08/07/2020 Frank Shostak/Mises Wire/Mises Institute
Why does the dollar bill in one’s pocket have value? The value of money is established, according to some experts, because the government in power says so. For some commentators the value of money is on account of social convention. What this implies is that money has value because it is accepted. And why is it accepted? …because it is accepted! Obviously this is not a good explanation of why money has value.
The Difference between Money and Other Goods
Let us try another approach. Demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them. Likewise, people demand money not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value—it is exchangeable in terms of other goods and services. Money is demanded, because it offers the benefit of its purchasing power, i.e., its price.
Consequently, for something to be accepted as money it must have a preexisting purchasing power, a price. So how does a thing that the government proclaims will become the medium of exchange acquire such purchasing power, a price?