The Importance of Community in the Creation of Money

Menger wrote in Geld, 1909, that “what is money for one people is not necessarily money for other peoples, and what previously use to be money is nowadays often a commodity like any other.”  Every economic group or community can choose what their means of payment is.

The importance of community to the creation of money cannot be understated, but often is. Money creation can happen either through a spontaneous order adoption—gold is money again spontaneously in Southern Venezuela—or through bureaucratic-state induced adoption.

The Importance of Community in the Creation of Money

The Austrian View from Menger, Mises, and Rothbard

The question of  “what is or what is not money?” is determined by an an economic good’s function and position as an intermediary of trade in an economic community. Money is identified as a generally accepted medium of exchange. Not just any medium of exchange, but a generally accepted one. This would be an asset that you own and you would find it surprising if any seller in a specific economic community would not accept it as payment.

“It is likewise irrelevant for the general concept of money whether an object of trade has acquired the above functions automatically or by some sort of compulsion,” Menger explained.

Therefore, the process or mechanism of adoption one asset goes through to become a group’s generally accepted medium of exchange, is independent of whether that asset is or is not money. The concept of a generally accepted medium of exchange is a different topic from how an asset becomes monetized.

Economic goods cannot be money in themselves

The creation of money is like the evolution of language

“No thing is in itself money,” said Menger, “because, for example, of its material and its technical or external form, let alone because of mere acts of will of rulers.”  No economic good can be a generally accepted medium of exchange just by its properties.

First, a group of sellers must accept it as payment, so that economic good can become money for that group of sellers and, therefore, for their customers. Money, like language and even social media, is a network good.

To create money, a network of people—a community—must use it as a payment asset, then that asset becomes money.

One of the challenges for the Bitcoin community is to develop a community of sellers that accept Bitcoin as a payment. In the Austrian view, not even Bitcoin can be considered money in El Salvador, because Bitcoin is not yet generally accepted as a medium of exchange.

First, because of general technological challenges and second because the Bitcoin Law was in fact used to make the ChivoWallet—Bukele’s “Fiscal Central Bank”—a provider of dollar-denominated government currency debt similar to a checking account balance, but in a government bank with an app that uses Bitcoin as a façade.

Continuing with the concept of money, Menger expanded over time his early work on monetary phenomena to communicate that,

“a good of whatever kind, be it a commodity previously serving consumption or technical production, a raw material or a finished product, a metal weighed out, or a document capable of circulating, becomes money when and insofar as in the historical development of a people’s trade in goods it actually acquires the function of a generally used intermediary of exchanges.”

Thus, this economic good that competes with other goods to be the most tradeable good, by assuming a distinct intermediary position in the trade of an economic community–or economic network–becomes distinct to all other economic goods because the trade among the latter is mediated by the former: money is the tradeable good that mediates the exchange of other tradeable goods.

“For the general concept of money it makes no difference whether a traded good performs the above functions more or less perfectly or inadequately,” Menger continues.

Communities create money based on what they generally accept

The importance of the community is in their individual preferences

As soon as and as for long as an asset intermediates trade in an economic group, then that asset is money—for that group—whether it functions well or badly, whether it is sound or pathological. The assignats and mandats of the French government in the 1700s, or any other depreciating generally accepted medium of exchange throughout history, for sure functioned badly in the last stages of their circulation. But they were pathological money, not something different than money. They were money because as Ludwig von Mises said:

“Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function.”

Moreover, the assignats and mandats circulated exclusively because of an unjust legislation that coerced their use on the economic community; a complete abuse of the prerogative and legal privileges of the French nation-state from back then.

Still, so long as they actually performed the function of general intermediary of trade then they were money, because as Rothbard said, that although “many textbooks say that money has several functions…it should be clear that all of these functions are simply corollaries of the one great function: the medium of exchange.” Pathological money can, is, and was money. The worse money is still money.

Therefore, our focus should be on creating communities that use sound monetary institutions and promoting the same institutions throughout other communities.

I hope Menger, Mises, and Rothbard have been helpful in understanding money as a network good, because–as Vijay Boyapati said—“the value is in the network.”  Therefore, our focus should be on creating communities that use sound monetary institutions and promoting the same institutions throughout existing communities.

When it comes to money, the importance of community cannot be ignored.

References

Latzer, Michael, and Stefan W. Schmitz, eds. Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money. Cheltenham, UK: E. Elgar Pub., 2002/1909.

Mises, Ludwig Von. Human Action: A Treatise on Economics. Edited by Bettina B. Greaves. Indianapolis: Liberty Fund, Incorporated, 2014/1949.

Rothbard, Murray N. What Has Government Done to Our Money?: And, the Case for a 100 Percent Gold Dollar. Ludwig von Mises Institute, 2005/1963.