Thursday, April 7, 2016

Carl Menger on the Origin of Money in his 1909 Article “Geld”

Carl Menger’s famous 1892 article “On the Origin of Money” in the Economic Journal was based on an earlier article called “Geld” (“Money”) in the German language publication the Handwörterbuch der Staatswissenschaften (Menger 1892). This article went through a further two revised editions in 1900 and 1909 (Menger 1900 and 1909).

In the third edition of 1909, Menger had expanded the article to about 55 pages from the original 27 pages in the 1892 version.

In his first section of the 1909 article “Geld” called “The Origin of Generally used Intermediaries of Exchange,” Menger notes that certain commodities are more saleable than others and these goods are adopted more and more in market exchanges in the barter spot trade process that produces general commercial money.

Amongst these goods are the following:
“4. Goods in which, because of social customs or prevailing power structures, certain frequently repeated unilateral performances are effected or have to be effected (for example, gifts and dues to be paid by custom or because of obligations in specific goods to chieftains, priests, medicine men, etc., compensation for damages specified in particular goods, fines for having killed someone, certain goods customarily paid in bride purchases, etc.); for precisely for these goods, which are mostly eagerly desired anyway by those members of society who are best able to pay for them, there is the added special, ever-renewed demand for the above-mentioned purposes.” (Menger 2002 [1909]: 30–31).
This is a valuable insight. What Menger is referring to here includes what would now be called “ceremonial money” or “non-commercial money” because it tended to be restricted to social customs and was not a general commercial medium of exchange. Of course, “money” as a descriptive term here is potentially misleading, but it is a useful shorthand for saying something like “quasi-monetary prestige commodities used in social customs, gift-giving etc.”

However, since Menger refers to the “gifts” he mentions here as “unilateral” it is not at all clear that he is thinking of gift exchange in the sense that concept is understood in modern anthropology.

In Section 6 called “Money as a Medium of Unilateral and Substitute Transfers of Wealth,” Menger has an important section discussing ancient societies and the emergence of money:
“Voluntary as well as compulsory unilateral transfers of assets (that is, transfers arising neither from a ‘reciprocal contract’ in general nor from an exchange transaction in particular, although occasionally based on tacitly recognized reciprocity), are among the oldest forms of human relationships as far as we can go back in the history of man’s economizing. Long before the exchange of goods appears in history or becomes of more than negligible importance for the supply of goods, we already find a variety of unilateral transfers: voluntary gifts and gifts made more or less under compulsion, compulsory contributions, damages or fines, compensations for killing someone, unilateral transfers within families, etc.

As long as trading in goods is of no more than negligible importance for the supply of goods to individual households, transfers of this sort are, as a matter of course, offered or embodied in goods having use value for the recipient. In the case of compulsory transfers in the barter economy, there is the additional consideration that they must be specified in goods that the obligated party actually has at his disposal or (for transfers at a set time and periodically recurring transfers) is likely to have at his disposal. The disadvantages inherent in such obligations, which are highly important in the barter stage, basically have to do with the fact that in many cases they force the obligated parties into lines of production that are either unsuited to their household economies or become troublesome and uneconomical for them in the course of time, while actually they often are or come to be of little value to the entitled party and are not at all proportionate to the sacrifices to be made by the obligated party. Besides, with unambiguously specified transfers in kind it is always doubtful whether the obligated party will be able to satisfy the lawful claims of the entitled party under all circumstances, especially when it is a matter of fixed-time or recurring transfers.

In the era of barter, with its overly harsh law of obligations, which is only partially mitigated by patriarchal relationships, the disadvantage just mentioned tends to promote the specification of substitute performances that in many cases, which can be found in great numbers in the oldest documents and statute books, make it easier and in others possible at all for the obligated party to perform and for the entitled party effectively to obtain performance.

But as soon as trade in goods gains in extent and importance among a people, as generally used media of exchange emerge, and as, with the progressive division of labour and the expansion of market trading, an ever growing number of market goods may be bought and sold for money, there also arises from this changed situation a new and much more perfect means of overcoming the difficulty that prevents the assured fulfilment of unequivocally specified economic obligations in the barter economy and that sometimes necessitates the arrangement of substitute economic performances: the specification of unilateral transfers in money. (Menger 2002 [1909]: 49–50).

