Bitcoin’s Path to Money: Menger’s Theory and the Debate on Medium of Exchange vs. Store of Value

36

Bitcoin’s Evolution as Money: Carl Menger’s Theory and the Debate between Medium of Exchange and Store of Value

In the last decade, ardent supporters of digital currencies have engaged in rigorous discussions surrounding the fundamental nature of Bitcoin (BTC). Is it intended to function as peer-to-peer electronic cash, as envisaged in Satoshi Nakamoto’s seminal white paper, or does it primarily serve as a digital store of value, akin to precious metals like gold? Furthermore, a central question looms large in the debate over the primary function of money: should its role as a medium of exchange take precedence over its attributes for preserving value? This elucidative article explores the Austrian school of economics, with a focus on the insights provided by Carl Menger in his work, “On the Origins of Money.”

Menger’s Perspective on the Emergence of Money

Rather than engaging in the dichotomy of whether Bitcoin should be a medium of exchange (MoE) or a store of value (SoV), this editorial aims to probe the critical consideration when something transitions into a unit of currency. In “On the Origins of Money,” Carl Menger, a foundational figure in Austrian economics, elucidates that the genesis of money is a spontaneous social institution born from individuals pursuing their self-interest, rather than a mandate imposed by the state.

Menger’s thesis posits that this evolution commences when certain commodities gain prominence due to their attributes, such as durability, transportability, and divisibility, making them more “saleable” than others. These commodities find greater acceptance in trade because they facilitate exchanges for desired goods. Over time, the most saleable commodities become universally accepted as a medium of exchange, driven by constant demand from parties looking to trade them for other goods.

Menger succinctly states:

“As the extension of trade in space and time advances and as prevision for satisfying future needs over increasingly long intervals becomes more general, each individual will strive, in his own interest, to select goods as media of exchange, the saleableness of which extends widely both in time and space.”

Mises and Rothbard on Money’s Primary Functions

In the context of Bitcoin, Menger’s theory implies that its role as a medium of exchange should take precedence, especially in its nascent stages. Essentially, BTC must gain widespread acceptance in transactions before assuming the mantle of a store of value. Austrian economists Ludwig von Mises and Murray Rothbard concur, highlighting that the medium of exchange function precedes the store of value function in the transition to becoming money.

In September 2022, Kristoffer Mousten Hansen and Karras Lambert, contributing to Mises.org, further expounded on Mises’ perspective. They emphasize Mises’ belief that a commodity must first establish its ability to “retain value” over time before becoming a medium of exchange and, subsequently, a store of value. They conclude that adherents of the Austrian school should prioritize Bitcoin’s “medium of exchange” function over its “store of value” role, aligning with Mises, Menger, and Rothbard.

Hansen and Lambert argue that diminishing the importance of active cryptocurrency usage in favor of a “HODL forever” approach contradicts Mises’ recognition that “business usage alone can transform a commodity into a common medium of exchange.” They also note that the store of value-centric perspective can be traced back to a message by renowned computer scientist Nick Szabo. Despite its prevalence in the crypto community, this perspective departs from the Austrian school’s conception of money’s origins.

What are your thoughts on Carl Menger’s definition of money and the process of its evolution? We invite you to share your insights and opinions on this subject in the comments section below.

Frequently Asked Questions (FAQs) about Bitcoin’s Evolution

More about Bitcoin’s Evolution

• Bitcoin’s White Paper by Satoshi Nakamoto
• Carl Menger’s “On the Origins of Money”
• Austrian School of Economics
• Ludwig von Mises
• Murray Rothbard
• Kristoffer Mousten Hansen and Karras Lambert’s Essay on Mises.org
• Nick Szabo’s Profile
• Bitcoin.org
• Mises Institute