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Refutation of Menger’s Theory of the Origin of Money by Stephen Zarlenga Director, American Monetary Institute P.O. Box 601, Valatie, NY 12184 518-392-5387 Attend the AMI Monetary Reform Conference Chicago, Sept. 21-24, 2006

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Refutation of Menger’s Theory of the Origin of MoneybyStephen ZarlengaDirector,American Monetary InstituteP.O. Box 601, Valatie, NY 12184518-392-5387http://www.monetary.orgami@taconic.netAttend the AMI Monetary Reform Conference Chicago, Sept. 21-24, 2006

Failure of economics to properly define the nature of money.Still argued: What is the essence of money?
  • Is it a concrete power deriving value from its material, in a commodity like gold?
  • Is it a monetized private credit issued by banks?
  • Is it an abstract social invention – a fiat of the law?
  • Is it some kind of hybrid?
the answer has been of great importance in determining society s monetary systems
The answer has been of great importance in determining society’s monetary systems:
  • An Intrinsic Commodity or a credit nature indicates private control could be tolerated.
  • An abstract legal nature – a legal institution - indicates governmental or societal control

is a necessary condition for economic justice.

three possible methodologies
Three Possible methodologies:
  • Theoretical method (logic and deduction)
  • Empirical method (Historical approach)
  • Anthropological approach (look for analogies)

Some animosity has arisen between practitioners of these three methods.


Ludwig Von Mises (theoretical approach)“Knapp ... as one of the standard bearers of historicism inpolitical economy, had thought that a substitute for thinking about economic problems could be found in the publication of old documents”


AlexanderDel Mar(historical/empirical method) “As a rule political economists ... do not take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.”


George Knapp:(historical approach)“I hold the attempt to deduce (the nature of money) without the idea of a state to be not only out of date, but even absurd.”(no photo found)


Carl Menger'sOrigin of MoneyAn attempt to theoretically deduce the market origin of money, without institutional beginnings.Menger excerpted his Origin from an earlier work, in 1892 when William Ridgeway published his extensive empirical work on the origins of monetary weights and standards.


Menger’s method is entirely theoretical.He makes no mention of places or times in support of his thesis.Indeed the only historical references are footnoted away to his earlier work, Principles of Economics, and only a few pages are referenced. Examining them we find brief descriptions of various commentators views on the origin of money, including Plato and Aristotle from antiquity, and Paulus from the Byzantine Roman Empire.In the referenced Menger work, he finally comes to what he considers historical support for his thesis, but in order to read it we are again footnoted off toyet another work, John Law's Money And Trade Considered. Only a few pages are indicated, but Menger assures us that John law has correctly figured out the question and is therefore the originator of “the correct theory of the origin of money“, coinciding with Menger's.However, the indicated pages of Money and Trade Considered, provide no historical material on the origin of money, but give more supposition, deduction, and description of the physical properties, mainly of silver, and its suitability as money.


Menger presents only four pieces of actual historical evidence. The first three are Commentaries fromAristotle, Plato and Julius Paulus.But these three commentaries don’t support him - they argue 180 degrees against his thesis and support the opposite view of an institutional nature of money, based on societal decision, not on market forces.This counter-evidence does not phase him in the least and he makes no comment recognizing that it is contra to his viewpoint.


Plato's description:Money is “a token for purposes of exchange.”Aristotle's description:“All goods must therefore be measured by some one thing... now this unit is in truth demand, which holds all things together ... But money has become by convention a sort of representative of demand; and this is why it has the name 'nomisma' - because it exists not by nature, but by law (nomos) and it is in our power to change it and make it useless.”Thus Menger is incorrect when he claims nomisma is based on the shape of the coin. The crucial nature of this error does strain belief.Julius Paulus' description:“A substance was selected whose public evaluation exempted it from the fluctuations of the other commodities, thus giving it an always stable external (nominal) value. A mark (of its external value) was stamped upon its substance by society. Hence its exchange value is based, not upon the substance itself, but upon its nominal value.”


Indeed, Menger's only historically based evidence is his assertion that:“Tested more closely, the assumption underlying (the governmental origin of money) gave room to grave doubts...(as) 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.”We aren't told exactly who had these “grave doubts”.Apparently then, Menger accepts the importance of factual historical evidence, and demands it from competitive theories. But he presents this lack of evidence not to support his theory but to undercut his opposition.


