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The Substance of Money

In the previous article, we dealt with the question of what money is, discussing its origins, and nature as a widely observable phenomenon. We saw that money is not the result of legislation, nor is it a collective agreement of the market participants. Rather, it is the predictable result of economizing individuals exchanging their commodities for more saleable ones, in attempts to get exposure to more and better exchange opportunities. Money then spontaneously emerges as a widespread medium of exchange.

The understanding of the nature of money allowed us to identify saleability, the extent of the economic sacrifices required to exchange a particular commodity, as the definitive characteristic determining the substance of money. Understanding of the specific substance which becomes money, therefore, requires us to further investigate the concept of saleability.

The proper assessment of the influence of the various relevant factors affecting the saleability of a commodity is a complicated task which cannot be generalized. However, we can identify some notable forces which, for most cases, appear to be the most influential. Exploring those forces shall then provide us with the common examples, and more importantly, with a general method to approach specific cases and analyze them. Through studying some of the primary considerations concerning the saleability of commodities, this article aims to provide the reader with a general approach to assess the likelihood of different commodities emerging as money in an economy.

Saleability Considerations

The saleability of commodities, as stated above, is too complex to be formally generalized, at least without losing some essential considerations. The approach we will take here instead is studying the prominent factors and the proper way to analyze them. We will start with what influence the internal characteristics of a commodity may have on its saleability, by looking into three types of common considerations.

Saleability Across Scales

The first type we may call saleability across scales, and it deals with the costs involved with using a commodity in exchanges of different sizes (in terms of value involved). The lower the economic costs required in adjusting the quantity of a commodity to precisely reflect a particular exchange value, the more exchange opportunities it may be suitable for, thus, the higher its saleability will be.

The most notable characteristic influencing this type is the divisibility of the commodity. The degree of divisibility of a good is determined by the extent to which we can divide an entire unit of it into sub-units, doing so while preserving the value of the whole quantity. If we use an example, a chair is poorly divisible, as two sub-units of half a chair have a much lower value than the entire chair. On the other hand, silver has relatively high divisibility, as two halves of a silver coin generally are worth the same as the whole coin.

When assessing divisibility, there are two primary considerations we should take into account. The extent to which a single unit can practically be divided into sub-units while keeping the same value of the entire sum, and the economic costs attached to the process of dividing the good. The further a good can be divided, and the lower the costs imposed in the process of the division, the more divisible we may say the good is. For the first criteria, we saw that silver does an excellent job. However, with the second criteria, we can see that the process of dividing silver isn’t very convenient and may require specialized labor, thus making its division somewhat costly.

Saleability Across Locations

The second type deals with the saleability of a commodity across different locations, that is the commodity’s portability. This consideration has two main components, the transportation costs of a commodity, and the transaction costs for transferring command over it. The lower the economic costs involved in transporting and exchanging a commodity at differing locations, the more exchange opportunities will be available for it, and the more saleable it is likely to be.

This consideration, however, is not at all limited to the question of physical distance alone, especially in our modern-day economy. When using banks, or other financial intermediaries for that matter, there are usually some minimal fixed costs required for the transaction, often regardless of the distance of the recipient, or even if the recipient is the bank itself. This cost tends to make some small, nonphysical, payments uneconomic, even if they would be without the transaction cost¹. I would still categorize this within the “locations” type, both for convenience reasons and because the physical location does play a non-negligible role for most cases.

Saleability Across Time

The last category we will discuss here is saleability across time. The further into the future a commodity is likely to preserve its value, the lower the economic costs it imposes on its owner when the latter delays exchanging the former.

The most notable factor in this regard is the durability of the commodity, that is, how well can it be preserved through time, and what are the costs for its preservation. We can see how, for example, perishable goods have very low durability, while other commodities, most notably gold, are highly durable and can be preserved with negligible or no cost. The more durable a commodity is, the better it can maintain its value and use in the economy. Therefore, better durability increases the demand for a commodity, thus increasing its saleability.

Saleability across time, as well as the other types we discussed above, are also usually influenced by other factors, which are not necessarily inherent to the commodity itself. We will now turn to such highly important issue, which may not be an inherent characteristic of the commodity, but has an enormous effect on its saleability, its production and supply.

The Money Supply

The supply of a commodity and the characteristics of its production are probably the most influential “external” factors for its saleability. The treatment of the production process of money is out of the scope of this article, but it should suffice to say it can have tremendous effects on the supply of a commodity and its saleability². Below we will deal with the more concrete issue of the impact of an increase in the supply of money on its saleability, and the possible consequences of such increases.

All goods are subjected to the law of diminishing marginal utility, and money is no different in that regard. This economic law asserts that the marginal utility of a good to an economizing individual is diminishing with the increase in its supply at his disposal. The reason is that by economizing, an individual will first dedicate a specific good to satisfy his more urgent needs. Then, with the further units of the good added, he will use those to satisfy successively less urgent needs, which will cause him to assign lower use value to each additional unit of the good³.

