**The following article was written by Kristoffer Mousten Hansen and Karras Lambert and published on September 28, 2022. cryptocurrency as money – a store of value or medium of exchange.was originally published on mises.org. The opinions expressed in this article are the author’s own; Bitcoin.com is not responsible for the opinions, content, accuracy, or quality within the editorial**
Cryptocurrency enthusiasts generally have a great appreciation for the Austrian School of economics. This is understandable, as Austrian economists have always argued for the benefits of privately produced money that is not under government control. Unfortunately, however, a false understanding of the development and function of money has developed and increasingly prevails, at least among some Bitcoin supporters – a narrative that is incompatible with the fundamentals of Austrian monetary theory.
This view can probably be traced back toIn line with Nick Szabo’sessay emphasizing collectibles, the primary and predominant function of money is “storage of value,” and this function is paralleled by that of a medium of exchange. According to this view, a commodity must first “transmit value” over time. It is then used as a medium of exchange and finally established as a unit of account.
In this explanation, the emergence and function of money are reversed. The primary, and indeed the only essential function of money is as a medium of exchange. Its status as a “store of value” (more on this phrase later) is incidental, its function as an accounting unit is non-essential, and there have been many monetary instruments throughout history that were never used as accounting units.
The Austrian tradition, from Karl Menger to Ludwig von Mises and Murray Rothbard, has always maintained that money is essentially a medium of exchange, that its other so-called functions are incidental, and that in the case of “stores of value” it is metaphorical. In the following, this position is explained.
On Value
To understand the nature of money, we must first review the theory of value. The Austrians have always emphasized the subjective nature of value. It is not inherent in goods, but always relative to the individual acting and his potential choices. At the moment of choice, he gives value to a thing by preferring that thing over another. An object may be valued for its usefulness in directly accomplishing the purposes of the acting individual (as a consumption good), for assisting in the production of a consumption good (as a production good), or as a medium of exchange.
The important point is that value is a subjective concept and has meaning only in choice situations. Since subjective value cannot be transferred across time, there is no “storage of value” in the literal sense. Of course, one can store it for later use, but one cannot store its value in the same way one stores physical integrity. At all times, however, subjective value plays a central role in the formation of market exchange rates, or prices.
An exchange takes place only when both parties to the exchange prefer what the other has to what they give in return. In a monetary economy, where most exchanges take place between monetary and non-monetary goods and services, the principle of reverse preference ordering is the same: the seller of the good prefers the sum of money received for the good, and the buyer prefers the good over the sum of money he must give up for it.
In a society where exchange is consistently repeated, an integrated system of market prices is established. The market price of a thing is then the same as its market value. To call something a “store of value” is actually to say that its market value is expected to remain the same or increase over time. The difference between money and other goods is that the market value of money cannot be expressed in terms of a single price, but must be expressed in terms of an overall range of prices. This range of prices is the purchasing power of money. When we speak of money as a store of value, what we really mean is that we expect it to have stable or increasing purchasing power over all other goods.
About Money
An important argument of the “store of value” proponents is that money is the good that best serves as a store of value and thus gradually emerged as the most common medium of exchange. This idea has little to do with Menger’s account of the origin of money. What emerged as money was not the best store of value, but the most marketable good.
The transition from direct to indirect exchange progresses as market participants discover that the breadth of demand for goods varies, and instead of bartering directly, they exchange for goods that are more widely demanded and thus more marketable. A small number of goods with useful characteristics for exchange, such as high value per unit weight and volume, divisibility, durability, and transportability, gradually become the dominant medium of exchange. Precious metals were used as money until the 20th century precisely because their qualities made them the most suitable commodity for this purpose.
Note that so far Menger’s discussion of monetary theory has made no mention of money being a store of value. In fact, he explicitlyarguedthat it would be a mistake to allow money to have the function of a store of value.
But the idea of attributing to money also the function of transferring “value” from the present to the future must be specified as erroneous. While metallic coins are undoubtedly suitable for this purpose as well, due to their durability and low cost of preservation, it is nevertheless clear that other commodities are more suitable. Indeed, where commodities less easily preserved than precious metals have assumed the character of money, experience has proved that they usually serve for the purpose of circulation, but not for the preservation of “value.”
It is only a fortuitous feature, and not essential to their monetary function, that monetary metals are also excellent stores of value. The property that makes a commodity a so-called store of value is also likely to make it a superior medium of exchange. Durability, therefore, is important for any monetary commodity, and it is clearly essential for it to remain a “store of value” forever.
Indeed, as Mises explained,Insofar as it can be said to exist in a given monetary commodity, the function of the storage of value is built into that commodity’s primary function as a medium of exchange. ‘Money functions as a medium of exchange that is generally accepted and generally used.’ Money serves as a medium of exchange that is generally accepted and generally used, and this is its sole function. All other functions that people ascribe to money are merely special aspects of its primary and only function as a medium of exchange.”
We need not discuss the demand for money in depth. As Mises mentions in the chapter just quoted, it is clear that people stockpile money and that all money is always held by someone somewhere. However, this also does not indicate that money necessarily functions as a “store of value.” As William H. Hutt explained in hisclassic paper(later elaborated by Hans Hermann Hoppe), the use of money in a person’s cash balance is the stockpiling of purchasing power against contingencies.
We keep cash on hand for emergencies or to take advantage of unexpected profit-making opportunities. But even bad money, i.e., money whose purchasing power is diminished and thus whose “store of value” is unintelligible, is used for this purpose. To have money is to hold on to it until a date in the uncertain future when it is expected to be exchanged for something of greater value.
Final Thoughts
Bitcoin enthusiasts who subscribe to the Austrian school of Menger, Mises, and Rothbard err by placing fundamental importance on the “store of value” function of money at the expense of its “medium of exchange” function, the latter being the only essential aspect of money The two are not the same thing. Similarly, downplaying the importance of the positive use of cryptocurrencies, which also entails an increase in business demand, in favor of the “HODL forever” mindsetis contrary to Mises’ recognition. Mises’ recognitionthat “business use alone can turn a commodity into a common medium of exchange.”
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