The Future of Fiat Money: A Mengerian Perspective

In two essays published around the turn of the 20th century Carl Menger (1892, 1909) offered a logical evolutionary account or “rational reconstruction ” of the development of money out of barter. He explained how money had emerged incrementally and spontaneously from individuals ’ efforts to economize on their costs of achieving desired trades. Menger had to rationally reconstruct the origins of commodity money because the events he wanted to explain took place prehistorically, before written evidence. His theory is consistent with the anthropological and experimental evidence we do have. Just as importantly, the theory is grounded in the behavior of decentralized, self-interested, and modestly informed individuals. These features favor Menger’s theory over theories that imagine money to be the creature of heroic invention, central planning, or (untraceable) legal restrictions. In “The Evolution of a Free Banking System ” (Selgin and White 1987) we used Menger’s account of the evolution of commodity money as the starting point for a discussion of the evolution of an unregulated bank-based payments system. We argued that, absent legal restrictions, private banknotes and transferable deposits would largel