Menger's Reasoning: He sets out to explain the adoption of the precious metals as money by market forces, excluding the intervention of governments to make them a “product of convention and authority.“ He starts by asserting the difficulties of barter:Menger’s use of the “spread“: He points out that one usually purchases at the asked price and sells at the bid price. The difference between these prices is called the “spread.”Menger's Definition of Liquidity: He measures liquidity by the tightness of the spread between bid and asked prices, But Its important to note that Menger qualifies this: “again, account must be taken of the quantitative factor in the liquidity of commodities.”He then posits that a trader would tend to barter goods for more liquid ones, even if he didn't need the particular commodity, in an effort to eventually be able to barter the more liquid items for actually desired items By this market process, the most liquid commodities slowly, achieve the status of money, without “general convention or a legal dispensation” making it so. Then once certain commodities become “money“, they become even more liquid than other goods:“The effect produced by...goods...becoming money is widening the chasm between their liquidity and that of all other goods,” andaccording to Menger it is “only from this pointthat the state intervenes:”“And the ground of this distinction we find, lies essentially in that difference in the liquidity of commodities set forth above - a difference so significant for practical life and which comes to be further emphasized by intervention of the state.”That is Menger’s theoretical construct. He gives 6 causes of liquidity; 5 space or place factors affecting liquidity; and 7 time limits to a commodity's liquidity.

our critique of menger
Our critique of Menger
  • Critique of his theoretical method

Logic is not appropriate for determining an historical event.

Facts and Observation are needed.

  • Circularity of Menger’s reasoning

His 6 causes of liquidity reduce to 3: supply, demand, and the “development of the market” but development of the market is also a definition of liquidity and Menger uses it that way also. So Liquidity is caused by liquidity. He is in a circle. To really explain liquidity he would have to explain why supply, demand and markets develop for an item.

  • Menger’s choice of the spread for his

money determinant is wrong

The following charts demonstrate the error of using the spread as his determinant of money. He should have focused onvolatility!


Of Menger's 6 causes (see Appendix 1), points 1,2,and 6 really reduce to one point - the effective demand for the commodity. Point number 2 should refer to the trading power rather than purchasing power, as he is discussing a pre-monetary situation. Cause #6 would be entirely reflected in the effective demand.Causes #3 and #4 are reducible to the supply of the commodity.So we are left with 3 causes of liquidity - supply, demand, and his cause #5, the development of the market and of speculation in the commodity.The circularity arises from the fact that cause # 5 can be viewed as much as a defining element of liquidity, as a cause of it. And indeed Menger uses it in that way! This can be seen in Menger’s use of quantity or volume of trading, as a qualification of liquidity:“Again, account must be taken of the quantitative factor in the liquidity of commodities.”But the quantitative factor is a part of cause number 5 - the development of markets. Thus the tight spread and volume traded in the market (quantity) becomes his definition of liquidity. Thus liquidity, by one defining element of it (development of market mechanisms) causes liquidity by another defining element of it (the tight spread).So liquidity is caused by liquidity. I stress that I'm notreferring to the increased liquidity which a money commodity would exhibit by virtue of its becoming money. This is before it became money.


Volatility of the “precious“ metals1500 – 1650…. fell 80%1789 – 1809…. fell 46%1809 – 1849…. rose 145%1849 – 1875…. fell 20%1914 – 1917.… fell 65%1971 – 1974….rose 500% from $38 to $200 an ounce.1975 – 1976….fell 50%, from $ 200 an ounce to $103.1976 – 1981….rose over 700% to over $8801981 - 1990s multiyear decline to $232Now its reached $575 an ounce! (oops! back to $535) It’s not possible to explain these movements as due to changes in the dollar. Gold is volatile! Goldbugs: Get over it!!!


Menger's 2 sentence discussion of Aristotle's and Xenophon's observations that precious metals were steadier in price than other goods, completely misses the point that gold and silver were already being used for money. Thus the observations do not apply to them as commodities evolving into a role as money, but to commodities which were already money.Menger asserts that:“This development (becoming money) was materially helped forward by the ratio of exchange between the precious metals and other commodities undergoing smaller fluctuations...than that existing between most other goods - a stability which is due to the peculiar circumstances attending the production, consumption and exchange of the precious metals, and is thus connected with the so called intrinsic grounds determining their exchange value.”


The East-West Dichotomy in the Gold/silver ratioIn the west the ratio was usually 1 to 12 but in the East it was normally 1 to 7. So control of the land bridge between East and West yielded great power.

