Another approach, which also helps in interpreting historical evidence, is to base assumptions on a logical (but also conjectural) story of the evolution of a “typical” free banking system, as it might occur in an imaginary, unregulated society called Ruritania. The story can be supported along the way by illustrations from actual history. But it only accounts for features of past banking systems that were predictable (though perhaps unintended) consequences of self interested, individual acts, uninfluenced by legislation.

Our story involves four stages: First, the warehousing or bailment of idle commodity money; second, the transition of money custodians from bailees to investors of deposited funds (and the corresponding change in the function of banks from bailment to intermediation); third, the development of assignable and negotiable instruments of credit (inside money); and fourth, the development of arrangements for the routine exchange (clearing) of inside monies of rival banks.

In Ruritania, however, since state interference is absent, coinage is entirely private. It includes various competing brands, with less reliable, more “diluted” coins first circulating at discount and eventually forced out of circulation entirely. This appears to contradict Gresham’s Law, which states that “bad money drives good money out of circulation.” Yet, properly understood, Gresham’s Law applies only where legal tender laws force the par acceptance of inferior coins. 6 In contrast, Ruritania’s free market promotes the emergence of coins of standard weights and fineness, valued according to their bullion content plus a premium equal to the marginal cost of mintage.

Under Ruritania’s pure commodity-money regime traders who frequently undertake large or distant exchanges find it convenient to keep some of their coin (and bullion) with foreign-exchange brokers who can then settle debts by means of less costly ledger-account transfers. Money-transfer services also develop in connection with deposits initially made, not for the purpose of trade, but for safekeeping. Wealthy Ruritanians who are not active in commerce begin placing temporarily idle sums of commodity money in the strongboxes of bill brokers, moneychangers, scriveners, goldsmiths, mintmasters, and other tradespeople accustomed to having and protecting valuable property and with a reputation for trustworthiness. Coin and bullion thus lodged for safekeeping must at first be physically withdrawn by its owners for making payments. These payments may sometimes result in the redeposit of coin in the same vault from which it was withdrawn. This is especially likely in exchanges involving money changers and bill brokers. Such being the case, it is possible for more payments to be arranged, without any actual withdrawal of money, at the sight of the vault, or better still by simply notifying the vault’s custodian to make a transfer in his books.

In transfer banking of this kind money on deposit is meant to be “warehoused” only. The custodian is not supposed to lend deposited money at interest, and receipts given by the “banker” for it are regular warehouse dockets.Thus, primitive Ruritanian bankers are bailees rather than debtors to their depositors, and their compensation comes in the form of depositors’ service payments.

The lending of depositors’ balances is a significant innovation: it taps a vast new source of loanable funds and fundamentally alters the relationship between Ruritanian bankers and their depositors. “The . . . bailee develops into the debtor of the depositor; and the depositor becomes an investor who loans his money . . . for a consideration” (Richards 1965, 223). Money “warehouse receipts” or bailee notes become IOUs or promissory notes, representing sums still called deposits but placed at the disposal of the banker to be reclaimed upon demand

Nonnegotiable checks open the way to negotiable ones, while assignable promissory notes open the way to negotiable bank notes. What distinguishes the latter is that they are not assigned to any one in particular, but are instead made payable to the bearer on demand. Thus Ruritania would evolve the presently known forms of inside money — redeemable bank notes and checkable deposits.

…giving inside money, not only to depositors of coin or bullion, but also to those who come to borrow it. The use of inside money is not just convenient to bank customers. It also makes for greater banking profits…

notes the below should levate “selgin synthetic commodity”

Aside from its immediate benefits to Ruritania’s bankers and their customers, the use of inside money has wider, social consequences. Obviously it reduces the demand for coin in circulation, while generating a much smaller increase in the demand for coin in bank reserves.

The net fall in demand creates a surplus of coin and bullion, which Ruritania may export or employ in some nonmonetary use.

The result is an increased fulfillment of Ruritania’s nonmonetary desires with no sacrifice of its monetary needs. This causes a fall in the value of money, which in turn “acts as a brake” on the production of commodity money and directs factors of production to more urgent purposes (Wicksell 1935, 124). Of even greater significance than Ruritania’s one time savings from fiduciary substitution (the replacement of commodity money with unbacked inside money) is its continuing gain from using additional issues of fiduciary media to meet increased demands for money balances. By this means every increase in real money demand becomes a source of loanable funds to be invested by banks, whereas under a pure commodity-money regime an increase in money demand either leads to further investments in the production of commodity money, or, if the supply of commodity money is inelastic, to a permanent, general reduction in prices. The latter result involves the granting of a pure consumption loan by money holders to their contemporaries. Thus, fiduciary issues made in response to demands for increased money balances allow Ruritania to enjoy greater capitalistic production than it could under a pure commodity-money regime.

…profit opportunities exist to promote a more general use of particular inside monies. The discounting of notes outside the neighborhood of the issuing bank’s office provides an opportunity for arbitrage when the par value of notes exceeds the price at which they can be purchased for commodity money or local issues in a distant town, plus transaction and transportation costs.

^^^boc paper


Competition eventually reduces note discounts to the value of transaction and transportation costs, plus an amount reflecting redemption risk.


In accepting the notes of unfamiliar banks at minimal commission rates, brokers unintentionally increase the general acceptability of all notes, promoting their use in place of commodity money.

^^^^cbcds as bank notes

Moreover, because they can issue their own notes (or deposit balances) to purchase “foreign” notes and therefore need not hold costly till money, banks can out-compete other brokers. Still another incentive exists for banks to accept rival notes: larger interest earnings. If a bank redeems notes it acquires sooner than other banks redeem the first bank’s notes issued in place of theirs, it can, in the interim, purchase and hold interest-earning assets. The resulting profit from “float” can be continually renewed. In other words, a bank’s earnings from replacing other notes with its own may be due, not just to profits from arbitrage, but also to enhanced loans and investments.


If transaction and transportation costs and risk are low enough, competition for circulation reduces brokerage fees to zero, reflecting the elimination of profits from arbitrage. This leads Ruritanian banks to accept each other’s notes at par.


below is the result limit of arbitrage to zero


Because notes from one town come to be accepted in a distant town at par, there is little reason to lug around commodity money any more.



re limitation on demand…

Commodity money, formerly used in circulation to settle exchanges outside Ruritania’s banks, might now be used to settle clearings among them. To really economize on commodity money rival banks have to exchange notes frequently enough to allow their mutual obligations to be offset. Then only net clearings, rather than gross clearings, need to be settled in commodity money. Thus banks can take further advantage of the law of large numbers, and more commodity money becomes available for nonmonetary uses.

technically crpytographic?*******bitcoin provides clearing

Suppose Ruritania has three banks, A, B, and C. A has $20,000 of B’s notes, B has $20,000 of C’s notes, and C has $10,000 of A’s notes. 24 If they settle their obligations bilaterally, they need to have $20,000 to $40,000 of commodity-money reserves on hand among them, depending on the chronological sequence of their exchange. On the other hand, if they settle their balances multilaterally, they need only $10,000 of reserves among them: A’s net balance to B and C combined is +$10,000; B’s net balance to A and C combined is $0; and C’s net balance to A and B combined is -$10,000. Hence all three balances can be settled by a transfer of $10,000 from C to A. Apart from reducing reserve needs, multilateral clearing also allows savings in operating costs by allowing all debts to be settled in one place rather than in numerous, scattered places.


aka stabke demand

Since no statutory reserve requirements exist, reserves are held only to meet banks’ profit-maximizing liquidity needs, which vary according to the average size and variability of clearing balances to be settled after routine (e.g. daily) note and check exchanges. The holding of reserve accounts at one or more clearinghouses results in significant savings in the use of commodity money. In the limit, if inter-clearinghouse settlements are made entirely with other assets (perhaps claims on a super-clearinghouse which itself holds negligible amounts of commodity money), and if the public is weaned completely from holding commodity money, the only active demand for the old-fashioned money commodity is nonmonetary: the flow supply formerly sent to the mints is devoted to industrial and other uses.

contractual obl

. Markets for these uses then determine the relative price of the money commodity. Nonetheless, the purchasing power of monetary instruments continues to be fixed by the holders’ contractual right (even if never exercised) to redeem them for physically specified quantities of commodity money. The special difficulty of meeting any significant redemption request or run on a bank in such a system can be contractually handled, as it was historically during note-dueling episodes, by invoking an “option clause” allowing the bank a specified amount of time to gather the needed commodity money while compensating the redeeming party for the delay. The clause need not (and, historically, did not) impair the par circulation of bank liabilities.

— — — — — Reedem = for commod money; money = commod money(?)

In the evolution of Ruritania’s free banking system, bank reserves do not entirely disappear, since the existence of bank liabilities that are promises to pay continues to presuppose some more fundamental money that is the thing promised. Ruritanians forego actual redemption of promises, preferring to hold them instead of commodity money, so long as they believe that they will receive money if they ask for it. Banks, on the other hand, have a competitive incentive to redeem each other’s liabilities regularly. As long as net clearing balances are sometimes greater than zero, some kind of reserve, either commodity money itself or secondary reserves priced in terms of the commodity money unit of account, has to be held.

