Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money (review)

This is a somewhat specialized book. It partly derived from a workshop held in Vienna in October 2000 titled "The Analysis of New Electronic Payments Systems Based on Carl Menger's Institutional Theory of the Origin of Money." The largest single contribution, which runs from page 25 to page 108, however, is a translation into English (by Leland Yeager and Monika Streissler) of Menger's lengthy 1909 paper "Geld," a third edition of the article in the Handwörterbuch der Staatswissenschaften from 1892 onward, from which the much shorter, better-written, and deservedly better-known 1892 Economic Journal article, "On the Origin of Money," was distilled. The remainder of the book consists first of a short paper by Erich Streissler setting out Menger's idiosyncratic place in the history of economic thought (a late follower of "the Older German Historical School of Economics" [11]); then there are three further short papers, the first of which, chapter 3, by Stefan Schmitz, contrasts current neoclassical models of why money is held with Menger's institutional approach. This is followed by two chapters, the first by Selgin and White, the second again by Schmitz, involving thought experiments about the potential future implications of electronic money.

I liked Schmitz's first contribution most. It gives a succinct exposition of three models, the Kiyotaki/Wright (1992) "search" model, the standard overlapping generations model, and Townsend's (1980) spatial separation model. For this alone this chapter should be on every M.Sc. student's reading list. Then Schmitz shows that all three models assume some imperfection in markets which can be corrected by an asset already possessing monetary characteristics. Thus, in Kiyotaki and Wright, "the probability of accepting money is π and the expectations concerning the acceptability by others is denoted Π" (115). But π and Π are initially exogenously given. Schmitz argues, correctly, that all these models are static and assume what needs to be explained, namely, why initially some commodities and later (intrinsically worthless) pieces of paper became generally accepted in payment.

Enter Menger and the historical evolution of money. There are, perhaps, two main questions. First, does this extended paper add much to the EJ article? My answer is no. As Yeager noted, "Menger could have written otherwise, but he preferred a complicated, verbose and old-fashioned style; and he is the author" (108); so Yeager and Streissler kept Menger's style. Moreover, the additional concepts (e.g., the inner and outer exchange values of money) are often idiosyncratic and complex; as Streissler notes, there is some internal inconsistency and the message is less clear than in the EJ article.

That message was that money evolved by private sector agents attempting to reduce transaction costs by using, first indirect barter, then commodity money, and finally paper claims on commodity moneys. A repeated corollary was that the intervention of the state was not essential. As Streissler comments, "The State perfecting anything in economic affairs, what a horrible notion!"; it was "anathema to Menger" (17). In fact, the longer paper (chapter 2) is both more nuanced and better balanced historically than the EJ article; see in particular section 5, "The Perfecting of the Monetary and Coinage System by Government." Nevertheless, what almost all economists take from Menger is that money is essentially a private sector invention, arising from individual optimization in a market setting.

This is a message that a few economists and most historians and numismatists find unacceptable. As Schmitz correctly states, money is a social institution (my emphasis) and as such derives mainly from the needs of social interaction (government, taxation, dispute resolution, religious offerings, etc.). "Domestic animals, furs and slaves," Schmitz notes, were "examples of early media of exchange." The word pecuniary, meaning having a monetary characteristic, comes from the Latin root pecus, "cattle...