Menger on the Origin of Money

Carl Menger (1840-1921), the founder of Austrian economics, wrote this classic paper:

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Menger imagines a world without money. In this world, people exchange goods for goods in spot transactions (barter). What happens when person A wants a good from person B, but the latter does not want the goods the former has to trade? This is the famous problem of the double coincidence of wants.

Menger notes that commodities have “different degrees of saleableness,” and that money has a virtually unlimited saleableness (Menger 1892: 242–243). Yet the differences of degrees of saleableness apply to many other commodities. Many goods once bought cannot be sold again except at a loss (Menger 1892: 244).

What do you do with your excess goods once you have obtained what you immediately want in a barter exchange? What do you do if you are unable to obtain what you want through a direct barter spot transaction? It makes sense for you to obtain goods with a high degree of saleableness, and then exchange these in the wider community at present or in the future. By this process, the most saleable good (or goods) becomes the medium of exchange (Menger 1892: 249).

I find it curious that even Menger makes this concession at the beginning of the following important paragraph:

“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin. This is much more to be traced in the process depicted above, notwithstanding the nature of that process would be but very incompletely explained if we were to call it ‘organic,’ or denote money as something ‘primordial,’ of ‘primaeval growth,’ and so forth. Putting aside assumptions which are historically unsound, we can only come fully to understand the origin of money by learning to view the establishment of the social procedure, with which we are dealing, as the spontaneous outcome, the unpremeditated resultant, of particular, individual efforts of the members of a society, who have little by little worked their way to a discrimination of the different degrees of saleableness in commodities.” (Menger 1892: 250).

Menger concludes that precious metals have arisen as a medium of exchange among many peoples because “their saleableness is far and away superior to that of all other commodities” (Menger 1892: 252). Yet Menger also recognises the “important functions of state administration” in creating coinage and creating public confidence in the “genuineness, weight, and fineness” of coined money (Menger 1892: 255). Another important point is that Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by legal recognition of some commodities as money, or where more than one commodity money exists by fixing a definite exchange ratio between them (Menger 1892: 255). In this way, governments have perfected precious metals in their function as money (Menger 1892: 255).

There are a number of problems with Menger’s paper, as follows:

(1) The flawed assumption running through the paper is that a money-less human society would be one where goods are obtained to a significant extent by barter spot transactions. This is clear in the hypothetical scenario Menger (1892: 241–243) envisages early in his paper.

It is perfectly possible that money might have arisen this way, but it is quite another thing to say that it can only ever have arisen in this way, and in no other way. The Austrians have a militant position on the origin of money that appears to me to go well beyond what Menger said in this 1892 article. For modern Austrians,

“[sc. Mises’s] Regression Theorem also shows that money, in any society, can only become established by a market process emerging from barter. Money cannot be established by a social contract, by government imposition, or by artificial schemes proposed by economists.” (Rothbard 2009: 61).

Yet it appears to me that Menger explicitly rejects this idea here:

“It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.” (Menger 1892: 250).

That seems to leave some room in Menger’s view for government law to establish money.

It is obvious that the historical origin of money cannot be traced to one moment of invention in the past: for there have undoubtedly been multiple independent instances in history where things have emerged as a unit of account and medium of exchange in different societies in different times. It is far more likely that the origins of money are complex. Here history and anthropology matter: the idea that you can sit in an armchair and use deduction to obtain apodictic certainty about how some complex social practice arose in the past is nonsensical. Empirical evidence and inductive reasoning are clearly important.

The obsession with barter spot transactions seen in Menger ignores another fundamental relation: the existence of debt/credit transactions (which might even be construed as reciprocal gift giving). As David Graeber argues,

“[the] great flaw of the economic model is that it assumed spot transactions. I have arrowheads, you have beaver pelts, if you don’t need arrowheads right now, no deal. But even if we presume that neighbors in a small community are exchanging items in some way, why on earth would they limit themselves to spot transactions? If your neighbor doesn’t need your arrowheads right now, he probably will at some point in the future, and even if he won’t, you’re his neighbor—you will undoubtedly have something he wants, or be able to do some sort of favor for him, eventually. But without assuming the spot trade, there’s no double coincidence of wants problem, and therefore, no need to invent money.

... What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts. In most such societies, if a neighbor wants some possession of yours, it usually suffices simply to praise it (‘what a magnificent pig!’); the response is to immediately hand it over, accompanied by much insistence that this is a gift and the donor certainly would never want anything in return. In fact, the recipient now owes him a favor. Now, he might well just sit on the favor, since it’s nice to have others beholden to you, or he might demand something of an explicitly non-material kind (‘you know, my son is in love with your daughter...’) He might ask for another pig, or something he considers roughly equivalent in kind. But it’s almost impossible to see how any of this would lead to a system whereby it’s possible to measure proportional values.”
David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.