The scarcity of the money commodity, and the costliness of holding reserves, also serves to pin down Ruritania’s price level and to limit its stock of inside money

In few words, unregulated banking is likely to be far less radically unconventional, and much more like existing financial arrangements, than recent writings on the subject suggest.


One important contemporary financial institution is nonetheless absent from the Ruritanian system: to wit, the central bank. This is because market forces at work in Ruritania do not lead to the natural emergence of a monopoly bank of issue capable of willfully manipulating the money supply.


Assuming that free-bank liability issues run up against increasing marginal costs (an assumption to be defended in the next chapter), the conditions for long-run equilibrium of a free banking industry can be stated. As the public holds only inside money, with commodity money used only in bank reserves to settle clearing balances, these conditions are as follows: First, the demand for reserves and the available stock of commodity money must be equal. Second, the real supply of inside money must be equal to the real demand for it. Once the first (reserve-equilibrium) condition is met, the tendency is for any disequilibrium in the money supply to be corrected by adjustments in the nominal supply of inside money. An excess supply increases, and an excess demand reduces, the liquidity requirements (reserve demand) of the system. This is shown in chapters 5 and 6 below. On the other hand, if the reserve-equilibrium condition is not satisfied, the system is still immature. An excess supply of reserves then causes an expansion of the supply of inside money. If this leads to an excess supply of inside money, it will promote an increase in both reserve demand and prices, causing both the nominal demand for money and the demand for reserves to rise. There must be one price level at which both equilibrium conditions are met. When this price level is achieved, the system is in a long-run equilibrium. For the sake of simplicity, the analysis that follows starts with a free banking system (similar to Ruritania’s) in long-run equilibrium and assumes an unchanging supply of bank reserves.

This result has other important implications. It means that a solitary bank in a free banking system cannot pursue an independent loan-pricing policy. A “cheap-money” policy in particular would only cause it to lose reserves to rival banks. Also, no bank would be able, by overissuing, to influence the level of prices or nominal income to any significant degree, since the clearing mechanism rapidly absorbs issues in excess of aggregate demand, punishing the responsible bank. Consequently, the structure of nominal prices would not be indeterminate. Assuming stationary conditions of production, free banks face a determinate schedule of nominal money demand which strictly limits the extent of their issues.

In a mature free banking system, commodity money does not circulate, its place being taken entirely by inside money.

According to Koopmans (1933, 257), who has developed this approach most thoroughly, monetary policy should have the goal of “compensating for any deflation, due to hoarding, by creating a corresponding amount of new money, or of compensating for any inflation, due to dishoarding, by destroying money in like measure.” When this goal is achieved “the money outlay stream should remain constant.” In other words, money is neutral as long as Say’s Law remains valid (that is, as long as excess demand for money is zero). Conversely, monetary disequilibrium occurs and money is non-neutral whenever Say’s Law is violated: Hoarding and money destruction cause a leakage in the circular flow of income; dishoarding and money creation make, so to speak, new purchasing power spring from nowhere. In the first case, that of pure supply [of non-money goods], the situation is deflationary, in the second, where pure demand occurs, it is inflationary; in neither case does Say’s Law apply. If net pure demand is nil, monetary equilibrium prevails . . . the monetary equilibrium situation corresponds to Say’s Law [De Jong 1973, 24].

According to Durbin (1933, 187) such a policy would “avoid income deflation on the one hand and a profit inflation on the other.”

J. E. Meade (1933, 8) argues along the same lines that the total increase in the supply of money in a given period of time should equal the net increase in the demand for money during the same period, with bank investments adjusted correspondingly. Besides preventing changes in final (nominal) income this policy would assure an equilibrium interest rate.

…to the ideal of a truly demand-elastic money supply.

Monopolized Currency Supply

Under monopolized currency supply the ability of non-note-issuing (deposit or commercial) banks to convert deposits into currency is restricted. Deposit banks are not able independently to fulfill currency demands. They have to draw instead on their holdings of notes or fiat currency (or deposits convertible into notes or fiat currency) of the monopoly bank of issue.13 In doing so they reduce their reserves of high-powered money.

gold standard problem?

It follows that, unless the monopoly bank of issue adjusts the amount of its credits to the deposit banks to offset their reserve losses due to currency demand,14 their lending power decreases. The banks will have to contract their liabilities. A change in the form in which the public wishes to hold money balances causes a disequilibrating change in the total supply of money.15

/// chopped this somewhere:

the same conclusion holds for uncompensated reductions in the relative demand for currency, which in a system with monopolized currency issue results in a return of currency to the deposit banks, who add it to their reserve holdings and use it as a basis for credit expansion. A fall in the relative demand for currency results in monetary overexpansion even though the demand for money has not fallen and even though there is no expansion of credit by the monopoly bank of issue

a rise in outside-money demand means a demand to exchange inside money for outside money, the ultimate money of redemption. In a closed system this implies either a loss of confidence in banks issuing inside money (which contradicts the assumptions of the present part of this study) or a failure of the banking system to provide enough inside money for use as currency.2

Currency Supply under Free Banking

When banks are unrestricted in their ability to issue bank notes each can meet increases in its clients’ demands for currency without difficulty and without affecting its liquidity or solvency. Under such free-banking conditions the “transformation of deposits into notes will respond to demand,” and banks will be able to supply credit in the form that borrowers require (Agger 1918,

Under central banking the relation between the supply of base money and total money supply is a function of the relative demand for currency, whereas under free banking this is no longer the case. The reason for the difference is that under central banking the public’s use of central bank notes as currency competes with the banks’ use of them as reserves. Under free banking high-powered (outside) money is not usually used as currency.154).


In practice free banks would generally not keep on hand notes equal to 100 percent of their deposits, because the likelihood of demand for inside money shifting entirely into currency is minuscule

  • ********************

Freedom of note issue thus ensures the preservation of an equilibrium money supply as demand shifts from deposits to currency and vice versa. It assures that credit offers of persons willing to hold inside money are exploited even when the offerers want to hold bank promises in a form useful in circulation. It also assures that a growing [113] demand for inside money that involves an absolute increase in currency demand is readily accommodated, instead of going unsatisfied because of a shortage of currency.12 The ability of free banks to function smoothly as intermediaries even in the face of changing currency demand stems from their note-issuing powers.

Under monopolized currency supply the ability of non-note-issuing (deposit or commercial) banks to convert deposits into currency is restricted. Deposit banks are not able independently to fulfill currency demands. They have to draw instead on their holdings of notes or fiat currency (or deposits convertible into notes or fiat currency) of the monopoly bank of issue.

13 In doing so they reduce their reserves of high-powered money.

If there is competitive note issue, the traditional argument for a lender of last resort carries much less weight.

When banks go on holiday, deposits are immobilized, and checks become practically useless in making payments. Currency can, however, still circulate while banks are temporarily closed.

s Friedman and Schwartz note in their Monetary History of the United States (1963, 295fn), the troubles of the National Banking System “resulted much less from the absence of elasticity of the total stock of money than from the absence of interconvertibility of deposits and currency.” To achieve the latter, free note issue would have been, not only adequate, but more reliable than centralized note issue.39

wiki: bis

Failures to keep monetary policy in line with reality and make monetary reforms in time, preferably as a simultaneous policy among all 60 member banks and also involving the International Monetary Fund, have historically led to losses in the billions as banks try to maintain a policy using open market methods that have proven to be based on unrealistic assumptions.

Central banks do not unilaterally “set” rates, rather they set goals and intervene using their massive financial resources and regulatory powers to achieve monetary targets they set. One reason to coordinate policy closely is to ensure that this does not become too expensive and that opportunities for private arbitrage exploiting shifts in policy or difference in policy, are rare and quickly removed.


Most theorists agree that a banking system should utilize all voluntary savings made available to it, without creating credit in excess of voluntary savings which causes monetary disequilibrium.

Although a monopoly in currency supply allows the monopoly bank to escape adverse clearings in the short run, for such a monopoly [151] to be “natural,” that is, for it to represent a stable market equilibrium, it must be able to maintain its notes in circulation more efficiently than rival firms in an environment of free entry where adverse clearings result in demands for its reserves. In other words, the average costs of maintaining notes in circulation, i.e., of building a market for currency holding by the public so that adverse clearings are avoided, must be declining with scale or at least subadditive.23 For a single bank to gain a monopoly of note issue it is not sufficient that banking involve substantial fixed costs, with relatively small marginal costs, from issuing additional notes. The bank must also take steps to improve the popularity of its notes relative to commodity money or relative to notes of other banks, or it must suffer the expense of redeeming them soon after their issue. If the costs to the bank of extending the market or of redemption rise rapidly enough at the margin,24 its average costs per unit of outstanding currency will rise above the minimum level long before the point at which it would saturate the market for currency. In this case the industry cannot be considered a natural monopoly, and no single firm will be able to avoid the consequences of rivals establishing their own circulations and returning its excess notes to it for redemption.

