by G. Stolyarov II

Created on: December 30, 2006   Last Updated: May 08, 2007

The Austrian School of Economics offers an innovative and vital perspective on how money came to be, a perspective that firmly establishes money as a free market creation and validates the efficacy of market exchange.

According to Carl Menger, the 19th-century founder of the Austrian School, money could not have originated as the invention and imposition of a wise ruler or government. Several difficulties and outright absurdities are inherent in such a scenario:

1) No historical record of any state-imposed origin of money anywhere in the world can be found. Surely, such a critical development, if it had originated in a state edict, would have attracted the attention of contemporaries who would have permanently commemorated it in a multitude of ways.

2) The state theory of the origin of money assumes that a single person or committee, having never been introduced to the concept of a universal medium of exchange that is seldom or never used for direct consumption, invented such a concept. This would require an almost superhuman degree of creativity, seeing as the king or committee would need to have originated the idea of money in an experiential vacuum.

3) When money emerged, there was already a multitude of differently valued goods in the economy. If money had arisen as a state edict, the state would need to have pre-determined all the initial monetary prices and exchange rates for the myriad commodities already in existence. This would imply that money, a characteristic of at least a somewhat free market, would need to have begun in a setting of absolute government price controls: a contradiction in terms. Furthermore, absolute price controls have empirically shown to be unenforceable even in the most intrusive totalitarian dictatorships. How could an ancient king, with far less technology and manpower, have managed to impose the new monetary unit and all its accompanying exchange rates on his entire populace? His subjects likely would have been reluctant to immediately alter their lives in so radical a fashion. Their resistance would have rendered even a wise monetary scheme impossible to implement from above.

As an alternative to the state theory, Menger offers a view of money as derived from the spontaneous order of the free market. Menger's theory implies, in the words of economist Adam Ferguson, that money is a "product of human action, but not of human design."

Menger begins with the commonsense observation that different goods have different degrees of salability

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