Historical facts contradict MengerHe asserts the universal use of gold and silver“among all peoples of advanced economic civilization”
  • Sparta contradicts him
  • Rome contradicts him
  • Peru contradicts him
  • China contradicts him

William Ridgeway’s work contradicts MengerHe catalogued a remarkableconsistency in the coinages of Mediterranean city states at 130-135 grains of gold. (8.4 grams)Here is a partial list of 130 grain gold coins:Croesseus' gold stater (c.550BC)……… 128 grainsDarius' Persian Daric (c.505 C)………… 130 grainsRhodos gold coin (5th century BC) …… 130-135 grainsThasos gold coin (411 BC) … ………… 130-135 grainsAthens gold coin (about 400 BC)……… 130 grainsMacedonian Stater of Philip II (345 BC)…130 grainsBabylonian and Phoenician coinage…… 260 grainsA double 130, perhaps indicating that a yoke (pair)of oxen was more normal in this advanced area.Here then may be the “monuments“ that Menger demanded.

bernard laum s work contradicts menger
Bernard Laum’s work contradicts Menger
  • Investigating the temple cult-monetary link, Bernard Laum's Hieleges Geld (Holy Gold) was published in 1924; an important German work. Some of its conclusions are:
  • “The roots of money lie in the cult, originating first out of sacrifices to the gods, then payments to the priests…”
  • “The history of money is the history of the secularization of the cultic forms...”
  • “The Greek states became the creators of money because they were the holders of the cult.”
  • Then commenting directly on Menger’s theory:
  • “The theorist claims general validity for his deductive statements, because he has come to his results in the 'exact' way. The historian is more modest. He will not assert that Menger's theory never and nowhere materialized in reality. Had the 'homo oeconomicus' of today appeared in the world 3,000 years ago, he would have certainly invented money according to Menger's rationalist principles. I only claim that the historical origin of money does not correspond with this theory... according to our researches money is a creature of the religious-political legal rights system... I know very well, that mainly in the latter phases, profane (economic and fiscal) factors determined the development of money just as much as religious factors, but it is difficult to draw a line separating the two spheres.”
anthropological evidence contra menger
Anthropological evidence contra Menger

In 1949, A.H. Quiggin's study of money in contemporary primitive societies - A Survey of Primitive Money - was published with findings universally against Menger's thesis:

  • “But it would be hard to find any among the simpler societies consciously troubled by the inconveniences of barter, and money is usually the introduction of the trader and troubles from outside.”
  • “The objects that are the nearest approach to money-substitutes may be seen to have acquired their functions by their use, not in barter but in social ceremony.”
  • “Where a cattle standard exists, this is adequate and discourages the growth of primitive currencies... it is noteworthy that the largest and most varied collections of primitive money come from cattle - less areas.”
  • “The evidence suggests that barter - in its usual sense of exchange of commodities - was not the main factor in the evolution of money. The objects commonly exchanged in barter do not develop naturally into money and the more important objects used as money seldom appear in ordinary barter. Moreover the inconveniences of barter do not disturb simple societies... this is the state of affairs over about half the world at the present day (1949) ...”
  • ... the use of a conventional medium of exchange, originally 'full bodied' but developing into token money, is first noted in the almost universal customs of 'bride price' and 'wer geld' (blood money for deaths and injuries) ... It is not without significance that in any collections of primitive currency the majority of the items are described as used in bride price.”

This anthropological approach is limited - it is not possible to establish history through such contemporary studies - but the evidence mounts up.


APPENDIX 1 The Causes of Different Degrees Of LiquidityFrom Menger’s ORIGIN OF MONEY, available as monograph # 40, from the CMRE, BOX 1630, Greenwich, Conn. 06836. The degree to which a commodity is found by experience to command a sale, at a given market, at any time, at prices corresponding to the economic situation (economic prices), depends upon the following circumstances.Upon the number of persons who are still in want of the commodity in question, and upon the extent and intensity of that want, which is un supplied, or is constantly recurring.Upon the purchasing power of those persons.Upon the available quantity of the commodity in relation to the yet unspoiled (total) want of it.Upon the divisibility of the commodity, and any other ways in which it may be adjusted to the needs of individual customers.Upon the development of the market, and of speculation in particular. And finallyUpon the number and nature of the limitations imposed politically and socially upon exchange and consumption with respect to the commodity in question.We may proceed in the same way in which we considered the liquidity of commodities at definite markets and definite points of time to set out the spatial and temporal limits of their liquidity. In these respects also we observe in our markets some commodities, the liquidity of which is almost unlimited in space or time, and others the liquidity of which is more or less limited. The spatial limits of the liquidity of commodities are mainly conditioned-By the degree to which the want of the commodities is distributed in space.By the degree to which the goods lend themselves to transport, and the cost of transport incurred in proportion to their value.By the extent to which the means of transport and of commerce generally are developed with respect to different classes of commodities. By the local Extension of organized markets and their intercommunication through arbitrage.By the differences in the restrictions imposed upon commercial intercommunication with respect to different goods, in inter local and, in particular, in international trade. The time-limits to the liquidity of commodities are mainly conditioned -By permanence in the need for them (their independence of fluctuation in the same).Their durability, i.e. their suitableness for preservation.The cost of preserving and storing them.The rate of interest.The periodicity of a market for the same.The development of speculation and in particular of time bargains in connection with them.The restrictions imposed politically and socially on their being transferred from one period of time to another