An error sometimes committed in considering the natural monopoly question is to assume that the only marginal costs of currency issue are the cost of paper and ink, which do not rise significantly at the margin and may even fall due to economies of large-scale purchasing. This implies that banks face an inexhaustible demand for their notes, or that they will not be asked to redeem them in base money. But, where notes are convertible, this can happen only if the issuer has a monopoly of currency supply to begin with — one based, for example, on special legislation prohibiting the entry of other note-issuing banks that might redeem their rival’s issues.25

Simply this: that throughout the experience of both Europe and America the tendency under unrestricted entry has always been toward a plurality of note-issuing banks.26

This does not mean that a change of standard would be likely; however, if many people desired it, it could occur. A well-working free banking system can grow on the foundation of any sort of base money that the public is likely to select, and competition in the supply of base money is no less desirable than competition in the supply of bank liabilities, including bank notes, redeemable in base money.

Exogenous fluctuations in the output of commodity money will occur due to technological innovations which are not mere responses to changes in demand, and such fluctuations will be a cause of monetary disequilibrium.1

A Bitcoin Standard: Lessons from the Gold Standard

Suppose that the use of Bitcoin has grown to such an extent that it has replaced existing fiat currencies and has become the predominant medium of exchange or at least the backing for the predominant medium of exchange in a large group of countries. I will call a monetary system the Bitcoin standard

The paper argues that because there would be virtually no arbitrage costs for international transactions, countries could not follow independent interest rate policies under the Bitcoin standard. However, central banks would still have some limited ability to act as lenders of last resort. Based on the experience during the classical gold standard period, the paper conjectures that there would be mild deflation and constant exchange rates under the Bitcoin standard

The most important similarity between the Bitcoin standard and the gold standard is that no central bank or monetary authority controls the supply, or more importantly, changes in the supply of the anchor of the monetary system

Given the usefulness of Bitcoin as a medium of exchange, it is possible that the Bitcoin standard could exist without each country’s monetary authority issuing a fiduciary currency. Nonetheless, I assume that monetary authorities choose to issue fiduciary currencies in order to have the ability to finance fiscal deficits through money creation. Further, I make this assumption to have the media of exchange under the Bitcoin standard be similar to those under the gold standard, because each country issued its own fiduciary currency under the gold standard.

Thus, I assume that in addition to Bitcoin, there are Bank of Canada dollars, Federal Reserve dollars, European Central Bank (ECB) euros, Bank of England pounds and so forth.4 These central bank currencies are separate currencies that circulate alongside Bitcoin. They are tied to Bitcoin because they are redeemable in Bitcoin on demand. These central bank currencies are fiduciary because the central banks would not be required to fully back their issues with Bitcoin, just as under the gold standard central banks did not fully back their note issues with gold.

The redemption of these fiduciary currencies takes the form of transferring Bitcoins from the central bank’s “wallet” to the “wallet” of the commercial bank or person requesting the withdrawal rather than transferring gold coins or bullion as was the case under the gold standard.

Under the gold standard, interest rate policy worked through bank rates (discount rates), or, more correctly, because the monetary authority in a country could set its bank rate different from that in other countries. Countries had some latitude to raise or lower their bank rate to raise or lower interest rates generally in their country, and in this way affect the domestic economy. One might think that monetary authorities would not have this ability, because gold arbitrage would work to equate interest rates across countries. Gold would flow to the country where it would earn the highest rate of return and that would limit the differences in interest rates among countries on the gold standard

Lender of Last Resort The ability of monetary authorities to issue fiduciary currencies under the gold standard enabled them to act as lenders of last resort when there were runs on commercial banks, because these currencies could serve as reserves for the banking system. The policy tools for acting as a lender of last resort were determination of the collateral eligible for discounting and the haircut on that collateral. The same mechanism enables central banks to act as lenders of last resort when there are bank runs under the Bitcoin standard. A stylized description of how a central bank acted as lender of last resort in a financial crisis under the gold standard and can act under the Bitcoin standard is the following. Financial institutions have reserve accounts on the central bank’s books. When they face runs on their notes or deposits and are in danger of running short of reserves, the central bank can supply financial institutions with reserves by purchasing (“discounting”) commercial paper and other assets presented by commercial banks with its own fiduciary currency. Because these reserves are in terms of the central bank’s fiduciary currency, the central bank does not have to possess the amount of gold or Bitcoin equal in value to the amount that it credits to the commercial bank before making the transaction. Because the central bank does not 10This explanation for (1) as the restriction on a central bank’s interest differs from that given by Bordo and MacDonald (2005), which relies on expectations of exchange rate movements. However, both explanations arrive at the same implications for the range in which a central bank could set its bank rate without gold flows occurring. 11The existence of the Atlantic cable might suggest that the band (1) would be much smaller. However, Officer (1996, 114) argues that cable transfers were “an instrument that in historical fact was eschewed by arbitrageurs and transferors.” 9 have to make the discount purchases by paying out gold or paying out Bitcoin, it can simply create reserves for banks. Should financial institutions have to meet withdrawal demands by depositors, they would draw on their reserve account with the monetary authority and obtain the paper or digital form of the central bank’s fiduciary currency. Because these fiduciary currencies are accepted as media of exchange, they would most likely satisfy depositors’ withdrawal demands. That central bank fiduciary currencies are redeemable on demand in gold or Bitcoin opens up the possibility of runs on central banks because of concerns about their ability to meet demand. The possibility of such runs means that a central bank can only issue its fiduciary currency up to a point. The ability of a monetary authority to act as lender of last resort under either the gold or Bitcoin standard is limited. This is in contrast with the almost unlimited ability of central banks to act as lenders of last resort under a fiat monetary standard.12

Facing such a run on its fiduciary currency, a central bank is limited in what it can do because it cannot act as the lender of last resort to itself. There are two possible actions it can take. One is to suspend payments, as the Bank of England did in 1791. The problem with this action is that unless there is a credible commitment to redeem in the future, existing fiduciary currency will very likely depreciate in value and the central bank may never be able to issue fiduciary currency again. The other possibility is to borrow Bitcoin from other central banks with the promise to repay once the crisis it faces abates

under the Bitcoin standard, just as under the gold standard, the money supplies of different countries would not necessarily move together, although the more tightly a group of countries are linked in terms of trade and finance, the more closely their money supplies would be linked.

Conjecture: Under the Bitcoin standard, the exchange rates among the fiduciary currencies of various countries would be fixed at par, because the cost of Bitcoin arbitrage is essentially zero.

Breaking Down Sovereign Bond

The government of a country with an unstable economy tends to denominate its bonds in the currency of a country with a stable economy.

This has happened many times throughout history, and a typical example of this is provided by Weimar Germany of the 1920s, which suffered from hyperinflation when the government massively printed money, because of its inability to pay the national debt deriving from the costs of World War I.

Further, there are historical examples where countries defaulted, i.e., refused to pay their debts, even when they had the ability of paying it with printed money. This is because printing money has other effects that the government may see as more problematic than defaulting

Lending to a national government in a currency other than its own does not give the same confidence in the ability to repay, but this may be offset by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation;[citation needed] and this increases the credibility of the debtor.


MMT’s main tenets are that a government that issues its own fiat money:

  1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;


Monopoly protection is the sole economic distinction between commodity and monopoly money. The supply increase caused by seigniorage is mitigated only by political unrest as people resist the consequential value decrease. This unrest initially manifests as capital flight, which is countered by foreign exchange controls.

However, as shown in Stability Property, the purpose of state money (fiat) is to collect seigniorage, which is a tax. In other words, Ideal Money is a tax collection system that collects no tax. Granting the above assumptions, Ideal Money is the obsolescence of state money. The proposal fails to consider the reason that fiat exists in the first place.

The proposal incorrectly assumes that Thiers’ Law governs. If this was the case people would not use fiat. It also ignores the existence of foreign exchange controls, which exist specifically to prevent capital flight. Such controls strengthen as capital flight accelerates, in order to preserve tax revenue.

Finally, such controls materially limit price discovery in the index, making it less useful than the envisioned reference.

The proposal offers no rational explanation for how people will become able to move between state monies in the face of such controls. It assumes that people will better recognize the tax, due to the presence of the index and their ability to compare against it, and therefore will more effectively control the state’s appetite for the tax. Given the near universal use of gold as a comparably objective index prior to the evolution of global fiat, it is not clear how fiat ever took hold if we can assume people will react to it in this manner.

There is an argument that Bitcoin is an objective index whereas gold is not. This is based on the inflationary supply of gold in contrast to the fixed supply of Bitcoin. This assumes that monetary inflation implies an unstable money whereas fixed supply implies a stable money. As shown in Stability Property, both monies are stable. The argument fails to acknowledge that value, as indicated by the index, is a consequence of both supply and demand. Gold demand is stabilized by inflation and Bitcoin’s demand is stabilized by fees.

The theory is therefore invalid. Either fiat will cease to exist or it will collect tax. States only surrender this tax under extreme duress and in such cases only briefly. If anything the “ideal money” will be Bitcoin, and it will not trade freely with state monies (to the extent they remain).

