The Theory Of Money In The Tradition Of Carl Menger. Part I

Carl Menger, Principles of Economics (1871), Chapter VIII - The Theory of Money:

"In the early stages of trade, when economizing individuals are only slowly awakening to knowledge of the economic gains that can be derived from exploitation of existing exchange opportunities, their attention is, in keeping with the simplicity of all cultural beginnings, directed only to the most obvious of these opportunities. In considering the goods he will acquire in trade, each man takes account only of their use value to himself. Hence the exchange transactions that are actually performed are restricted naturally to situations in which economizing individuals have goods in their possession that have a smaller use value to them than goods in the possession of other economizing individuals who value the same goods in reverse fashion.

… The direct provision of their requirements is the ultimate purpose of all the economic endeavors of men. The final end of their exchange operations is therefore to exchange their commodities for such goods as have use value to them. The endeavor to attain this final end has been equally characteristic of all stages of culture and is entirely correct economically. But economizing individuals, would obviously be behaving uneconomically if, in all instances in which this final end cannot be reached immediately and directly, they were to forsake approaching it altogether.

… He would therefore make the marketing of his commodities either totally impossible, or possible only with the expenditure of a great deal of time, if he were to behave so uneconomically as to wish to take in exchange for his commodities only goods that have use value to himself and not also other goods which, although they would have commodity-character to him, nevertheless have greater marketability than his own commodity. Possession of these commodities would considerably facilitate his search for persons who have just the goods he needs.”

The most basic trade is one where two individuals prefer to have, for their personal consumption, what the other has.

Besides trading what you have for what you would rather have, you can also trade what you have for something you can more easily trade for what you would rather have. This means you trade something that you are not interested in consuming yourself for something you are also not interested in consuming yourself. In deciding what to accept in this kind of trade, you must evaluate all the elements that make it more or less difficult to sell, and at what price, and compare that to the good you are considering trading away.

These elements are:

  • Its marketability for personal consumption
  • The ease with which it can circulate between individuals who do not consume it
  • The costs that are brought about due to its physical makeup

The causal connection between goods

Carl Menger, Principles of Economics, Chapter I-2 - The Causal Connections Between Goods:

"Our well-being at any given time, to the extent that it depends upon the satisfaction of our needs, is assured if we have at our disposal the goods required for their direct satisfaction. If, for example, we have the necessary amount of bread, we are in a position to satisfy our need for food directly.

… The same applies to all other goods that may be used directly for the satisfaction of our needs, ..

But we have not yet exhausted the list of things whose goods-character we recognize. For in addition to goods that serve our needs directly (and which will, for the sake of brevity, henceforth be called “goods of first order”) we find a large number of other things in our economy that cannot be put in any direct causal connection with the satisfaction of our needs, but which possess goods-character no less certainly than goods of first order. In our markets, next to bread and other goods capable of satisfying human needs directly, we also see quantities of flour, fuel, and salt. We find that implements and tools for the production of bread, and the skilled labor services necessary for their use, are regularly traded. All these things, or at any rate by far the greater number of them, are incapable of satisfying human needs in any direct way—for what human need could be satisfied by a specific labor service of a journeyman baker, by a baking utensil, or even by a quantity of ordinary flour? That these things are nevertheless treated as goods in human economy, just like goods of first order, is due to the fact that they serve to produce bread and other goods of first order, and hence are indirectly, even if not directly, capable of satisfying human needs.”

An individual acts to improve his state of being as compared with not acting.

A good is something from the external world that improves the state of being of an individual, as perceived by the individual. A higher order good is something that helps produce the good that can be used by the individual for his perceived improvement.

First order goods are traded on the market because there are individuals who seek them. Because of the demand for first order goods, there is a demand for higher order goods, and this is why they are produced and traded on the market.

The marketability of commodities

Carl Menger, Principles of Economics, VII-2 - The Marketability of Commodities:

”..the obvious differences in the marketability of commodities is a phenomenon of such far-reaching practical importance, the success of the economic activity of producers and merchants depending to a very great extent on a correct understanding of the influences here operative, that science cannot, in the long run, avoid an exact investigation of its nature and causes. Indeed, it is also clear that a complete and satisfactory solution to the still controversial problem of the origin of money, the most liquid of all goods, can emerge only from an investigation of this topic.”

VII-2-B - The different degrees of marketability of commodities:

"The first cause of differences in the marketability of commodities we have thus seen to be the fact that the number of persons to whom they can be sold is sometimes larger and sometimes smaller, and that the points of concentration of the persons interested in their pricing are sometimes better and sometimes less well organized. …

The second cause of differences in the marketability of commodities is thus the fact that the geographical areas within which their sale is confined are sometimes wider and sometimes narrower, and that while there are many trading points within this area at which some commodities can be sold at economic prices, there are only a few such points in the case of other commodities. …

The third cause of differences in the marketability of commodities, then, is the fact that the quantitative limits of the amounts of them that can be sold are sometimes wider and sometimes narrower, and that within these limits the quantities of some commodities brought to market can easily be sold at economic prices, while this is not true of other commodities, or at least not in the same degree. …

The fourth cause of differences in the marketability of commodities is thus the fact that the time limits within which commodities can be sold are sometimes wider and sometimes narrower, and that within these limits some commodities can be sold at economic prices at any time, while others can be sold only at more or less distant points in time.”

Goods vary in difficulty in finding someone to trade them with, for use by them. A good can have a high demand or a low demand for consumption, be sold widely or sparsely, and be sold frequently or infrequently.

