The Theory Of Money In The Tradition Of Carl Menger

[Nielsio2]

I've written an article explaining the mechanics of money in the tradition of Carl Menger, the founder of the Austrian School of economics.

I cover what money is, as well as: the causal connection between goods, the marketability of commodities, the periodic table of the elements, and speculation.

http://nielsio.tumblr.com/post/41447049086/the-theory-of-money-in-the-tradition-of-carl-menger

 

I have left issues such as fiat currency and the regression theory for Part 2.

[TheRobin]

Interesting read.I still don't udnerstand why gold would fit the description needed for being considered "money".The demand for gold (especially in the middle ages or early inudstrial revolution) wasn't that high (or was it?), not many goods were produced with gold and only a small percentage of the actual gold in circulation was used to make those goods. Nowadays there's more usage to it, but back then, all that comes to my mind is goldsmiths making jewelry with it (which wasn't that high in demand, seeing as barely anyone had the money for such fancies).Also, out of curiosity: What would you trade your gold against with a goldsmith? Seeing as there you'd exchange one form of gold for another form of gold (which would imply that the value came from the form of the material in that trade not solely from the material itself).

[Nielsio2]

 

Interesting read.

Thank you.

I still don't udnerstand why gold would fit the description needed for being considered "money".
The demand for gold (especially in the middle ages or early inudstrial revolution) wasn't that high (or was it?), not many goods were produced with gold..

For something to be used in indirect exchange it doesn't necessarily need a high demand. All the other factors that go into making something attractive for indirect exchange can mitigate a possible low demand (quantity and frequency) of use in production. As long as there is a somewhat stable demand for it, and a somewhat developed exchange market for people who want to use it in production. That's the thing about (precious) metals: when they arrived they had unique characteristics unmatched by any other material. And over time, more and more uses developed for it. So I would estimate that over time the demand was stable and increasing.

Note that (

) it was silver that has been used as money more than gold. And before silver it was something else. Market conditions change.

..and only a small percentage of the actual gold in circulation was used to make those goods.

1. What do you base this on?

2. Gold can be stored for an extremely long time compared to other goods, while retaining its use case. If 1% of it is used every year, and 1% is mined every year, that doesn't pose a problem for its use in indirect exchange. And remember: the good only has to outperform the other good that producers want to sell for indirect exchange. It does not have to have a 'perfect' value (an ideal that really has no basis in subjective markets).

Nowadays there's more usage to it, but back then, all that comes to my mind is goldsmiths making jewelry with it (which wasn't that high in demand, seeing as barely anyone had the money for such fancies).

Also, out of curiosity: What would you trade your gold against with a goldsmith? Seeing as there you'd exchange one form of gold for another form of gold (which would imply that the value came from the form of the material in that trade not solely from the material itself).

 

Form can indeed raise subjectively perceived value. The raw material cost of my computer is minuscule compared to the market price it can attain on the market.

[TheRobin]

For something to be used in indirect exchange it doesn't necessarily
need a high demand. All the other factors that go into making something
attractive for indirect exchange can mitigate a possible low demand
(quantity and frequency) of use in production. As long as there is a
somewhat stable demand for it, and a somewhat developed exchange market
for people who want to use it in production.

Maybe I misunderstood your article somewhat then. Are you saying that people speculated on the longterm demand of gold then, as the basis for their use of money?

..and only a small percentage of the actual gold in circulation was used to make those goods.

1. What do you base this on?

That was more my guess than anything else. My reasoning was, that IF gold had been used too much to make goods, then it wouldn't have been good basis for money as the total amount of it would have been decreasing quickly. Another reason was that goldproducts (i.e. jewelry (I don't know of any pracitcal products at those earlier times)) could only be afforded by the aristocracy or rulers of the times, and since the ratio of rulers:rest is quite low I assumed a low demand in goldproducts as well relative to its use in exchange (which everyone else used it for).

Btw I'm looking forward to reading your part 2 on this

[Nielsio2]

Maybe I misunderstood your article somewhat then. Are you saying that people speculated on the longterm demand of gold then, as the basis for their use of money?

The longterm influences individuals in their choices in accepting something in indirect exchange. My point was that over the long-longterm, the demand was slowly increasing, which means that over the medium term demand was at minimum rather stable. Ofcourse, there could be periods and places where this was not the case. If in your region most people are turning to the monastic life, and trade with others slows down considerably, this has effects on indirect exchange as well.

That was more my guess than anything else. My reasoning was, that IF gold had been used too much to make goods, then it wouldn't have been good basis for money as the total amount of it would have been decreasing quickly.

There are market forces that counter overconsumption (through higher prices). See: 

Another reason was that goldproducts (i.e. jewelry (I don't know of any pracitcal products at those earlier times)) could only be afforded by the aristocracy or rulers of the times, and since the ratio of rulers:rest is quite low I assumed a low demand in goldproducts as well relative to its use in exchange (which everyone else used it for).

Even if precious metals were only used by the rich and by religious institutions, as long as the demand is stable enough, that would work.

But once you know what to look for, you'll find more.

See:

https://en.wikipedia.org/wiki/Silver#History

https://en.wikipedia.org/wiki/Silver#Folklore

https://en.wikipedia.org/wiki/Gold#Cultural_history

[Nielsio2]

The theory of money in the tradition of Carl Menger. Part II

http://www.vforvoluntary.com/articles/the-theory-of-money-in-the-tradition-of-carl-menger-part-ii.html

 

"In this part I will critique Rothbard’s theory of money (Rothbard is a follower of Ludwig von Mises on money, as far as I know), then I will apply Menger’s theory to fiat money, and lastly I will comment on the Bitcoin phenomenon based on what I have written up to that point."