Rothbard makes the above argument in “Man, Economy, and State”, but explicitly limits his definition of a bank to that of a “warehouse” for money:

When a man deposits goods at a warehouse, he is given a receipt and pays the owner of the warehouse a certain sum for the service of storage. He still retains ownership of the property; the owner of the warehouse is simply guarding it for him. When the warehouse receipt is presented, the owner is obligated to restore the good deposited. A warehouse specializing in money is known as a “bank.”

Banks do offer this warehousing service, in the name of safe deposit. But banks are not so narrowly defined.

A. Definitions of Monopoly

The farmer is free to ask any price he wants, just as Ford is, and is free to look for a buyer at such a price. He is not in the least compelled to sell his produce to the organized “markets” if he can do better elsewhere. Every producer of every product is free, in a free-market society, to produce as much as he wants of whatever he possesses or can purchase and to try to sell it, at whatever price he can get, to anyone he can find.24 Naturally, every seller, as we have repeatedly stated, will attempt to sell his produce for the highest possible price; similarly, every buyer will attempt to purchase goods at the lowest possible price. It is precisely the voluntary interaction of these buyers and sellers that establishes the entire supply and demand structure for consumers’ and producers’ goods. To accuse Ford or a waterworks or any other producer of “charging whatever the traffic will bear” and to take this as a sign of monopoly is pure nonsense, for this is precisely the action of everyone in the economy: the small wheat farmer, the laborer, the landowner, etc. “Charging whatever the traffic will bear” is simply a rather emotive synonym for charging as high a price as can be freely obtain

The second definition is related to the first, but differs very significantly. It, in fact, was the original definition of monopoly and the very definition responsible for its sinister connotations in the public mind. Let us turn to its classic expression by the great seventeenth-century jurist, Lord Coke:

A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise … to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.30

In other words, by this definition, monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group.

That this definition was formerly important in economic analysis is clear in the following quotation from one of the first American economists, Francis Wayland:

A monopoly is an exclusive right granted to a man, or to a monopoly of men, to employ their labor or capital in some particular manner.32

It is obvious that this type of monopoly can never arise on a free market, unhampered by State interference. In the free economy, then, according to this definition, there can be no “monopoly problem.”33

A succinct definition of monopoly price has been supplied by Mises:

If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly.37

The monopoly price doctrine may be summed up as follows: A certain quantity of a good, when produced and sold, yields a competitive price on the market. A monopolist or a cartel of firms can, if the demand curve is inelastic at the competitive-price point, restrict sales and raise the price, to arrive at the point of maximum returns. If, on the other hand, the demand curve as it presents itself to the monopolist or cartel is elastic at the competitive-price point, the monopolist will not restrict sales to attain a higher price. As a result, as Mises points out, there is no need to be concerned with the “monopolist” (in the sense of definition 1 above); whether or not he is the sole producer of a commodity is unimportant and irrelevant for catallactic problems. It becomes important only if the configuration of his demand curve enables him to restrict sales and achieve a higher income at a monopoly price.38

The inelastic demand curve, giving rise to an opportunity to monopolize, may present itself either to a single monopolist of a given product or to “an industry as a whole” when organized into a cartel of the different producers. In the latter case, the demand curve, as it presents itself to each firm, is elastic. At the competitive price, if one firm raises its price, the customers preponderantly shift to purchasing from its competitors. On the other hand, if the firms are cartelized, in many cases the lesser range of substitution by consumers would render the demand curve, as presented to the cartel, inelastic. This condition serves as the impetus to the formation of the cartels studied above.

Consumers make the curve elastic by their power of substituting purchases of other goods. Many other goods compete “directly” in their use-value to the consumer. If some firm or combination of firms should, for example, achieve a monopoly-price for cake soap, housewives can shift to detergents and thus limit the height of the monopoly price. But, in addition, all goods, without exception, compete for the consumer’s dollar or gold ounce. If the price of yachts becomes too high, the consumer can substitute expenditure on mansions, or he can substitute books for television sets, etc.41

Furthermore, as the market advances, as capital is invested and the market becomes more and more specialized, the demand curve for each product tends to become more and more elastic. As the market develops, the range of consumers’ goods available increases enormously. The more consumers’ goods are available, the more goods can be purchased by consumers, and the more elastic, ceteris paribus, the demand curve for each good will tend to be. As a result, the opportunities for the establishment of monopoly prices will tend to diminish as the market and “capitalist” methods develop.

The question arises: Why cannot other entrepreneurs seize the gainful opportunity and enter into the production of this good, thereby tending to eliminate the opportunity? In the case of the cartel, this is precisely the tendency that will always prevail and lead to the breakup of a monopoly-price position. Even if new firms entering the industry are “bought off” by being offered quotal positions in the old cartel, and both the new and the old firms have been able to agree on allocations of production and income, such actions will not suffice to preserve the cartel. For new firms will be tempted to acquire a share in the monopoly gains, and ever more will be created until the entire cartel operation is rendered unprofitable, there being too many firms to share the benefits. In such situations, the pressure will become greater and greater for the more efficient firms to cut loose from the cartel and to refuse further to provide a comfortable shelter for the host of inefficient firms.

Thus, we conclude not only that there is nothing “wrong” with “monopoly price,” but also that the entire concept is meaningless. There is a great deal of “monopoly” in the sense of a single owner of a unique commodity or service (definition 1). But we have seen that this is an inappropriate term and, further, that it has no catallactic significance. A “monopoly” would be of importance only if it led to a monopoly price, and we have seen that there is no such thing as a monopoly price or a competitive price on the market. There is only the “free-market price.”

There is no economic difference between a cartel and a single organization. Changing organizational size is a free market outcome observable as capital seeks optimal economies of scale.

In other words, monopoly price is only produced by state grant of monopoly power.

Monopoly money is not subject to competitive production, allowing its producer to obtain a monopoly premium in the pricing of new units. As such it increases the proportion of money to goods, resulting in price inflation.

Fiat money does not have use value. It has utility as a money only to the extent that people are willing to trade for it. These people may and often do include an issuing state, though this is not a distinguishing characteristic.

However such a declaration is also not a distinguishing characteristic. Fiat is simply money without use value. Money with use value is referred to as commodity money.

If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media. As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium. A part of the total amount of money-substitutes issued is usually covered by a money reserve held. Thus a part of the total amount of money-substitutes issued is money certificates, the rest fiduciary media. But this fact can only be recognized by those familiar with the bank’s balance sheets. The individual banknote, deposit, or token coin does not indicate its catallactic character.[2]

Money is a commonly used medium of exchange.[1] People wishing to achieve their ends often have to trade. They can exchange their goods directly, if they have matching preferences and suitable goods, or indirectly, with the help of another good, the medium of exchange.

A commodity that comes into general use as a medium of ex­change is money. The concept of a “medium of exchange” is precise. But when exactly comes a medium of exchange into “common” or “gen­eral” use is not strictly definable.

Note that money is still a good — the most marketable good. Money is valuable to the extent that others are willing to accept it in exchange. But, money itself must first have originated as a directly serviceable good before it could become an indirectly serviceable good.[4]

For a good to become money, it must have the physical properties and be considered valuable by itself. The price of a good, when employed only for nonmonetary purposes, is a good starting point to estimate its price for use as a money. Should the good stop being money, it will still have value due its other uses.[6]

Money did not and never could begin by some arbitrary social contract, or by some government agency decreeing that everyone has to accept the tickets it issues. Even coercion could not force people and institutions to accept meaningless tickets that they had not heard of or that bore no relation to any other pre-existing money.[2]

If anyone could produce paper money on their own, without backing by an underlying commodity, a hyperinflation would soon follow. Free entry into the note-production business must be restricted, and a money monopoly must be established. Fiat money can be only established via the development of money substitutes (paper titles to commodity money) — but only fraudulently and only at the price of economic inefficiencies. Hoppe speaks of the “devolution” of money.[9]

Money substitutes

Main article: Money substitutes

Or money certificates, are placeholders for actual money, that is stored in a bank and can be redeemed at any time by the present owner of the note. Instead of trading e.g. silver, people would trade with notes representing the silver. Apart from paper notes, the main types of such substitutes are token coins, certificates of deposit, checking accounts, credit cards, and electronic bank accounts on the Internet. The advantage are lower transaction costs, the downside is a greater potential for abuse (and historically, this lure appeared to be irresistible).[11]

Credit money

Credit money is created when financial instruments are used in indirect exchange. It is only a derived kind of money: it receives its value from an expected future redemption. For example, an IOU can be accepted by others, if they trust the reputation of the issuer of debt. This risk of default also limits its application.

“Not surprisingly, therefore, credit money has reached wider circulation only when the credit was denominated in terms of some commodity money, when the reputation of the issuer was beyond doubt, and when it was the only way to quickly provide the government with the funds needed to conduct large-scale war.”[12]

Fiat money

Main article: Fiat Money

Often called paper money, fiat money is in a wider sense any money declared to be legal tender by government fiat. In the narrower sense used here, fiat money is an intrinsically useless good used as a means of payment and a storable object.[13] All modern paper currencies are fiat money.

There are many reported advantages to fiat money as opposed to commodity-based money, among them:

  • much lower costs of production

The main risk of this money is the possibility of a complete loss of value.