“… with the broadening and deepening money economy, compulsory transfers (taxes, damages or fines, etc.) are most suitably specified in money wherever it is not a matter of direct compulsory transfers of consumption goods (requisitions, dues paid in kind for the recipient's own use, etc.) but rather transfers of wealth; at the same time extant obligations in kind are progressively converted into obligations in money, so that with the progressive development of the economy, it is money that more and more becomes the preferred medium of unilateral compulsory performances.

What has just been said essentially holds for voluntary unilateral transfers also. Whoever wants to give another person something of value for free (as a gift, legacy, wedding present, etc.) will in certain circumstances do so in goods intended to serve the recipient’s production or consumption purposes directly; in all other cases, however, in which it is a question of economic performance (and not of acts, for example, of personal attention or devotion, where the economic aspect is subordinate to the personal one), he will most appropriately employ that exchangeable good which gives the recipient command over all goods on the market, namely, money.” (Menger 2002 [1909]: 50).
Here Menger does envisage gift exchange and understands that “[v]oluntary as well as compulsory unilateral transfers” of goods in social and legal obligations and tax-like payments preceded the barter economy.

Nevertheless, this does not change Menger’s fundamental mechanism of the spontaneous emergence of money from barter spot trade as the primary way money is created.

It seems to me on reading the passage in full that Menger envisages this historical sequence:
(1) primitive societies (whether tribal or hunter gatherers, etc.) first used gift exchange, wergeld penalties or tax-like obligations in kind.

(2) but then as barter spot trade emerges and becomes significant, Menger’s conventional story takes over: money emerges internally within a society as the most saleable commodity (perhaps even from one of the prestige goods first functioning as ceremonial money), and then

(3) money tends to replace gift exchange, blood money and taxes in kind.
Certainly, this is much better and more historically accurate than the simple analysis in Menger’s article of 1892.

But, fundamentally, Menger misses the important point that general commercial money might arise from non-commercial money or prestige goods, not because of an internal process of barter spot trade in which such a good emerged as the most saleable commodity, but because of its social role in legal compensations such as wergeld or social conventions like bride-price.

That is, the process is quite different from Menger’s barter spot trade theory, and as Grierson argued “where societies have developed the notion of money as a general measure of value, it will, I believe, most often be found that a system of legal compensation for personal injuries, at once inviting mutual comparison and affecting every member of the community, lay behind them.” (Grierson 1977: 29).

Also missing is the role of ancient temple-states in creating a proto-money unit of account, as probably happened in ancient Egypt and Mesopotamia.

Curiously, Menger might also have taken account of this had he only developed a further concession he made in his 1909 article as follows:
“Like other social institutions, the institution of intermediaries of exchange, which serves the common good in the fullest sense of the term, may, as I shall explain later, emerge or be promoted, but also impeded, in its automatic development by the influence of authority (for example, public or religious) and especially by legislation. This manner of emergence of media of exchange, however, is neither the only nor the earliest one. Here, a relation exists similar to that between statute law and common law: media of exchange originally emerged and eventually, through progressive imitation, became generally used not by way of law or agreement but by way of ‘custom’, that is, through similar actions, corresponding to similar subjective impulses and similar intellectual progress, of individuals living together in society (as the unreflective result of specific individual strivings of the members of society) – a circumstance which subsequently, as with other institutions that arose in like manner, does not rule out, of course, their being established or influenced by government.” (Menger 2002 [1909]: 33).
This is rather confused, but it does not seem Menger is here saying that money in the earliest times was established by state intervention. Rather, he envisages an important role for the state after money has emerged first by a spontaneous process from internal barter spot trade.

This is clear from later in the article in the section called “The Perfecting of the Monetary and Coinage System by the State” (Menger 2002 [1909]: 45–48). In discussing the advantages of a uniform, state-minted coinage, Menger even remarks that “in recent times, private coinages have met the general requirements of trade only imperfectly” (Menger 2002 [1909]: 46). And while he opposed legal tender law from an economic point of view, nevertheless Menger argued that “in certain cases the needs of trade seem to permit and occasionally downright to require not only some sort of government intervention but specifically the declaring of particular kinds of money as legal tender” (Menger 2002 [1909]: 82).

However, as Semenova (2014) argues, Menger did not modify his core historical arguments and still seems still to have envisaged the barter spot trade theory of money’s origin as the major and most important means by which it arose. But we now know that this view, however, is unlikely to be a universal theory, nor perhaps even the major method by which money arose historically. It was but one of a number of processes.

