Explaining the origins of money as a commodity with intrinsic value

The regression theorem refers to a theory of the origin of money that states that money must have originated as a commodity with intrinsic value in the marketplace. The idea was first proposed by Austrian economist Carl Menger in his 1892 work “On the Origins of Money.” The regression theory is offered as an alternative to the state theory of money which states that money can come into existence only when it is backed by the government. The regression theory, however, argues that money comes into existence through a gradual process of evolution in the marketplace, without the need for any government sanction.

Economists who try to explain the regression theory generally start with the question of why money, particularly fiat money which is simply just a piece of paper, has any value at all in the marketplace. That is, why is a currency like the U.S. dollar which is just a piece of paper widely accepted by people? The most common answer to this question is that fiat money can be used to buy other useful goods such as houses, cars etc. But this answer is insufficient —it tries to tackle the question of why fiat money can buy other useful goods by simply saying that it can buy other useful goods. So why is fiat money, which has little intrinsic value, considered valuable?

In real life, people accept money in exchange for goods in the present because they are aware that money was accepted as a medium in exchange for other goods in the past. For example, people accept wages in the U.S. dollar today because they are aware that the dollar was used to buy cars, groceries and other goods in the market yesterday. This gives them confidence in the value of their money. But what made people accept the U.S. dollar in exchange for other useful goods in the past?

Economists who advocate the regression theory of money argue that money must have originated as a useful commodity like gold or silver. This is the only way, they argue, it could have possibly been accepted by people in exchange for other useful goods at some point in the past. If a thing did not possess any intrinsic value, it is unlikely that people in the marketplace would have accepted it in exchange for other goods and services. So, the argument of these economists is that commodities like gold and silver must have been traded in exchange for other goods and services at some point in history purely because they offered some kind of personal utility to people. For example, these precious metals could have been used to make ornaments, to fill teeth, etc., which gives them intrinsic value.

As gold and silver became more widely accepted in the marketplace for their intrinsic value, they must have become acceptable even to people who did not derive any direct value from their use. In other words, people may have started accepting precious metals even though they derived no direct use from these metals since they were confident that they could exchange these metals with other people (who wanted gold and silver for their intrinsic value) for other useful goods that they really wanted. This is the first step in the spontaneous process of the evolution of money in the marketplace that eventually led to precious metals being accepted by people purely for their exchange value. The precious metals may have also been found to possess other advantages. For example, gold because of its physical properties is not easily destroyed by the elements of nature and it maintains its value over time because the supply of gold cannot be easily ramped up as mining gold involves significant production costs.

Source: Read Full Article