Electronic money

The information technologies have been able to develop very efficient and beneficial new instruments to access and transfer. But no purely electronic money has been produced so far, except for government money, which is free from competition.[14] A possible candidate for a purely electronic money, which is currently in the experimental stage, is bitcoin which is limited in amount through a process called mining which cryptographically requires proof of work.

Definitions of money supply

Main article: Money supply

Even though the overall definition of money as ‘a commonly accepted medium of exchange’ [15] [16], authors have differed with its interpretation even within the Austrian School; and more generally, economists use a variety of definitions by which an attempted calculation of the money supply is put forward.

In general, most of the definitions used by governmental institutions rely upon the sum of all commercial paper based on their liquidity, and these metrics include — in order of the breadth of their corresponding definitions of money — M0, M1, M2, MZM, M3 (which has been discontinued), and L.

Austrians contend with the idea that merely the liquidity determines the viability of the commercial paper, and insteada rely on whether a means of credit actually serves as the final means of exchange[citation needed]. For example, when traveler’s checks are exchanged in a store, the actual final exchange with common media takes place when the store demands cash or other money substitues in return for the traveler’s check. In this sense, the traveler’s check is an example of something included in most government money supply metrics, but not in Austrian money supply metrics.

The production of additional units of money will decrease the value of already existing units. Those owning these additional units will tend to pay more money for goods and services or demand additional goods and services, and demand in turn more money when selling their own goods and services. Thusly, the production of money has a tendency to raise money prices, starting from the producers of money and spreading to other economical actors.

Money can be employed in several ways:[4]

  • Money can be held. Holding it “buys” alleviation from a currently felt uneasiness about an uncertain future. If the future seems more uncertain, people will increase their cash holdings.

To increase production, man must form capital. To create it, he must restrict his consumption and transfer his labor for that period to producing immediately-satisfying con­sumers’ goods.

The restriction of con­sumption is called saving, and the transfer of labor and land to the formation of capital goods is called investment.[1]

In a modern economy, large amounts of saved money are usually not hoarded, but rather are used to fund establishment and expansion of business operations.[2]

Capital are the goods that were produced by previous stages of production but do not directly satisfy consumer’s needs; they are used in production to eventually produce consumer goods

The creation of capital goods is called investment.[1]

All capital goods are perishable. The few products that are not perishable but permanent become, to all intents and pur­poses, part of the land. Otherwise, all capital goods are perish­able, used up during the processes of production. It can be said that capital goods are transformed into their products during production.

In economics, capital consists of assets that can enhance one’s power to perform economically useful work. For example, a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument; similarly, roads are capital for inhabitants of a city. Capital is distinct from land and other non-renewable resources in that it can be increased by human labor, and does not include certain durable goods like homes and personal automobiles that are not used in the production of saleable goods and services. Adam Smith defined capital as “that part of man’s stock which he expects to afford him revenue”. In economic models, capital is an input in the production function.

A capital good (also called complex products and systems or (CoPS)) is a durable good that is used in the production of goods or services. Capital goods are one of the three types of producer goods, the other two being land and labour.

Examples include hand tools, machine tools, data centers, oil rigs, semiconductor fabrication plants, and wind turbines.

People buy capital goods to use as static resources to make other goods, whereas consumer goods are purchased to be consumed.

For example, an automobile is a consumer good when purchased as a private car.

Dump trucks used in manufacturing or construction are production goods, because companies use them to build things like roads, dams, buildings, and bridges.

In the same way, a chocolate bar is a consumer good, but the machines that produce the candy are production goods.

Some capital goods can be used in both production of consumer goods or production goods, such as machinery for production of dump trucks.

Consumption is the logical result of all economic activity, but the level of future consumption depends on the future capital stock, and this in turn depends on the current level of production in the capital-goods sector. Hence if there is a desire to increase the consumption, the output of the capital goods should be maximized.[3]

The dollars that one can hold in one’s hand are fiat, just as are the bitcoin that one can spend with one’s private keys. As such the term “fiat” alone does not distinguish between the Dollar and Bitcoin. However this distinction was never required before the existence of Bitcoin. Market monies without use value were presumed not to be possible. However there is a material distinction between these two types of money, neither of which have use value. This begs for a new differentiating term.

The Dollar (as all state fiat) differs from Bitcoin in that it depends on monopoly protection for production. It is this prohibition of market competition that allows the state to limit supply and therefore extract seigniorage.

monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group

The monopoly on production of state fiat is created by anti-counterfeit statute. A unit of the money is considered invalid unless produced by an authorized agent of the state.

Money secured against counterfeit by statute may then reasonably be referred to as “monopoly money” (not to be confused with Monopoly Money), and Bitcoin as “market money”. When the face value of fiat is reduced to its production cost it has transitioned to market money.

Commodity money is also market money, as it does not rely on monopoly privilege to restrict its supply. If commodity money supply is too great, it ceases to be a useful money due to the lack of portability.

Both money and money substitutes constitute currency. Money is sometimes referred to as base money. All monies are subject to lending and therefore necessarily credit expansion (i.e. into money substitutes) and its corresponding fractional reservation.

A currency (from Middle English: curraunt, “in circulation”, from Latin: currens, -entis, literally meaning “running” or “traversing”), in the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins.[1][2][3][need quotation to verify] A more general definition sees a currency as a system of money (monetary units) in common use, especially for people in a given country.[4] Under this definition, U.S. dollars (US$), euros (€), Japanese yen (¥), and pounds sterling (£) exemplify currencies. Such various currencies are recognized[by whom?] as stores of value and are traded between countries in foreign-exchange markets, which determine the relative values of the different currencies at any given point in time.[5] Currencies in this sense are defined by governments, and each type has limited[by whom?] boundaries of acceptance.

Other definitions of the term “currency” appear in the respective synonymous articles: banknote, coin, and money. This article uses the definition which focuses on the currency systems of countries.

One can classify currencies into three monetary systems: fiat money, commodity money, and representative money, depending on what guarantees a currency’s value (the economy at large vs. the government’s physical metal reserves). Some currencies function as legal tender in certain political jurisdictions. Others simply get traded for their economic value.\

National banknotes are often — but not always — legal tender, meaning that courts of law are required to recognize them as satisfactory payment of money debts.[2] Historically, banks sought to ensure that they could always pay customers in coins when they presented banknotes for payment. This practice of “backing” notes with something of substance is the basis for the history of central banks backing their currencies in gold or silver. Today, most national currencies have no backing in precious metals or commodities and have value only by fiat. With the exception of non-circulating high-value or precious metal issues, coins are used for lower valued monetary units, while banknotes are used for higher values.

The perception of banknotes as money has evolved over time. Originally, money was based on precious metals. Banknotes were seen by some as an I.O.U. or promissory note: a promise to pay someone in precious metal on presentation (see representative money), but were readily accepted — for convenience and security — in the City of London for example from the late 1600s onwards. With the removal of precious metals from the monetary system, banknotes evolved into pure fiat money.

The Song Dynasty in China was the first to issue paper money, jiaozi, about the 10th century AD. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years’ service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to maintain the value of the paper money by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes became disfavored.[15]

During the 13th century, Marco Polo described the fiat money of the Yuan Dynasty in his book The Travels of Marco Polo.[16][17]

All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver… and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.

— Marco Polo, The Travels of Marco Polo

Washington Irving records an emergency use of paper money by the Spanish for a siege during the Conquest of Granada (1482–1492).

In 17th century New France, now part of Canada, the universally accepted medium of exchange was the beaver pelt. As the colony expanded, coins from France came to be used widely, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against the Iroquois had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk of mutiny.

Jacques de Meulles, the Intendant of Finance, conceived an ingenious ad hoc solution — the temporary issuance of paper money to pay the soldiers, in the form of playing cards. He confiscated all the playing cards in the colony, had them cut into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver.

What is the nature of those little disks or documents, which in themselves seem to serve no useful purpose, Carl Menger 13 and which nevertheless, in contradiction to the rest of experience, pass from one hand to another in exchange for the most useful commodities, nay, for which every one is so eagerly bent on surrendering his wares?

To assume that certain commodities, the precious metals in particular, had been exalted into the medium of exchange by general convention or law, in the interest of commonweal, solved the difficulty, and solved it apparently the more easily and naturally inasmuch as the shape of the coins seemed to be a token of state regulation. Such in fact is the opinion of Plato, Aristotle, and the Roman jurists, closely followed by the mediaeval writers. Even the more modern developments in the theory of money have not in substance got beyond this standpoint.1

It is a question concerning not only the origin but also the nature of money and its position in relation to all other commodities.

Consider how seldom it is the case, that a commodity owned by somebody is of less value in use than another commodity owned by somebody else! And for the latter 19 20 On the Origins of Money just the opposite relation is the case. But how much more seldom does it happen that these two bodies meet! Think, indeed, of the peculiar difficulties obstructing the immediate barter of goods in those cases, where supply and demand do not quantitatively coincide; where, e.g., an indivisible commodity is to be exchanged for a variety of goods in the possession of different person, or indeed for such commodities as are only in demand at different times and can be supplied only by different persons! Even in the relatively simple and so often recurring case, where an economic unit, A, requires a commodity possessed by B, and B requires one possessed by C, while C wants one that is owned by A — even here, under a rule of mere barter, the exchange of the goods in question would as a rule be of necessity left undone.

