What is Money?
Money is not simply a government-issued piece of paper or a balance in a bank account. According to Austrian economics, money is a market phenomenon—an emergent product of human cooperation, not legislation. It arises spontaneously as individuals seek to trade goods and services more efficiently in a complex society.
At its core, money is a medium of exchange. In early barter economies, trade required a “double coincidence of wants”—you had to find someone who both had what you wanted and wanted what you had. Over time, individuals began to favor trading goods that were more widely accepted: items like salt, cattle, or gold. These goods became media of exchange because of their desirability, divisibility, durability, portability, and scarcity. Through this process, money emerged naturally on the free market.
Carl Menger, the founder of the Austrian School, explained this evolutionary origin of money in 1871. He showed that the most saleable commodities—those easiest to trade—gradually became money. This stands in contrast to the statist view that money was invented by governments.
The Properties of Money
Not all goods can serve as money. Through centuries of use and observation, economists have identified several key properties that make a good suitable as money:
Durability – Money must withstand time and usage without deteriorating. A commodity that spoils, rusts, or disintegrates cannot effectively store value.
Divisibility – It must be easy to divide into smaller units for small transactions without losing value. Gold, for instance, can be minted into coins of various sizes.
Portability – Money should be easy to transport and use in exchange, which is why cows or barrels of oil make poor money despite being valuable.
Uniformity – Each unit of money must be equal to every other unit. This ensures fairness and ease in accounting.
Recognizability – People must be able to easily identify and verify the money’s authenticity.
Scarcity – Money must be limited in supply; otherwise, it loses its purchasing power. Abundant items like seashells or paper notes (when printed excessively) fail this test.
Historically, gold and silver performed these roles well. In the digital age, Bitcoin also meets many of these criteria—especially scarcity, divisibility, and portability—making it a contender for sound money in the 21st century.
Money, once established, plays three critical roles:
Medium of exchange – facilitating trade.
Unit of account – providing a common measure for prices and economic calculation.
Store of value – preserving wealth across time.
Sound money—typically represented by gold or, today, potentially Bitcoin—protects individuals from the arbitrary expansion of the money supply by central authorities. The Austrian tradition warns against inflationary policies and credit expansion, which distort prices, mislead entrepreneurs, and lead to economic booms and busts.
In conclusion, money is not a tool of the state, but a tool of civilization. It is the bedrock of voluntary exchange, social cooperation, and long-term economic growth. Understanding its origin, nature, and properties is essential to defending freedom in the marketplace.