In theory, one could even transfer debts/IOUs and obtain commodities in this way.

Most probably, money has emerged in complex ways:

(1) from debt/credit transactions and transfers of IOUs;

(2) from wergild-like social practices (e.g., some Medieval societies),

(3) from government-based designation of a unit of account and the demand for taxes measured in that unit of account (e.g., ancient Mesopotamia; see below), and

(4) barter between strangers and in international trade. The cacao money of Mesoamerica and the salt money of Ethiopia may well be instances of money emerging through barter (Graeber 2011: 75). However, in long distance trade, barter transactions might have led to the origin of money in the sense of a money of account (to measure the value of other commodities), but even here may not have widely functioned as a medium of exchange.

As Graeber notes, money in the sense of a money of account (as a measure of value of commodities) can very probably emerge before the medium of exchange role.

And in actual human societies (whether small hunter gatherer or agricultural communities, or larger tribe/group communities with more complex economic organisation with greater division of labour), the way goods are obtained and distributed may be by open-ended sharing, centralized allocation (e.g., Iroquoi allocation of goods by women’s councils), “gift exchange,” where a present good is exchanged for the social obligation of a future “gift,” even though there does not need to be exact value equivalence. Social relations complicate even this “gift exchange” economy: some people may not even bother to call in the gifts owed to them, they might accept something of lesser value in the end. Such money-less societies can persist for centuries, with barter spot transactions remaining insignificant or confined to external transactions with strangers.

The emergence of money from such arrangements appears to have much to do with the legal or social systems of penalties and fines for crimes, injuries or slights. It was here that things – prized things – were used to measure value, in the sense of compensation for injury.

The origin of money in ancient Mesopotamia appears to be in the development of an abstract money of account in the temple and palace institutions: these temples and palaces represented state institutions with large internal centrally planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. Many prices were set and administered in the money of account which developed from weight units. The two units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley. In the private economy, exchange involved a high degree of credit/debt transactions or “gift exchange,” not simply barter in spot transactions (Hudson 2004: 102). Silver money of account spread to the private economy mostly notably as a means of paying debts to temples and palaces (Hudson 2004: 115). But many ordinary people could pay in commodities, and the administered pricing system in terms of silver/grain developed in the temples was to assist in calculation of payments in kind.

(2) Menger holds that precious metals emerged as the medium of exchange for their “special saleableness.” He thinks that no “accident, nor the consequence of state compulsion, nor voluntary convention of traders effected this” (Menger 1892: 254). This seems to contradict his statement on p. 250 (cited above).

In fact, Menger’s view is highly questionable, since metals were not especially divisible or used in uniform divisible units until the invention of coinage. Most bullion and metal would have been of too high a value for ordinary transactions. The historical origin of coinage in Western civilization lies with the state:

“the state’s role in the development of coinage is undisputed … Coinage was not an endogenous development of the economic sphere, as Menger held, nor was it created merely in order to facilitate trade which had existed thousands of years before money and was in no need of facilitation” (Peacock 2006: 642).

To be fair to Menger, he did not assert that coinage “was an endogenous development of the economic sphere.” What Menger believed is that precious metal as commodity money (not necessarily coined) emerged because of its “special saleableness.” But this is not necessarily true, because precious metal was unlikely to have been used in daily, ordinary transactions by common people before small unit coins. Coins were the creation of the state, and even the early coins were minted in denominations far too high for small transactions (Kraay 1964). The reason that coinage eventually became a widely-accepted medium of exchange and unit of account was that the state demanded its issued coin back for payment of taxes and other payments to the state, such as harbour dues and fines. This process is what monetized the economy and encouraged the use of coinage as a medium of exchange. This is essentially the Chartalist explanation of monetised economies.

We can end by noting that, in contrast to the cultish, dogmatic assertions of Rothbard (2009: 61), Menger recognised that the state improved the effectiveness of money through issuing coinage, and in fixing exchange ratios between commodity money. He also allowed that a medium of exchange might be instituted by way of government legislation (Menger 1892: 250).

UPDATE
I will also look at Menger’s Principles of Economics (1st edn. 1871) in the section on money, but I think most of the criticisms above will also apply to it.

DAVID GRAEBER LINKS

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011.

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.

David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.

BIBLIOGRAPHY

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Menger, Carl, 2007. Principles of Economics (trans. Grundsätze der Volkwirthschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Ludwig von Mises Institute, Auburn, Alabama.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Murphy, Robert P. 2003. “The Origin of Money and Its Value,” Mises Daily, September 29, 2003
http://mises.org/daily/1333

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Rothbard, M. N., 2009, The Essential von Mises, Ludwig von Mises Institute, Auburn, Alabama.