These difficulties would have proved absolutely insurmountable obstacles to the progress of traffic, and at the same time to the production of goods not commanding a regular sale, had there not lain a remedy in the very nature of things, to wit, the different degrees of saleableness (Absatzfahigkeit) of commodities.

The theory of money necessarily presupposes a theory of the saleableness of goods. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case, — presenting only a difference of degree — of a generic phenomenon of economic life — namely, the difference in the saleableness of commodities in general.

This holds good of wholesale as well as retail prices. Even such marketable goods as corn, cotton, pig-iron, cannot be voluntarily disposed of for the price at which we have purchased them

The truth is, that even in the best organized markets, while we may be able to purchase when and what we like at a definite price, viz.: the purchasing price, we can only dispose of it again when and as we like at a loss, viz.: at the selling price. 2

If we call any goods or wares more or less saleable, according to the greater or less facility with which they can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same, we can see by what has been said, that an obvious difference exists in this connection between commodities.

A commodity is more or less 3 The height of saleableness in a commodity is not revealed by the fact that it may be disposed of at any price whatever, including such as result from distress or accident. In this sense all commodities are pretty Carl Menger 27 saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices. The interval of time, moreover, within which the disposal of a commodity at the economic price may be reckoned on, is of great significance in an inquiry into its degree of saleableness. It matters not whether the demand for a commodity be slight, or whether on other grounds its saleableness be small; if its owner can only bide his time, he will finally and in the long run be able to dispose of it at economic prices.

. Upon the number of persons who are still in want of the commodity in question, and upon the extent and intensity of that want, which is unsupplied, or is constantly recurring. 2. Upon the purchasing power of those persons. 3. Upon the available quantity of the commodity in relation to the yet unsupplied (total) want of it. 29 30 On the Origins of Money 4. Upon the divisibility of the commodity, and any other ways in which it may be adjusted to the needs of individual customers. 5. Upon the development of the market, and of speculation in particular. And finally. 6. Upon the number and nature of the limitations imposed politically and socially upon exchange and consumption with respect to the commodity in question.

The spatial limits of the saleableness of commodities are mainly conditioned — 1. By the degree to which the want of the commodities is disturbed in space. 2. By the degree to which the goods lend themselves to transport,and the cost Carl Menger 31 of transport incurred in proportion to their value. 3. By the extent to which the means of transport and of commerce generally are developed with respect to different classes of commodities. 4. By the local extension of organised markets and their inter-communication by “arbitrage.” 5. By the differences in the restrictions imposed upon commercial inter-communication with respect to different goods, to interlocal and, in particular, in international trade.

The time limits to the saleableness of commodities are mainly conditioned — 1. By permanence in the need of them (their independence of fluctuation in the same). 2. Their durability, i.e., their suitableness for preservation. 3. The cost of preserving and storing them. 4. The rate of interest. 5. The periodicity of a market for the same. 32 On the Origins of Money 6. The development of speculation and in particular of time-bargains in connection with the same. 7. The restrictions imposed politically and socially on their being transferred from one period of time to another.

It has long been the subject of universal remark in centres of exchange, that for certain commodities there existed a greater, more constant, and more effective demand than for other commodities less desirable in certain respects, the former being such as correspond to a want on the part of those able and willing to traffic, which is at once universal and, by reason of the relative scarcity of the goods in question, always imperfectly satisfied. And further, that the person who wishes to acquire certain definite goods in exchange for his own is in a more favourable position, if he brings commodities of this kind to market, than if he visits the markets with goods which cannot display such advantages, or at least not in the same degree. Thus equipped he has the prospect 4 Cf. my article on “Money” in the Handwurterbuch der Staatswissenschaften (Dictionary of Social Science), Jena, 1891, iii, p. 730 et seq. 33 34 On the Origins of Money of acquiring such goods as he finally wishes to obtain, not only with greater ease and security, but also, by reason of the steadier and more prevailing demand for his own commodities, at prices corresponding to the general economic situation — at economic prices. Under these circumstances, when any one has brought goods not highly saleable to market, the idea uppermost in his mind is to exchange them, not only for such as he happens to be in need of, but, if this cannot be effected directly, for other goods also, which, while he did not want them himself, were nevertheless more saleable than his own. By so doing he certainly does not attain at once the final object of his trafficking, to wit, the acquisition of goods needful to himself. Yet he draws nearer to that object. By the devious way of a mediate exchange, he gains the prospect of accomplishing his purpose more surely and economically than if he had confined himself to direct exchange. Now in point of fact this seems everywhere to have been the case. Men have been led, with increasing knowledge of their individual interests, each by his own economic interests, without convention, without legal compulsion, nay, even without any regard to the common interest, to exchange goods destined for exchange (their “wares”) for other goods equally destined for exchange, but more saleable.

With the extension of traffic in space and with the expansion over ever longer intervals of time of prevision for satisfying material needs, each individual would learn, from his own economic interests, to take good heed that he bartered his less saleable goods for those special commodities which displayed, beside the attraction of being highly saleable in the particular locality, a wide range of saleableness both in time and place

But it is admitted, that there is no better method of enlightening any one about his economic interests than that he perceive the economic success of those who use Carl Menger 37 the right means to secure their own. Hence it is also clear that nothing may have been so favourable to the genesis of a medium of exchange as the acceptance, on the part of the most discerning and capable economic subjects, for their own economic gain, and over a considerable period of time, of eminently saleable goods in preference to all others. In this way practice and a habit have certainly contributed not a little to cause goods, which were most saleable at any time, to be accepted not only by many, but finally by all, economic subjects in exchange for their less saleable goods; and not only so, but to be accepted from the first with the intention of exchanging them away again

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,” or “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.8

On the other hand, he who brings other wares than money to market, finds himself at a disadvantage more or less.

. The reason why the precious metals have become the generally current medium of exchange among here and there a nation prior to its appearance in history, and in the sequel among all peoples of advanced economic civilization, is because their saleableness is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary functions of money.

There is no centre of population, which has not in the very beginnings of civilization come keenly to desire and eagerly to covet the precious metals, in primitive times for their utility and peculiar beauty as in themselves ornamental, 45 46 On the Origins of Money subsequently as the choices materials for plastic and architectural decoration, and especially for ornaments and vessels of every kind.

The commodities, which under given local and time relations are most saleable, have become money among the same nations at different times, and among different nations at the same time, and they are diverse in kind. The reason why the precious metals have become the generally current medium of exchange among here and there a nation prior to its appearance in history, and in the sequel among all peoples of advanced economic civilization, is because their saleableness is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary functions of money. There is no centre of population, which has not in the very beginnings of civilization come keenly to desire and eagerly to covet the precious metals, in primitive times for their utility and peculiar beauty as in themselves ornamental, 45 46 On the Origins of Money subsequently as the choices materials for plastic and architectural decoration, and especially for ornaments and vessels of every kind. In spite of their natural scarcity, they are well distributed geographically, and, in proportion to most other metals, are easy to extract and elaborate. Further, the ratio of the available quantity of the precious metals to the total requirement is so small, that the number of those whose need of them is unsupplied, or at least insufficiently supplied, together with the extent of this unsupplied need, is always relatively large — larger more or less than in the case of other more important, though more abundantly available, commodities. Again, the class of persons who wish to acquire the precious metals, is, by reason of the kind of wants which by these are satisfied, such as quite specially to include those members of the community who can most efficaciously barter; and thus the desire for the precious metals is as a rule more effective. Nevertheless the limits of the effective desire for the precious metals extend also to those strata of population who can les effectively barter, by reason of the great divisibility of the precious metals, and the enjoyment procured by the expenditure of even very small quantities of them in individual economy. Besides this there are the wide limits in time and space of the saleableness of Carl Menger 47 the precious metals; a consequence, on the one hand, of the almost unlimited distribution in space of the need for them, together with their low cost of transport as compared with their value, and on the other hand, of their unlimited durability and the relatively slight cost of hoarding them. In no national economy which has advanced beyond the first stages of development are there any commodities, the saleableness of which is so little restricted in such a number of respects — personally, quantitatively, spatially, and temporally — as the precious metals. It cannot be doubted that, long before they had become the generally acknowledged media of exchange, they were, amongst very many peoples, meeting a positive and effective demand at all times and places, and practically in any quantity that found its way to market

Under such circumstances it became the leading idea in the minds of the more intelligent bargainers,and then, as the situation came to be more generally understood, in the mind of every one, that the stock of goods destined to be exchanged for other goods must in the first instance be laid out in precious metals, or must be converted into them, or had already supplied his wants in that direction.

This development was materially helped forward by the ratio of exchange between the precious metals and other commodities undergoing smaller fluctuations, more or less, than that existing between most other goods, — a stability which is due to the peculiar circumstances attending the production, consumption, and exchange of the precious metals, and is thus connected with the so-called intrinsic grounds determining their exchange value

y. Finally the precious metals, in consequence of the peculiarity of their colour, their ring, and partly also their specific gravity, are with some practice not difficult to recognise, and through their taking a durable stamp can be easily controlled as to quality and weight; this too has materially contributed to raise their saleableness and to forward the adoption and diffusion of them as money.