The effects of this law in relation to money can first be observed in the cash balance an individual holds, but more important for our purposes, it also applies to the purchasing power of money itself. With an increase in the supply of money, the first to receive the new money units will assign less marginal value to them compared to other goods. Thus he will be willing to spend more money on goods which now have larger marginal value to him. The owner of the new money will then be ready to exchange more units of it in commerce, causing the new receivers to have more money than otherwise. Thus they also will become more willing to spend a nominally higher amount of money, as the increased supply of money they now have reduces the value of each unit to them.

This process continues to ripple through the economy, making the value of each unit of money lower to an increasing number of people. Those people which the value of money unit has fallen for will be less willing to exchange their commodities for the same amount of money as previously, since this nominal amount of money now represents a lower value to them than it did before. Therefore, they will start raising the prices they charge in exchange for their commodities, as to adjust to the value the same amount of money was previously worth to them.

The successive increase in prices will ripple through the economy as the exchange between people who received the new money and people who didn’t continue. This process will end when all individuals have adjusted their prices, leading to higher prices throughout the economy, meaning each unit of money lost a portion of its purchasing power.

The further money production increases, the lower the value of money will become, and with that the higher the economic costs for exchanging the commodity at a later time will be, as a result of the fall in its purchasing power. Thus we see how this effect translates into a cost, an economic sacrifice, burdened upon those who accept the money in exchange. This economic sacrifice attached to the exchange of the commodity reduces its saleability, and thus discourages its use as money.

It is important to note that even without an actual production of the money substance, the mere awareness of the risk of a substantial increase in the supply of money may reduce its saleability. The reason is that this risk may possibly impose higher costs to sell the money in the future, and will cause individuals to account for this risk and price it accordingly in their present transactions. The preemptive actions taken against the risk of future money production can thus result in higher costs and therefore, lower saleability in the present.

External Factors

The money supply may be partially viewed as an external factor, but not to a full extent. The last consideration we shall discuss then is the influence of factors utterly unrelated to the money substance itself. The most notable of such external factors tend to be legislation, societal organization, and epistemic factors, that is the knowledge in a society.

We have already discussed such examples in the previous article, where we explained the effect legislation could have on the saleability of fiat money, and how the transition from nomadism to permanent settlements might have induced a shift from cattle money to metallic ones. Thus, we will now expound on the third factor, the epistemic one.

With the human pursuit of knowledge, people discover causal connections between the employment of particular objects and the satisfaction of their needs. Discoveries extending human knowledge can cause massive changes in the demand for goods. For example, petroleum was once considered of little use to humans, and had a miniscule demand. However, the demand for it became incredibly high after discovering its usefulness as an energy source, and its suitability to fuel the internal combustion engine. In other words, with the increase in the extent of our knowledge, the saleability of petroleum went from being practically negligible to be incredibly high. Later, the further development of its markets has improved its saleability even further. We can apply the same logic, though to a lesser extent, to many other goods, including historical money substances. The demand for gold, for example, has likely vastly increased after humans discovered the process of smelting, which allowed the employment of gold for many new purposes.

Changes in knowledge may also damage the saleability of a commodity. For example, if people were to discover that a commonly used material is toxic to their health (like happened with mercury), its demand will probably plummet, and its saleability is likely to mostly vanish. External factors, therefore, have a significant influence on the saleability of a commodity, and we can usually link their impact to lots of historical changes in the substance of money.

The Uses of Money

The usual explanation of money tends to divide its uses into three roles: a medium of exchange (MoE), store of value (SoV), and unit of account (UoA). In the previous article, we focused solely on the use of money as a medium of exchange and argued this is the nature of money and the cause for its origin while ignoring its other roles.

The reason for ignoring the other roles was intentional, as the other specific employments of money are of little importance for the general question of its nature and origin as a medium of exchange. However, for the present article, it is essential that we examine those uses, as they may strongly influence the demand for specific money, and consequently also its saleability. Contrary to the conventional notion, I would like to argue that the other (non-MoE) employments of money are not distinct, separable uses, but are the natural result of its use as a medium of exchange. Those other uses as we shall see are not at all inherent, nor exclusive to money itself, but are the byproduct of its use as a medium of exchange⁴.

Store of Value

The first role we will discuss here is that of a store of value. When exchanging commodities for money, people may not immediately use the money for which they exchanged. It is, in fact, most common for people to save their money and use it at different times for various purposes, or delay exchanging it for various reasons. When people are holding their money or saving it, we may say they are using it to “store value,” as they keep it with the intention to exchange it later.

However, a store of value is not at all an inherent, nor is it exclusive use of money. The reason money usually serves as a standard media to store value, at least to some extent, is because as the most saleable good it is expected to be easily exchanged for low economic costs also in the future, putting its holder in the best position to exchange it later. Also, because the saleability of a commodity is strongly affected by its ability to preserve low costs for exchange across time, the money prevailing on the market will likely be well suited to store value into the future and not just for immediate exchange.