VII-2-C The facility with which commodities circulate:

"Some commodities have almost the same marketability in the hands of every economizing individual. … However saleable commodities of this kind may be in the hands of their producers or certain merchants, they lose their marketability altogether, or at any rate in part, if even a suspicion arises that they have already been used or only been in unclean hands. They are therefore not suited in economic exchange to circulate from hand to hand.

Other commodities require special knowledge, skills, permits, or governmental licenses, privileges, etc., for their sale, and are not at all, or only with difficulty, saleable in the hands of an individual who cannot acquire these requisites. In any case they lose value in his hands. … Hence they are as little suited as the commodities of the previous paragraph to free circulation from hand to hand.

Moreover, commodities that must be specially fitted to the needs of the consumer to be useable at all are not saleable in an equal degree in the hands of every owner. … ..especially since these businessmen generally have facilities for fitting the commodities to the special needs of their customers. In the hands of another person, these commodities can be sold only with difficulty and almost always only at a heavy loss. These commodities too are not suited to free circulation from hand to hand.

Commodities whose prices are not well known or subject to considerable fluctuations also do not pass easily from hand to hand. A purchaser of such commodities faces the danger of “overpaying” for them, or of suffering a loss before he has passed them on due to a fall in price. … ..commodities that are subject to violent price fluctuations can circulate easily only “below the market,” since all persons who are not willing to speculate will want to protect themselves against loss. Thus commodities whose prices are uncertain or fluctuate severely are also not well suited to free circulation from hand to hand.

Thus we find that for a commodity to be capable of circulating freely it must be saleable in the widest sense of the term to every economizing individual through whose hands it may pass, and to each of these persons it must be saleable, not in one respect alone, but in all four of the senses discussed above.”

Goods vary in difficulty in finding someone to trade them with, for further trade by them. A good held by different people can attain the same market price or different prices. A good may require a special skill or license to be sold. A good may be subject to considerable fluctuation in price, which makes people who are unwilling to speculate on it only willing to pay a conservative price for it. Technological evolution is one reason why many consumer goods face quickly eroding market prices.

The periodic table of the elements

A Chemist Explains Why Gold Beat Out Lithium, Osmium, Einsteinium

The different chemical elements that exist on earth have a wide range of activity at the current temperatures and pressures that we experience. They react to varying degrees to exposure to air, such as bursting into flames or corroding. Some are a solid, some are a liquid, and some are a gas. Some are dangerously radioactive.

Most chemical elements have found their way to be useful in the production of goods. Because of the different kinds of activity, they bring with them different amounts of costs to keep them useful during transportation and storage. There are differences in the costs of discovering what the element is, and of which purity it is. There are differences in the costs of dividing up or combining an amount of elements.


Speculation | Jeffrey Herbener explains Rothbard:

”..when Rothbard theorizes about speculation, we can usefully break his treatment into these categories. He first points out how speculation works for the individual person. The individual person is speculating with respect to the future, about the outcome of his own actions. The second category is speculations that a person makes about the actions of others that he intends to interact with. So this is where we get the market. And within that category he talks about speculation that people make on their own about what others will be doing in the market; predicting what prices will be and so on. And then he talks about speculation by the specialists in the market; they’re predicting on behalf of other people the speculative outcome of even other people’s actions.

Now the way this plays out in Man, Economy, and State is as follows. So we get this first point that all action is speculative, on page 6. Very early on, this is part of the general theory of human action; it doesn’t apply to pricing per se. But Rothbard carries this through to the section on pricings. So when we get to the section on pricings, with demand and supply, he explicitly points this out. He says: ‘Both demand and supply are speculative’. When a person has a preference rank and they say ‘I prefer an Ipad 2 to 500 dollars’, both those entries in the preference rank are speculative. The person doesn’t know before getting the Ipad 2 and using it to attain his end, what the realized value of having the Ipad 2 is. He doesn’t know until he gives up the 500 dollars, what exactly the opportunity cost is that he foregoes in the future.

So speculation is in the very formation of demand and supply. He builds this into his pedagogy when he develops his presentation of demand and supply with the total stock, total demand analysis. So here he’s not just trying to show that prices must, of necessity, be determined just by preferences, but he explicitly brings out the speculative element in that presentation.

So the conclusion from this, of course, that he arrives at, is that prices themselves, both the level of prices in markets, and changes in prices that come through shifting demands and supplies, both of these things are speculative. Prices themselves are not like facts of nature; they’re results of human action that are based upon speculation.”

Reality is incredibly complex. In order to attain our ends, we must make predictions about the future and the effects of our possible actions, and choose among them.

A price is an exchange ratio of a trade that took place between two people. A price is the result of a bidding process, which involves two or more people. A bid is based on an individual’s goals, his understanding of the world, and his predictions about the future, all of which are changing as time goes by.


An economy is made up of individual seeking their personal goals. For this, they require goods, most of which are produced by others. In a monetary exchange, an individual trades away something he does not intend to use for another thing he does not intend to use. This means he must consider the value of the good to other people, which relates to how the good in the future can help other people attain their goals.

Menger emphasizes this point of a money good as a consumer or producer good in the appendix.

Carl Menger, Principles of Economics, Appendix J - History of Theories of the Origin of Money:

"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."

I will discuss issues such as fiat currency, legal tender laws, the regression question, and Bitcoin in Part II.

  1. concerninglibertyfirst reblogged this from nielsio
  2. amagi-nation reblogged this from nielsio and added:
    Thanks for posting this. I recently read The Origins of Money and am finishing up Principles of Economics. This was a...
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