1. The Dependence of the Subjective Valuation of Money on the Existence of Objective Exchange-Value

According to modern value theory, price is the resultant of the interaction in the market of subjective valuations of commodities and price goods. From beginning to end, it is the product of subjective valuations. Goods are valued by the individuals exchanging them, according to their subjective use-values, and their exchange ratios are determined within that range where both supply and demand are in exact quantitative equilibrium. The law of price stated by Menger and Böhm-Bawerk provides a complete and numerically precise explanation of these exchange ratios; it accounts exhaustively for all the phenomena of direct exchange. Under bilateral competition, market price is determined within a range whose upper limit is set by the valuations of the lowest bidder among the actual buyers and the highest offerer among the excluded would-be sellers, and whose lower limit is set by the valuations of the lowest offerer among the actual sellers and the highest bidder among the excluded would-be buyers.

This law of price is just as valid for indirect as for direct exchange. The price of money, like other prices, is determined in the last resort by the subjective valuations of buyers and sellers. But, as has been said already, the subjective use-value of money, which coincides with its subjective exchange value, is nothing but the anticipated use-value of the things that are to be bought with it. The subjective value of money must be measured by the marginal utility of the goods for which the money can be exchanged.1

It follows that a valuation of money is possible only on the assumption that the money has a certain objective exchange value. Such a point d’appui is necessary before the gap between satisfaction and “useless” money can be bridged. Since there is no direct connection between money as such and any human want, individuals can obtain an idea of its utility and consequently of its value only by assuming a definite purchasing power. But it is easy to see that this supposition cannot be anything but an expression of the exchange ratio ruling at the time in the market between the money and commodities.2

Once an exchange ratio between money and commodities has been established in the market, it continues to exercise an influence beyond the period during which it is maintained; it provides the basis for the further valuation of money. Thus the past objective exchange value of money has a certain significance for its present and future valuation. The money prices of today are linked with those of yesterday and before, and with those of tomorrow and after.

But this alone will not suffice to explain the problem of the element of continuity in the value of money; it only postpones the explanation. To trace back the value that money has today to that which it had yesterday, the value that it had yesterday to that which it had the day before, and so on, is to raise the question of what determined the value of money in the first place. Consideration of the origin of the use of money and of the particular components of its value that depend on its monetary function suggests an obvious answer to this question. The first value of money was clearly the value which the goods used as money possessed (thanks to their suitability for satisfying human wants in other ways) at the moment when they were first used as common media of exchange. When individuals began to acquire objects, not for consumption, but to be used as media of exchange, they valued them according to the objective exchange value with which the market already credited them by reason of their “industrial” usefulness, and only as an additional consideration on account of the possibility of using them as media of exchange. The earliest value of money links up with the commodity value of the monetary material. But the value of money since then has been influenced not merely by the factors dependent on its “industrial” uses, which determine the value of the material of which the commodity money is made, but also by those which result from its use as money. Not only its supply and demand for industrial purposes, but also its supply and demand for use as a medium of exchange, have influenced the value of gold from that point of time onward when it was first used as money.3

• 1See pp. 99. Also Böhm-Bawerk, Kapital und Kapitalzins, Part II, p. 274; Wieser, Der natürliche Wert, p. 46. (Eng. trans. The Theory of Natural Value.)
• 2See Wieser, “Der Geldwert und seine Veränderungen,” Schriften des Vereins für Sozialpolitik. 132:513 ff.
• 3See Knies, Geld und Kredit (Berlin, 1885), vol. 1, p. 324.