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Why Does Money Have Value? Not Because the Government Says It Does. | Mises Wire

Posted by M. C. on October 10, 2021

Contrary to the popular way of thinking, the value of a paper dollar originates in its link to gold—and not government decree or social convention. Following Ludwig von Mises’s regression theorem, money must have originated as a commodity. Furthermore, the fact that an entity has established a purchasing power with respect to various goods and services does not automatically qualify it as money, i.e., as the general medium of exchange. For the entity to become money, it must have wide acceptance.

Frank Shostak

Why does the dollar bill in our pockets have value? According to some commentators, money has value because the government in power says so. For other commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted, and why is it accepted? … because it is accepted! Obviously, this is not a good explanation of why money has value.1

The difference between Money and Other Goods

Now, demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them once consumed. This is not so with respect to money. According to Murray N. Rothbard,

Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.2

Why, then, is there demand for money? Why do individuals desire to have something which cannot be consumed and produces nothing? To provide an answer to this one must go back in time to establish how money emerged.

In trying to improve their lives and well-being, individuals discovered that by replacing direct exchange, where individuals exchange one good for another good, with indirect exchange they could enhance the marketability of their produce. The introduction of indirect exchange means that the produce of an individual is exchanged for some more marketable good and then this good is exchanged for the produce of another individual.

The key to a good’s emergence as a mediator of indirect exchange is that it must be widely accepted. On this, Ludwig von Mises observed that, over time,

there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.3

Similarly, Murray Rothbard wrote that,

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Contact Frank Shostak

Frank Shostak‘s consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.

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