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Money as an Expectation
These days, what is and isn't "real money" is a conversation often obscured by politics, centralized regulation, and loud shouting matches between economists. After all, even the "leader of the free world" himself, Donald J. Trump recently stated: "I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air."
The ideas formalized by Mises about the origins and value of money are largely extensions of thought from Austrian School founder Carl Menger. Menger pioneered the development of the subjective theory of value, rejecting the idea that the amount of time and labor put into the creation of a good mechanically determines its market value. In a nutshell, Mises' Regression Theorem (not labeled as such until his later works) states that although all value is indeed subjective, there is an objective exchange-value, or price (the result of the current market's subjective valuations), which determines a money or currency's usefulness at a given time.
In "The Theory of Money and Credit" he states: "The money prices of to-day are linked with those of yesterday and before, and with those of to-morrow and after."
In other words, the value of money today is a product of its exchange value yesterday, and an expectation of its potential future value. What money could be exchanged for by the holder in times past, influences what it can be exchanged for today, and the price of money today affects its value and perceived future utility, as well.
If everyone knew the U.S. dollar was going to crash tomorrow, for example, its market value would plummet, as individual market actors dropped it feverishly for more stable stores of value and means of exchange. This shows that not only is money's price ultimately subjective, but that it is also intrinsically linked to those expected price relationships of the future, and the confidence carrying over from the prices of the past.
Can Anything Be Money?
If the current objective exchange-value of modern money is traced back to its origin as a barter commodity, gold is usually recognized as the source. According to Mises, the moment gold began to be valued not only as a metal for jewelry, engineering, and decoration, but also as a dominant, useful means of exchange, it became money. In this way, current money has its roots in non-monetary commodity value by way of gold. Money, in this sense, and properly understood, isn't just created "out of thin air."
But wait a second. If basically any good's exchange price can be traced back to gold, that seems to imply that absolutely anything could become money. Hostess cupcakes are delicious, and they have an exchange value relationship with dollars, which are ostensibly connected to gold's value via the Regression Theorem. As such, if a given market began using cupcakes as a medium of exchange more popular than dollars, and called them money, would it make them so?
What About Bitcoin?
Some argue bitcoin can't be linked to gold like fiat can. It's critical to remember though, that both Mises and Menger were strongly opposed to inflationary, violence-backed currencies like the U.S. dollar. Mises urged a return to the gold standard. Though the USD has an exchange price today argued to be resultant of objective exchange-value confidence in gold many years ago, abandonment of the gold standard and the violent enforcement of adoption has rendered this connection (aside from inherited price perception) tenuous at best. Still, bitcoin has no such perceived time-honored legacy, regardless.
It emerged seemingly out of nowhere, and in a sense, out of nothing. A kind of economic big bang phenomenon. However, like gold, bitcoin can also be argued to have a non-monetary, original commodity exchange value. According to libertarian economist Jeffrey Tucker: “The innovation here, even according to the words of its inventor, is the payment network, not the coin. The coin or digital unit only expresses the value of the network. It is an accounting tool that absorbs and carries the value of the network through time and space.”
Nevertheless, if we trace to its deepest springs, first the subjective and then the objective exchange-value of commodities, we find that in the last resort it is still the subjective use-value of things that determines the esteem in which they are held.
Menger states that "Man himself is the beginning and the end of every economy." As such, we're at an interesting crossroads. It remains to be seen whether bitcoin or some other currency can or will overtake the violence-backed dollar. It's also not certain whether the Bitcoin network would retain its commodity value in a USD market collapse scenario.
Money, Here and Now
If tomorrow all the gold were somehow launched from the earth into outer space, economic life here would arguably be thrown into upheaval. That said, it wouldn’t be impossible, and new economies would emerge.
Source from Bitcoin.com, author Graham Smith
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