On the Origin of Money

“On the Origins of Money” by Carl Menger first appeared in the Economic Journal 2 (1892): 239–55; translation is by C.A. Foley.

It is an error in economics, as prevalent as it is patent, that all commodities, at a definite point of time and in a given market, may be assumed to stand to each other in a definite relation of exchange, in other words, may be mutually exchanged in definite quantities at will. It is not true that in any given market 10 cwt. of one article = 2 cwt. of another = 3 lbs. of a third article, and so on. The most cursory observation of market phenomena teaches us that it does not lie within our power, when we have bought an article for a certain price, to sell it again forthwith at the same price. If we but try to dispose of an article of clothing, a book, or a work of art, which we have just purchased, in the same market, even though it be all once, before the same juncture of conditions has altered, we shall easily convince ourselves of the fallaciousness of such an assumption. The price at which any one can at pleasure buy a commodity at a given market and a given point of time, and the price at which he can dispose of the same at pleasure, are two essentially different magnitudes.

This holds good of wholesale as well as retail prices. Even such marketable goods as corn, cotton, pig-iron, cannot be voluntarily disposed of for the price at which we have purchased them. Commerce and speculation would be the simplest things in the world, if the theory of the “objective equivalent in goods” were correct, if it were actually true, that in a given market and at a given moment commodities could be mutually converted at will in definite quantitative relations—could, in short, at a certain price be as easily disposed of as acquired. At any rate there is no such thing as a general saleableness of wares in this sense. The truth is, that even in the best organized markets, while we may be able to purchase when and what we like at a definite price, viz.: the purchasing price, we can only dispose of it again when and as we like at a loss, viz.: at the selling price.2

The loss experienced by any one who is compelled to dispose of an article at a definite moment, as compared with the current purchasing prices, is a highly variable quantity, as a glance at trade and at markets of specific commodities will show. If corn or cotton is to be disposed of at an organised market, the seller will be in a position to do so in practically any quantity, at any time he pleases, at the current price, or at most with a loss of only a few pence on the total sum. If it be a question of disposing, in large quantities, of cloth or silk-stuffs at will, the seller will regularly have to content himself with a considerable percentage of diminution in the price. Far worse is the case of one who at a certain point of time has to get rid of astronomical instruments, anatomical preparations, Sanskrit writings, and such hardly marketable articles!

If we call any goods or wares more or less saleable, according to the greater or less facility with which they can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same, we can see by what has been said, that an obvious difference exists in this connection between commodities. Nevertheless, and in spite of its great practical significance, it cannot be said that this phenomenon has been much taken into account in economic science. The reason of this is in part the circumstance, that investigation into the phenomena of price has been directed almost exclusively to the quantities of the commodities exchanged, and not as well to the greater or less facility with which wares may be disposed of at normal prices. In part also the reason is the thorough-going abstract method by which the saleableness of goods has been treated, without due regard to all the circumstances of the case.

The man who goes to market with his wares intends as a rule to dispose of them, by no means at any price whatever, but at such as corresponds to the general economic situation. if we are going to inquire into the different degrees of saleableness in goods so as to show its bearing upon practical life, we can only do so by consulting the greater or less facility with which they may be disposed of at prices corresponding to the general economic situation, that is, at economic prices.3 A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices.

The interval of time, moreover, within which the disposal of a commodity at the economic price may be reckoned on, is of great significance in an inquiry into its degree of saleableness. It matters not whether the demand for a commodity be slight, or whether on other grounds its saleableness be small; if its owner can only bide his time, he will finally and in the long run be able to dispose of it at economic prices. Since, however, this condition is often absent in the actual course of business, there arises for practical purposes an important difference between those commodities, on the one hand, which we expect to dispose of at any given time at economic, or at least approximately economic, prices, and such goods, on the other hand, respecting which we have no such prospect, or at least not in the same degree, and to dispose of which at economic prices the owner foresees it will be necessary to wait for a longer or shorter period, or else to put up with a more or less sensible abatement in the price.

Again, account must be taken of the quantitative factor in the saleableness of commodities. Some commodities, in consequence of the development of markets and speculation, are able at any time to find a sale in practically any quantity at economic, approximately economic, prices. Other commodities can only find a sale at economic prices in smaller quantities, commensurate with the gradual growth of an effective demand, fetching a relatively reduced price in the case of a greater supply.

2 We must make a distinction between the higher purchasing prices for which the buyer is rendered liable through the wish to purchase at a definite point of time, and the (lower) selling prices, which he, who is obliged to get rid of goods within a definite period, must content himself withal. The smaller the difference between the buying and selling of an article, the more saleable it usually proves to be.

3 The height of saleableness in a commodity is not revealed by the fact that it may be disposed of at any price whatever, including such as result from distress or accident. In this sense all commodities are pretty well equally saleable. A high rate of saleableness in a commodity consists in the fact that it may at every moment be easily and surely disposed of at a price corresponding to, or at least not discrepant from, the general economic situation—at an economic, or approximately economic, price.

The price of a commodity may be denoted as uneconomic on two grounds: (1) in consequence of error, ignorance, caprice, and so forth; (2) in consequence of the circumstance that only a part of the supply is available to the demand, the rest for some reason or other being withheld, and the price in consequence not commensurate with the actually existing economic situation.

V. Concerning the Causes of the Different Degrees of Saleableness in Commodities

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.

1.  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 unsupplied, or is constantly recurring.

2.  Upon the purchasing power of those persons.

3.  Upon the available quantity of the commodity in relation to the yet unsupplied (total) want of it.

4.  Upon the divisibility of the commodity, and any other ways in which it may be adjusted to the needs of individual customers.

5.  Upon the development of the market, and of speculation in particular. And finally.

6.  Upon 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 degree of the saleableness in commodities at definite markets and definite points of time,to set out the spatial and temporal limits of their saleableness. In these respects also we observe in our markets some commodities, the saleableness of which is almost unlimited by place or time, and others the sale of which is more or less limited.

The spatial limits of the saleableness of commodities are mainly conditioned—

1.  By the degree to which the want of the commodities is disturbed in space.

2.  By the degree to which the goods lend themselves to transport,and the cost of transport incurred in proportion to their value.

3.  By the extent to which the means of transport and of commerce generally are developed with respect to different classes of commodities.

4.  By the local extension of organised markets and their inter-communication by “arbitrage.”

5.  By the differences in the restrictions imposed upon commercial inter-communication with respect to different goods, to interlocal and, in particular, in international trade.

The time limits to the saleableness of commodities are mainly conditioned—

1.  By permanence in the need of them (their independence of fluctuation in the same).

2.  Their durability, i.e., their suitableness for preservation.

3.  The cost of preserving and storing them.

4.  The rate of interest.

5.  The periodicity of a market for the same.

6.  The development of speculation and in particular of time-bargains in connection with the same.

7.  The restrictions imposed politically and socially on their being transferred from one period of time to another.

All these circumstances, on which depend the different degrees of, and the different local and temporal limits to, the saleableness of commodities, explain why it is that certain commodities can be disposed of with ease and certainty in definite markets, i.e., within local and temporal limits, at any time and in practically any quantities, at prices corresponding to the general economic situation, while the saleableness of other commodities is confined within narrow spatial, and again, temporal, limits: and even within these the disposal of the commodities in question is difficult, and, in so far as the demand cannot be waited for, is not to be brought about without a more or less sensible diminution in price.

Further Reading

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