The difficulties experienced in the commerce and modes of payment of any country from the competing action of the several commodities serving as currency, and further the circumstance, that concurrent standards induce a manifold insecurity in trade, and render necessary various conversions of the circulating media, have led to the legal recognition of certain commodities as money (to legal standards). And where more than one commodity has been acquiesced in, or admitted, as the legal form of payment, law or some system of appraisement has fixed a definite ratio of value amongst them. All these measures nevertheless have not first made money of the precious metals, but have only perfected them in their function as money

One possible explanation is that a powerful ruler realized, either on his own or through wise counselors, that instituting money would benefit his people. So he then ordered everyone to accept some particular thing as money.

There are several problems with this theory. First, as Menger pointed out, we have no historical record of such an important event, even though money was used in all ancient civilizations. Second, there’s the unlikelihood that someone could have invented the idea of money without ever experiencing it. And third, even if we did stipulate that a ruler could have discovered the idea of money while living in a state of barter, it would not be sufficient for him to simply designate the money good. He would also have to specify the precise exchange ratios between the newly defined money and all other goods. Otherwise, the people under his rule could evade his order to use the newfangled “money” by charging ridiculously high prices in terms of that good.

footnote: Notice that fiat moneys have always emerged through their initial ties to commodity moneys. For example, we can trace back the purchasing power of U.S. dollar bills until the point when the notes were redeemable in gold or silver, and at that point we need merely explain the purchasing power of gold and silver.

The Necessity for a Value Independent of the Monetary Function before an Object can serve as Money

If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use. This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless2 and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

This link with a pre-existing exchange-value is necessary not only for commodity money, but equally for credit money and fiat money.3 No fiat money could ever come into existence if it did not satisfy this condition. Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money-substitutes already in circulation, i.e., claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting-point for their valuation lay in the objective exchange-value that they had at the moment when they were deprived of their character as claims. The other possible case is that in which coins that once circulated as commodity-money are transformed into fiat money by cessation of free coinage (either because there was no further minting at all, or because minting was continued only on behalf of the Treasury), no obligation of conversion being de jure or de facto assumed by anybody, and nobody having any grounds for hoping that such an obligation ever would be assumed by anybody. Here the starting-point for the valuation lies in the objective exchange-value of the coins at the time of the cessation of free coinage.

Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange-value has ceased to exist. Its value then is based entirely on its function as common medium of exchange.1

It is erroneous to object to our theorem, which may be called the regression theorem, that it moves in a vicious circle.8

It says: This always happens when the conditions appear; whenever a good which has not been demanded previously for the employment as a medium of exchange begins to be demanded for this employment, the same effects must appear again; no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.

As has been mentioned already, the obliteration of the memory of all prices of the past would not prevent the formation of new exchange ratios between the various vendible things. But if knowledge about money’s purchasing power were to fade away, the process of developing indirect exchange and media of exchange would have to start anew. It would become necessary to begin again with employing some goods, more marketable than the rest, as media of exchange. The demand for these goods would increase and would add to the amount of exchange value derived from their industrial (nonmonetary) employment a specific component due to their new use as a medium of exchange. A value judgment is, with reference to money, only possible if it can be based on appraisement. The acceptance of a new kind of money presupposes that the thing in question already has previous exchange value on account of the services it can render directly to consumption or production. Neither a buyer nor a seller could judge the value of a monetary unit if he had no information about its exchange value — its purchasing power — in the immediate past.

However, there is no praxeological difference between a medium of exchange and money. For the difference here boils down merely to one of how one defines the word “money,” and to what extent the medium in question is accepted in the market in order to meet the definition. Menger (2009, p. 11) defines money as the “universal medium of exchange,” meaning it must be accepted by everyone, while Mises (1998, p. 398) more reasonably maintains it must be “generally-accepted and commonly-used,” leaving some room for the possibility that not everyone need be willing to accept it.

The error in this argument is to be found in its regarding the utility of money from the point of view of the community instead of from that of the individual.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity.

Bitcoins are known to be a medium of exchange today. This proves that the regression theorem must apply to them even if it is hard to understand the original demand.3] It is also empirically known that they were sold for dollars before ever being used as a medium of exchange.4 This confirms what must necessarily have been true according to the regression theorem.

The correct approach, I think, was hinted at by Šurda, who obliquely says, “According to my opinion, the rational expectations of the potential utility of Bitcoin for the potential buyers exceeded the price demanded by the producers, and trade emerged”.10 Bitcoins would have had value to the person with the right entrepreneurial mindset.

A suspicion that Bitcoin might one day be a big deal explains everything about its original demand. selgin

For, as I explain in my paper on “Synthetic Commodity Money,” its otherwise modest achievement proves that, with the help of the right software, one might design an “ideal” money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes–be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it’s only a possibility. But what a possibility!

In addressing this, I will attempt to account for the emergence of bitcoins in terms of the monetary regression theorem. In doing so, I will argue that 1) the existence of bitcoins does not and could not challenge the regression theorem and 2) the regression theorem does not constitute any particular problem for bitcoins in terms of economic theory.

The regression theorem explains how a good can gain an initial value as a medium of exchange. The theorem states that to do so, the good must have at a point prior to acquiring medium-of-exchange value some other value as a good in itself, a direct-use value and then also an actual or potential direct-exchange (“barter”) value. Yet many observers have found themselves challenged to find any “direct-use value” in bitcoins. These objects appear to have value only as a medium of exchange.

First, the regression theorem is a praxeological statement. It does not admit of any qualifications in the form of value judgments on the part of observing economists. Therefore, the only challenge for the regression theorem/bitcoin relationship is to find any direct-use or direct-exchange value prior to and separable from the emergence of indirect-exchange value. S

As a praxeological statement, the monetary regression theorem is not threatened at all by the existence of bitcoins, nor are they threatened by it; the two merely gaze across the intellectual landscape at one another with knowing smiles. If we understand the regression theorem clearly, we already know that there must have been some direct-use and direct-exchange values, because 1) having them is a prerequisite for becoming a medium of exchange and 2) bitcoins are a medium of exchange.

Our challenge, then, is not to “test” our regression theorem as if it were a hypothetical “theory,” but rather to stretch our interpretive capabilities to the demands of the empirical case at hand. Our question as economists is not, “Was there a prior direct-use value?” but rather “What was it?”

Thus, even if every single interpreter, including myself writing now, were to end up failing to find any prior direct-use or direct-exchange values, we would still know that bitcoins had had one.

Consider, for example, the geek value hackers find in creating and attempting to crack encryption codes of any kind: “Dude, look at this code; I bet you can’t crack it,” may indeed be more highly valued to some people in some contexts than certain “real” economic objects or specific quantities of fiat money. Regardless of any potential future indirect-exchange value, one can imagine such persons expending hundreds of hours of effort in creating and breaking encryption codes, just because they like to. This may be true, separate from any degree of dependence on any particular expectations of future exchange values of code objects.

Even now, well after their initial emergence, there appears to be a “mystique value” and a “curiosity value” attached to bitcoins among widening circles of newcomers who, compared with founders and earlier adopters, tend to understand the underlying mechanics of the system less and less, but have the impression that participation is a way to be proud and to send a message of being techno-savvy, up to date, in the know, etc.

In other words, mere possession, knowledge, and use can carry social membership signaling functions in various sub-cultures, much as wearing certain styles of clothing does. These are also direct-consumption values to those concerned with such signaling. Direct-use values, whether psychological or sociological, do not have to be recognized by anyone other than those in a given sub-culture actually doing the valuing

But there is no a priori reason why any “good” or even “thing,” whatever it may be, cannot serve as a medium of exchange, provided it is scarce and satisfies other key monetary characteristics such as durability (not physical, but temporal!), divisibility, and fungibility (interchangability). The quality of tangibility was also characteristic of historical monetary-emergence patterns, but it is scarcity rather than tangibility that is the essential quality for a good. This should have become especially clear at the very point that we observed some intangible, scarce object actually serving as a medium of exchange!

There is also no reason that some initial transactions of bitcoins may not themselves have had characteristics of barter rather than indirect exchange. “I’ll give you two slices of pizza for a bitcoin” just because I want to have a bitcoin, is a barter transaction, not an indirect-exchange transaction. And indeed, it appears that perhaps the first “real” bitcoin transaction was a somewhat legendary swap of a large block of coins for a pizza. According to the Bitcoin Wiki’s history entry for 21 May 2010, “Laszlo first to buy pizza with Bitcoins agreeing upon paying 10,000 BTC [currently exchangeable for about $310,000] for ~$25 worth of pizza courtesy of jercos.”

I might also want a bitcoin for any reason I feel like having one. I might want to just study it and see how it works or collect it as a virtual souvenir or trophy. I might want to use some of its code string as T-shirt art. I might want to stay up nights trying to crack the system because it’s there, like the proverbial unclimbed mountain. I may just want to feel cool and smart by having a bitcoin and telling friends about it. None of these purposes constitutes an indirect-exchange purpose. These are all direct uses.

