in a special view of the first origin of money (pp. 4ff.), as in an exposition of the process by which a commodity that has become a means of exchange loses its original commodity character and eventually becomes a mere token of value. Although I must emphatically contradict this opinion, I nevertheless find a clearly expressed thought (or rather an observation) in Oppenheim’s argument which sufficiently explains why we encounter this mistake in the writings of many eminent economists. I refer to the observation that the character of money as an industrial metal often completely disappears from the consciousness of economizing men because of the smoothness of operation of our trading mechanism, and that men therefore only notice its character as a means of exchange. The force of custom is so strong that the ability of a metal used as money to continue in this role is assured even when men are not directly aware of its character as an industrial metal. This observation is entirely correct. But it is also quite evident that the ability of a material to serve as money, as well as the custom on which this ability is founded, would disappear immediately, if the character of money as a material applicable to industrial purposes were destroyed by some accident. I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost.

Menger recognizes that indirect trade is forward looking, and is a speculation on the future direct uses by individuals. Apples go bad rather quickly, whereas metals do so at a far lesser rate, therefore it makes sense to trade apples for some metal. I will be easier able to exchange the metal for something later, because the metal will still be in a good state, doesn’t lose it’s value if cut in parts, and so on. I am also able to easier exchange it than apples, because people recognize these properties and will therefore also accept it for non-direct use themselves. But the whole scheme relies on the fact that someone in the future actually wants to use the metal directly.

Most Austrians today believe that demand for a good as money raises its demand and thus raises its price. But demand for indirect exchange is not the same as demand for direct use. When you accept something as payment to trade it away later, you are not just a buyer, you are also a seller of the good.

So what happened with Mises and Rothbard to come to such a different conclusion? Related to this, Sennholz points out that Menger was worried about his observation that the purchasing power of the legal tender in his country was higher than the purchasing power of the metal it contained:

He was greatly alarmed by the fact that the guilder’s purchasing power exceeded the metal value of the silver guilder, which to him was an “economic anomality” harboring “the greatest dangers to the Austrian economy.”

That was in 1889. In his Principles of Economics (1871) in his chapter on the origins of money, he was quick to point out the influence of government over money:

Within the boundaries of a state, the legal order usually has an influence on the money-character of commodities which, though small, cannot be denied. The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.

But if, in response to the needs of trade, a good receives the sanction of the state as money, the result will be that not only every payment to the state itself but all other payments not explicitly contracted for in other goods can be required or offered, with legally binding effect, only in units of that good. There will be the further, and especially important, result that when payment has originally been contracted for in other goods but cannot, for some reason, be made, the payment substituted can similarly be required or offered, with legally binding effect, only in units of the one particular good. Thus the sanction of the state gives a particular good the attribute of being a universal substitute in exchange, and although the state is not responsible for the existence of the money-character of the good, it is responsible for a significant improvement of its money-character.

When something is legislated into being a legal tender, it gives that item value in direct use. At certain specified moments and times, people must be in the possession of it. This explains why those items rise in exchange value over and above what the materials they contain provide in exchange value.

Menger was born in 1840, Mises in 1881 and Rothbard in 1926. Paper currency became much more free-floating in the lives of Mises and Rothbard. They sought to explain the value of pieces of paper by referring to the past, but forgot to think about legal tender laws, which operated in Austria then and to this day.



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