Importantly, Menger also continued to reject chartalism (Semenova 2014: 115–124).

Had Menger only developed his theory and had access to more and better anthropological literature, he may have been forced to substantially modify his theory, and admit that money can probably emerge in a variety of ways as follows in addition to (1):
(1) a general commercial money can arise from barter spot trade, and in trade between communities, as in the cacao money of Mesoamerica and the salt money of Ethiopia (Graeber 2011: 75).

(2) a general commercial money can arise from ceremonial money used in bride-price, dowry, wergeld and other penalty systems but then first generalised to an abstract standard of value to calculate exchange rates of the ceremonial money with other commonly-exchanged commodities (see Grierson 1977; Quiggin 1949: 321–322; Einzig 1948: 984), just as Quiggin argued:
“The use of a conventional medium of exchange, originally ‘full-bodied’ but developing into ‘token’ money, is first noted in the almost universal customs of ‘bride-price’ and wergeld. When sister-exchange is not practicable, some other value must be substituted; where life for life is not demanded, some equivalent must be found. The history of ‘bride-price’ and wergeld (which has yet to be written) shows how formal the customary gifts become, fitted to definite scales of value. It is not without significance that in any collection of primitive currency the majority of the items are described as ‘used in bride-price’.

When once a system of conventional gifts or payments with a definite scale of values has been established (and this is necessary for ‘bride-price’ and for wergeld) the first steps are taken in the evolution of money. It develops thereafter in response to human needs into the accepted medium of exchange.” (Quiggin 1949: 322).
In very many societies, however, such “ceremonial money” like cattle will remain as an abstract standard of value and will not develop into a general medium of exchange, a state of affairs which contradicts Menger’s orthodox theory as well, since it implies that problems of barter do not force the emergence of a universal commercial money in numerous societies.

(3) a proto-money and abstract unit of account can be imposed from above by ancient government-temple states using weight units of metal from their economic planning systems, as in ancient Egypt and Mesopotamia.

(4) a general commercial money can arise from the state creation of coinage as in ancient Lydia and ancient Greece, where electrum and silver had been high prestige goods but not used commonly as barter goods in exchanges before their monetisation by the state.
Einzig, Paul. 1948. “New Light on the Origin of Money,” Nature 162.4130 (25 December): 983–985.

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

Grierson, P. 1977. The Origins of Money. Athlone Press and University of London, London.

Menger, C. 1892. “Geld,” in J. Conrad, Ludwig Elster, Wilhelm Lexis (eds.), Handwörterbuch der Staatswissenschaften (vol. 3). G. Fischer, Jena. 730–757.

Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255.

Menger, C. 1900. “Geld,” in J. Conrad, L. Elster, W. Lexis and E. Loening (eds.), Handwörterbuch der Staatswissenschaften (vol. 4; 2nd edn.). G. Fischer, Jena. 60–106.

Menger, C. 1909. “Geld,” in J. Conrad, L. Elster, W. Lexis and E. Loening (eds.), Handwörterbuch der Staatswissenschaften (vol. 4; 3rd edn.), Fischer, Jena. 555–610.

Menger, C. 1923. Grundsätze der Volkswirtschaftslehre (2nd rev. edn.), Hölder-Pichler-Tempsky, Vienna.

Menger, C. 2002 [1909]. “Money” (trans. L. B. Yeager and M. Streissler), in M. Latzer and S. W. Schmitz (eds.), Carl Menger and the Evolution of Payments Systems, Edward Elgar, Cheltenham, UK. 25–108.

Quiggin, A. H. 1949. A Survey of Primitive Money: The Beginnings of Currency. Methuen, London.

Semenova, Alla. 2014. “Carl Menger’s Theory of Money’s Origins: Responding to Revisionism,” The European Journal of the History of Economic Thought 21.1: 107–141.


  1. Lord Keyns, in my (Inal Gagloev) three comment on - - i reject many of your position about Menger and ancient economy.

    Pls see it.

    1. Your comment does not refute what I said, because:

      (1) my interpretation of the origin of money in Mesopotamia dos not depend on "primitivist" economics

      (2) on Homeric money, I already take full account of view there was no proper money in the late Dark Age:

      (3) you cite Hudson 2005, a work that actually supports my case, and

      (3) while it is also true Mesopotamia and Greece were a complex mix of state and market economies, his per se doesn’t refute my post.

    2. Lord Keyens, you can't answer on this my comment:


      In some point you was - wrong.