Therefore, it seems to be very reasonable economically to store at least some value in money, though there can be other commodities which might be more suitable for storing value in certain economic situations. For example, in today’s economy, we should note real estate, stocks, bonds, and gold as some significant store of value commodities. Thus while likely to be a store of value, and even though being a good store of value will improve the suitability of a commodity to serve as money, it is not at all certain it will be so. In fact, we could observe how with many hyperinflation scenarios people were so reluctant to store value in money that they were rushing to exchange it as fast as they could, running to the shops to get rid of their cash balances.

The common objection to the claim here is that when new money emerges, especially in cases where an older money is already established, it will first tend to be used to store value, and starts to largely circulate only later. This process causes the impression that money starts first as a way to store value, while only later becoming a medium of exchange. However, we shall see how this initial employment of money as a “store of value” before it gets into wide circulation is actually the result of initial low saleability as a medium of exchange, but it is nonetheless a medium of exchange.

In the beginning of the emergence of money, its saleability will still be relatively low, as it is just starting to increase its demand from its employment as a medium of exchange. That means that at first, there will still not be many exchange opportunities for the new money. This necessarily means people will need to wait a substantial amount of time, compared to the established money, to exchange it, that is, they will need to hold it to adopt it. The new money will then have to compensate the economic sacrifice it imposes on its holders with its relatively low saleability, otherwise it will be uneconomic to start using it as a medium of exchange, and thus will not get into circulation as money. The most probable compensation for the low saleability of the new money is its prospect to increase in value, and for it to be sufficiently attractive compensation, it will need to gain value compared to other commodities commonly used as a store of value. Therefore, without being a sufficiently attractive store of value, a commodity is not likely to gain enough saleability to replace an established money. We can see then how even initially, the new money is indeed used as a medium of exchange, but as a low velocity one. It will then have to gradually increase its saleability, which in the free market can be done by serving its holder as a superior store of value. The use of money as a store of value shall not be confused with its true nature as a medium of exchange, but we should view it as a detrimental factor for its increase in saleability and eventual increased use as a medium of exchange.

Unit of Account

The second use for money is as a unit of account, that is, the basic unit to measure prices and value in general. The reason money usually serves as a unit of account in economic transactions and calculations is due to the extensive knowledge we have on exchange prices for money. The unique attribute of money is that, due to its saleability, it widely circulates as the most commonly used medium in exchange. As people actively use money in their trades, we receive knowledge of the economic exchange value of goods on the market, almost exclusively denominated in money. From this vast use as a medium of exchange, money naturally becomes easier to deal with in economic calculations and price formation, as we can obtain the most accurate data on its exchange “equivalences” in virtually any other commodity traded on the market.

We should mention, however, that even though money naturally tends to become the general unit of account, it is not at all an inherent characteristic of it. The existence of money which does not generally serve as a unit of account, or the use of a non-money commodity as a unit of account are both entirely conceivable (though unlikely) cases.

Mises exposed the logical flaw of claiming the function of money is as a unit of account by comparing it to “describe the determination of latitude and longitude as a ‘function’ of the stars.”⁵ In both cases, the discussed function is a useful tool for humans, but it is not the essence, nor the origin of the object examined, but merely its further utilization by people.

We shall conclude here that the only use which is inherent in the definition of money is a circulating medium of exchange. While the employment of money as a store of value, or as a unit of account seems likely and even efficient from an economic standpoint, and while those will tend to occur as byproducts of its saleability naturally, it is not at all certain, nor is it a crucial part of the definition of money.


Saleability is the determining factor for the substance of money and is influenced by various conceivable factors. We saw through multiple examples the effects certain properties of a commodity, such as its divisibility, portability and durability, may have on its saleability. We have also seen how the supply and production of money, that is, its hardness, as well as other external factors may impact it too. With the emergence of money, people will naturally tend to use it as a store of value and a unit of account because some prominent considerations influencing its saleability, and therefore its likelihood to emerge as money, are aligned with the qualities needed for those uses. However, these roles are “secondary” to money, and are the byproduct of its use as a medium of exchange.

[1]: High transportation costs for a commodity could also lead to its centralization in trusted institutions. This introduces the risk of abuse of this trust, which may then impact the ability of using the commodity as money. See this article for a treatment of this risk, with special regard to gold:

[2]: For a treatment on the production of money, see “The Ethics of Money Production” by Jörg Guido Hülsmann, especially chapter 3 to 12.

[3]: Carl Menger, who was one of the three independent discoverers of the concept of marginal utility, has thoroughly explained the concept in his work “Principles of Economics”, chapter III — “The Theory of Value”.

[4]: The same line of argument can be found in Carl Menger’s “Principles of Economics”, chapter VIII section 3 — “Money as a “Measure of Price” and as the Most Economic Form for Storing Exchangeable Wealth”.

[5]: Ludwig von Mises, “The Theory of Money and Credit”, page 49.

Special thanks to Ben Prentice (mrcoolbp), The Bitcoin Observer (festina_lente_2), Bezant Denier (bezantdenier) and Thib (thibm_) for all the feedback I received from their reviews, comments, and suggestions which helped me shape this article.

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