According to popular view people accept money because of a government decree.1 A government decree it is argued makes a particular thing accepted as a general medium of exchange. But, does it make sense?
Demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them. It is different with money people demand it not for direct use in consumption but in order to exchange it for other goods and services.
Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services. Money is demanded because the benefit it offers is its purchasing power (i.e., its price). Consequently, for something to be accepted as money, it must have a pre-existing purchasing power, a price. So how does a thing that the government proclaims will become the medium of the exchange, acquire such a purchasing power, a price?
In his writings Carl Menger raised doubts about the soundness of the view that the origin of money is government proclamation. According to Menger,
An event of such high and universal significance and of notoriety so inevitable, as the establishment by law or convention of a universal medium of exchange, would certainly have been retained in the memory of man, the more certainly inasmuch as it would have had to be performed in a great number of places. Yet no historical monument gives us trustworthy tidings of any transactions either conferring distinct recognition on media of exchange already in use, or referring to their adoption by peoples of comparatively recent culture, much less testifying to an initiation of the earliest ages of economic civilization in the use of money.2
This post was published at Ludwig von Mises Institute on August 1, 2017.
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