From Barter to Fiat: Unanswered Questions for Chartalism

Opponents of sound money rely on harebrained explanations of the origin of money. Perhaps chief among them is the Chartalist school of thought, which struggles even to adequately explain what the “first day of money” would look like in its framework.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

Mises solved the circularity problem of money’s value by arguing, following Menger’s work, the original price of a money was established by its previous exchange ratios to other commodity goods in a barter economy which gave it purchasing power as a medium of exchange. In discussing the validity of Mises’s regression theorem of money, Rothbard spoke of “the last day of barter.” By this he meant that, theoretically, before the point in time when gold or other commodities were used as media of exchange or money, rather than just valued commodities, they were goods in a barter economy—directly exchanged for one another. Before they were used as money, their prices were determined by supply and demand and could be expressed in an array of other goods or fractions of goods for which they would exchange. For example, the price of an ounce of gold prior to money in a barter economy is whatever full or partial goods or services for which it will exchange at that moment.

As people recognized the inherent limitations of a barter economy and the general demand for certain goods with particular characteristics—scarcity, divisibility, portability, durability, recognizability, fungibility, high value per weight, etc.—people began to use these goods for indirect exchange. Direct exchange is the wealth-maximizing action where individuals give up what they want less to get what they want more from another willing actor in an act of trade (without coercion or fraud). Free exchange depends on subjective valuation and disagreement over value between the participants—each one values what the other has more than what is given up in exchange. Mises called this “reciprocal surrender.” While this is mutually beneficial and wealth-maximizing, it is inherently limited because each side of the trade must want and possess the goods or services the other offers more than his own at that time, possess an amount of goods for which the other is willing to exchange, and know about each other. Under direct exchange, only certain exchanges can take place and there can be no economic calculation.…