A hypothetical total evaporation of the exchange value (through some successful crackdown or “impossible” system failure) would also diminish most of the aforementioned geek coolness, curiosity, collector, and social signaling values right along with it. The scale and independence of the direct-use values are tenuous and apparently tied tightly to the indirect-exchange value. This may be why some observers have missed these components altogether or just do not trust them. If indirect-exchange value is really all that remains, a crash could well indeed take the money down to zero exchange value and extinction as a money.

All one needs to show to erase the alleged regression-theorem/bitcoin paradox is that direct-use and direct-exchange values were present: 1) at all (no degree-of-presence judgment is relevant); 2) at the very beginning (not needed later), and 3) within the value scales of the actual persons involved in creating and dealing with the objects early on (not within the value scales of later users or later economists).

Based on the above considerations, it appears that the regression theorem and bitcoins need have no quarrel with one another. Just because the direct-consumption value components were (and are) psychological or sociological in the sense of pertaining to factors such as inherent geek appeal, professional challenge to specialists, curiosity, and membership signaling, does not mean they were therefore non-existent. And existent was all they ever had to be.

And yet, in their physical nature, they are scarce because if someone did want them, and they thus became goods, there could be contests over their possession and use.

The entire purpose of the regression theorem was to help explain an apparent paradox of money: how does money have value as a medium of exchange if it is valued because it serves as a medium of exchange?

The essential point is that once exchange can occur between a money (USD) and Bitcoins, providers of goods have a means by which to value Bitcoins as a potential medium of exchange. The money regression is satisfied, because taken back far enough we reach traditional commodity money: BITCOINS -> USD -> MONETIZED GOLD & SILVER [start monetary economy] -> [end barter economy] COMMODITY GOLD & SILVER.

Of course, if a major meltdown occurred and knowledge of all price ratios was wiped out, Bitcoin probably would NOT directly emerge as a money (assuming Bitcoins have limited value outside of exchange). Fiat currencies with zero direct barter value certainly would not. Commodities such as gold and silver that have widely recognized direct value in barter would likely emerge first.

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.

(I’m using the word scarce here to only mean limited potential supply)

The Regression Theorem, as developed by the economist Ludwig von Mises, solves a particular problem in understanding the emergence of money. Because the demand for money comes from one’s ability to use it in trade for other goods, i.e. from its exchange value, and because this exchange value is in turn based on people’s willingness to accept it in exchange for goods, i.e. on its demand, we are met with an infinite regress if we simply attribute demand to exchange value, and exchange value to demand. Now, we can see in real life that these two things are based on one another in an economy where money operates, but the question is: how could this relationship come into existence? Why would someone demand a commodity for use in future exchange when no commodity is generally accepted as a medium of exchange? If a generally accepted medium of exchange is not already existence, one cannot be sure that he can eventually offload a good which he does not desire for his own employment. Only the barter of directly desired goods would exist as a common transaction. How then, did money come about?

From this process of the most marketable goods being accepted due to the demand for their direct uses, such goods become generally accepted as money due to their common use as exchange goods. Here the Regression Theorem explains, purely through logic, how money could arise from an environment lacking a generally accepted medium of exchange. The most important thing to take from the Regression Theorem for our purposes, however, is the fact that in order for goods to become money — generally accepted media of exchange — they must have been demanded for their non-exchange value, whatever that might be. That non-exchange value does not have to be direct consumption use, but might for example be a good’s ability to facilitate the exchange of true money, as in the case of the use of gold certificates that represent gold but are only paper, and from which we can explain the origin of modern fiat currency

As I have said above, it seems to me that there is in fact no contradiction with the current demand for Bitcoin and the Regression Theorem. All we need to do in order to explain this fact is to understand the reasons for this demand.

One theory attempting to explain this argues that it is the demand created by speculation on the future price of Bitcoin which allows for Bitcoin’s exchange demand

In the same way, Bitcoin has established a reliable transfer with fiat currencies (akin to redeeming gold certificates for gold), and can ease the use of those currencies. This is what makes Bitcoin different from any traditional kind of private fiat currency.

The high degree of anonymity that Bitcoin provides is probably the chief factor in its ability to facilitate the use of already existing money, but we can also point to Bitcoin’s low inflation rate and security as advantages over trading directly in fiat money.

The speculation theory gives only one possible reason for the initial demand for Bitcoin, in line with the Regression Theorem. It could be that the non-exchange demand for Bitcoin is a result of some other cause altogether, which has eluded this writer. The fact of the matter, however, is that there is indeed demand for Bitcoin, and, furthermore, that we needn’t throw out the logic of the Regression Theorem of Money as a consequence of that fact. Although it cannot be foreseen whether Bitcoin will rise in popularity and become an even more generally accepted medium of exchange, or on the other hand collapse and disappear from use, there is nothing in theory that prevents either of those outcomes from occurring. That is an empirical matter and cannot be known from theory alone.


The Austrian School however uses a more precise denition: money is the most universal medium of exchange, the most liquid good (Mises (1912)): Thus there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. [emphasis added]

Similarly, it is argued by Menger (1871) that: But it appears to me to be just as certain that the functions of being a measure of value and a store of value must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

Even though not money, Bitcoin is a medium of exchange. A non-universal medium of exchange is classied by the Austrians as secondary medium of exchange, as described by Mises (1999): Consequently there emerges a specic demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specic demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render. [emphasis added]

(mises 1912)

We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name at money to money that comprises things with a special legal qualication.25 [emphasis added]

Money substitutes are dened as (Mises (1912)): The special suitability for facilitating indirect exchanges possessed by absolutely secure and immediately payable claims to money, which we may briey refer to as money substitutes, is further increased by their standing in law and commerce.26 [emphasis added]

footnote: 25Mises also denes a third category, credit money, . . . being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no dierence between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them. In some way or other the maturity of these claims must be postponed to some future time. When Mises was writing this, pure at money did not exist yet, only credit money. Currently, the situation is reversed: all national currencies are pure at monies and the concept of credit money is of little practical use. For the purposes of this thesis, I will therefore ignore the category credit money.

Even stronger example of this unclarity is Salerno (2010), who presents both of these denitions in the same sentence: . . . perfectly secure and immediately convertible claims to money, such as bank notes and demand deposits, which substitute for money in individuals’ cash balances.

Mises (1912) writes how the utility (value) of money decreases as its quantity increases: An increase in a community’s stock of money always means an increase in the amount of money held by a number of economic agents, whether these are the issuers of at or credit money or the producers of the substance of which commodity money is made. For these persons, the ratio between the demand for money and the stock of it is altered; they have a relative superuity of money and a relative shortage of other economic goods. The immediate consequence of both circumstances is that the marginal utility to them of the monetary unit diminishes. [emphasis added]

3.5 Mises’ regression theorem 3.5.1 Introduction The purpose of the regression theorem is to explain how money (or media of exchange in general), achieve prices. A short version of the regression theorem is presented by Mises (1912): Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function. The point Mises is making is that the origins of money are a market phenomenon: This provides both a refutation of those theories which derive the origin of money from a general agreement to impute ctitious value to things intrinsically valueless and a conrmation of Menger’s hypothesis concerning the origin of the use of money.

On the other hand, Murphy (2012) admits that the Mises’ Regression Theorem applies to media of exchange in general, not only to money. So if Bitcoin is a medium of exchange, then either the regression theorem is

outright wrong, or is misunderstood and Bitcoin adheres to it. Murphy dismisses the claims that Regression Theorem refutes Bitcoin outright. So even if the regression theorem is used as a method to oppose Bitcoin, the methodologically correct argument would have to be that Bitcoin is not a medium of exchange.50

rothbard: Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established

Murphy (2012) argues that ideological (e.g. libertarian, anti-at-money, anti-fractionalreserve-banking) bias of Bitcoin’s proponents, and speculation could have created the initial demand.52 Similarly, Matonis (2011) argues that opposition to at money and/or current banking system and the economic depression as the most important reason for the rise of Bitcoin. jahabdank (2011) argues that transaction costs are the reason why Bitcoin has utility and this also could have aected initial demand

Bitcoin adheres to the Austrian theory of the catallactic origin of money. It is not (yet) money, merely a medium of exchange. However it already passed the thresholds that must praxeologically precede the function of medium of exchange: the emergence of price (which was originally based on production costs), and the emergence of liquidity (which was probably motivated by rational expectations and libertarian bias of its early adopters)

From a praxeological perspective, it is clear from the foregoing discussion there are two separate circumstances in which a new medium of exchange can start to function as a means of calculation and unit of account: (1) The new medium emerges from a pure barter economy, in which case it must have some previous direct-use value, or (2) it emerges when there is an existing money-price structure in place, or at least the memory of one.

Those who seek to determine if bitcoin violates the regression theorem, by asking whether or not it has been valued directly, are barking up the wrong tree. Bitcoin does not need to have a direct-use value in order to be a medium of exchange, because it did not emerge from a pure barter economy. This medium of exchange therefore does not violate the theorem. Clearly, it does have such a value, because it was directly exchanged for other goods, including the U.S. dollar.