Lesson 6 of 7
Nobody decided
Menger has money emerging from ordinary self-interested trades, with the state arriving afterwards. The rival account is stated too.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Menger's engine is saleableness: goods differ in how easily they can be sold without giving ground on price, and traders notice.
- Accepting a more saleable good you do not want, because it trades onward more easily, is individually sensible. Money is what that habit turns into when enough people have it.
- The rival account puts the origin in the state, in the unit of account it names and the payments it will accept. Knapp argued it in 1905, the dispute is live, and nothing here settles it.
Menger asks a question that sounds naive and is not: why would a person part with something useful for a metal disc they cannot eat or wear. He answers it twice, in chapter VIII of Principles of Economics and in an essay in the Economic Journal in 1892.
How a medium of exchange appears without anyone proposing one
- 1Direct barterNeeds two people who each want what the other has
- 2Goods differ in saleablenessSome sell easily at close to the going price, some do not
- 3Take the saleable goodAccept it although you do not want it, because it trades onward
- 4The habit spreadsOthers do the same for the same reason
- 5A medium of exchangeOne good is now taken by almost everyone
The problem with barter, stated properly
Menger's objection to direct exchange is not that it is inconvenient. It is that it requires a coincidence. Two people must each hold something the other wants more than what they hold, at the same moment, in the same place. He works through how rarely that happens in chapter VIII, and the rarity is the engine of everything that follows.
Saleableness is the idea
The 1892 essay names the property that does the work: goods differ in how readily they can be sold, in the quantity you hold, without accepting a worse price. A common grain sells easily. A specialist item may find a buyer only after a long wait or a large concession.
The move is then simple. If you cannot trade directly, take something more saleable than what you have, even though you do not want it, because it will trade onward. That is a better position and it takes no foresight about money at all. As more people do it, the saleable good becomes more saleable still, because acceptance is part of what saleableness means.
Menger then explains why precious metals ended up in that role: widely wanted, scarce, divisible, durable, cheap to move relative to value, and easy to judge. None of that requires a decree.
The state arrives afterwards
His conclusion is careful, and it is the sentence the essay is famous for without being a quotation: money in its origin is a social institution rather than a state one. He does not say the state is irrelevant. He says it perfects what already exists, by coining, by guaranteeing weight and fineness, and by naming what it will accept.
The objection, at full strength
There is a serious rival and it is not a footnote. Knapp, in The State Theory of Money, published in German in 1905 and in an abridged English translation in 1924, argues in chapter I that money is a creature of law. On his account the unit of account is nominal, defined by the state and carried forward across changes of material, and what makes something money is that the state proclaims it as the form in which obligations are discharged. He allows that metals circulated as exchange commodities before this, and denies that this stage was money.
There is also an empirical version of the objection, which is that the record of early societies shows accounting and obligation rather than the barter stage Menger's story begins from. This lesson does not adjudicate either. It marks that the dispute exists and is not settled, and the later critique course in this track returns to it.
Check yourself
What property does Menger's account of money turn on?
- Durability of metals
- Saleableness: how easily a good sells without conceding on price
- Legal tender status
Show the answer
Answer: B.
The 1892 essay makes differing degrees of saleableness the engine. Durability is one of several reasons metals scored well on it, and legal status comes later on his account.On Menger's account, what does the state do about money?
- It creates money by proclamation
- It perfects an institution that already exists, by coining and guaranteeing
- It has no role at all
Show the answer
Answer: B.
He treats money as social in origin and the state's contribution as later refinement. That is precisely the claim Knapp rejects.What is Knapp's rival claim?
- That barter never existed anywhere
- That money is a creature of law, with a nominal unit defined by the state
- That money must be backed by metal
Show the answer
Answer: B.
Chapter I of The State Theory of Money argues the unit of account is nominal and state-defined, and that what makes a thing money is the state's designation of it for discharging obligations.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter VIII, section 1, on the nature and origin of money, and chapter VII, section 2, on the different degrees of marketability of commodities.
- Menger, 'On the Origins of Money', Economic Journal, 1892, on saleableness, on the inadequacy of law or convention as an explanation, on why precious metals were selected, and on money as a social rather than a state institution.
- Knapp, The State Theory of Money, German original 1905, abridged English translation 1924, chapter I, on money as a creature of law and on the nominal, state-defined unit of account.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two-good example is invented to isolate the mechanism. It is not a historical claim about how any actual money began.
- Whether the historical record supports a barter stage at all is disputed by economists, historians and anthropologists. This lesson states both positions and settles neither.