“Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence” — Carl Menger, Principles of Economics.
The Theory of The Goods
In his book “Principles of Economics”, Carl Menger explains different economic theories that serve as a base in understanding the key factors that go into every economic act. Before we dig deep into the Theory of Money, it is important to understand Carl Menger’s Theory of The Goods. Carl Menger talks about the cause of the progress of Human welfare and taken from Adam Smith he claims that it is the division of labour that leads to such progress. According to Menger, a good’s purpose is to ultimately satisfy a specific human need. Moreover, goods have multiple orders. Goods of first order being goods that are used to satisfy direct needs, i.e bread and other so called consumption goods, goods of second order being goods used to create other goods of first order, i.e flour which is used to produce bread. The orders do not stop here, as in certain instances there could be goods of third order, fourth order and so and so forth. When talking about the progress of Human welfare, Adam Smith relates its success to the division of labour based purely on the production of goods of first order, while totally ignoring the production of goods of higher order. This is where Carl Menger’s theory differs from the classical liberal theory of Adam Smith. Carl Menger’s division of Labour is based on the division in producing goods of all different orders based on the needs of the economic individuals. While individual A is working as a fisherman in a specific commune or tribe, Adam Smith’s view in what leads them to the progress of human welfare is only if individual B is working as a hunter and thus producing another good of first order. However, the Austrian view of Carl Menger claims there should also be an individual C working to produce an advanced fishing rod that could help individual A in their profession as a fisherman to produce more and higher quality fish or in other words produce more and better goods of first order thanks to the effort put in producing a good of second order. The Theory of The Goods suggested by the father of the Austrian School of economics, Carl Menger, has a direct effect on the shape of his Theory of Money.
The Rise of Money
Primitive trade started by individuals basing their entire trading on use value traded goods. Individuals would trade goods that have a smaller use value with goods that have a greater use value, in each individual’s perspective and subjective needs. The constant need to search for an individual who had the goods you need to satisfy your needs while the goods you are offering also satisfy their needs, led to the slowdown of progress of the division of labour because of the low demand for production goods that can be used for future sale (goods of higher order). This problem pushed individuals to trade their goods for marketable commodities a.k.a saleable goods instead of struggling to find goods that satisfy their current or direct needs. With time, the marketable commodity turned into different forms of money, a good that can be used to acquire any other good. Saleability is the first and most important factor in determining what could be used as money according to Carl Menger’s Theory of Money.
Bitcoin as A Saleable Good
Bitcoin is saleable across space, time and scale. Bitcoin can be easily transferred from one bitcoin wallet to another, without incurring high transferring costs and without any limitations on transfers. Anywhere you are in the world you can transfer your bitcoins to any different location. Bitcoin is also saleable across time. When you earn bitcoin, unlike other goods for consumption purpose, you can use it for later purchases. If you receive an apple, you must consume it within a specific time frame before it rots, hence you cannot trade a 2 months old apple for a fresh orange. While Bitcoin does not rot, you can always store it and use after any specific time frame. Bitcoin is also saleable across scale. It is true that Bitcoin’s indefinite supply is 21 Million coins, but 1 Bitcoin can also be divided into 100,000,000 satoshis or even more if needed, hence the bitcoin holder would use satoshis to satisfy small payments. In contrast, land for example, is very a valuable asset, but land is not saleable across scale, landowners cannot divide their land into smaller lands in order to pay for goods of low value.
The Shift from Cattle to Coinage
As discussed above, the emergence of money took shape when people started trading saleable goods for goods that have a high use value in their very own perspective. One of the earliest and long used forms of saleable goods as money is cattle. Although cattle do not necessarily satisfy the saleability across time and scale functionality as much as bitcoin or other modern forms of money do, it did satisfy it more than other goods during that time, but more importantly cattle satisfied the saleability across space functionality. During the tribal era for instance, cattle made it possible for people to move around with their money (or wealth) and more importantly cattle were a universal good, in the sense that everyone understood the use value of cattle, hence it was easy for people to exchange specific goods and value them in quantities of cattle everywhere in the world.
With the rise of civilization and progress of division of labour, cattle’s marketability decreased in relative to metallic commodities. Metallic commodities were not only more divisible and durable than cattle, hence they satisfy the saleability across time and scale functionalities, but they also beat cattle in one of its main reasons behind its adoption and that is having a better saleability across space. Moving around small pieces of silver, copper or gold was by far more convenient and possible in a civilized society than moving around cattle.
But how did we get an understanding of the use value of coins during the shift from cattle to coinage? The transition did not happen suddenly with a top down approach, the then newer metallic standard was used in parallel with the older cattle standard. Having a value for an animal in metallic money served as a basis for the unit after the cattle standard became obsolete and replaced by the metallic standard. Carl Menger gives the example of The Debakion, Tessearbion, and Hekatomboin which are coins of the early metallic standard of the Greeks, along with other forms of metallic coins used by the Romans and Gauls. These coins had a picture of an animal designating the value of the said coins in the older cattle standard. This is exactly how the metallic standard took over.
The Shift from Fiat to Bitcoin
Theoretically speaking, Fiat is saleable across space, time, and scale. However, in practice there has been a long history of Fiat’s inability to reach its full saleability potential. This is mainly due to the fact that fiat requires a third party’s meddling in order to accomplish its saleable character. The US Dollar can be considered a universal fiat, as paying to a foreign country with another national money (like the Lebanese Pound) requires the central bank the issuer of national money to have enough US Dollar reserves to complete the transaction. If the central bank does not have enough US Dollars in its vaults, the national fiat loses its character as money that is saleable across space. This could be even applied to the US Dollar holder, due to the fractional reserve banking system, your bank could perform capital controls on your funds and forbid you from moving your US Dollars from your bank account.
Moreover, the third party between you and your money can ruin their saleability across time character. Since national fiat can be printed without it being backed by any hard commodity like gold, the central bank can ruin the value of your savings in fiat.
Bitcoin on the other hand does not require any third-party meddling. Bitcoin is 100% saleable as mentioned earlier. As a matter of fact, the more fiat is proving its non-saleable nature, the more people are starting to look for the Bitcoin alternative. Bitcoin came in as a solution for those who wanted to move their money but they could not either due to capital controls or sanctions, and Bitcoin’s 21 Million supply came in as a solution for those who want save their money on the long run. On top of all this the fiat standard simply can never survive in a globalized, borderless free market economy just like the cattle standard could not survive the rise of civilization.
As of now, bitcoin is valued in fiat, based on the supply/demand mechanism and mining difficulty. This is similar to the phenomenon mentioned by Carl Menger, when earlier civilizations shifted from the cattle standard to the metallic standard. The metallic standard is more convenient because of its better saleable nature than the cattle standard, meanwhile the whole process did not happen abruptly. If history were to repeat itself, we will be witnessing a dual standard of Fiat vs Bitcoin for a long time before the complete abolishment of fiat.