by Zero Hedge

Once a society embraces the division of labor, direct exchange becomes increasingly infeasible. Without money, specialization is constrained; without money, dreams of constructing an advanced society are merely a utopian pipe dream. At its core, money is the lubricant for human relations. It simultaneously solves many problems of cooperation while serving as the basis for economic calculation. As awareness of nonsovereign cryptocurrencies has risen dramatically, questions about the history of money have gained salience. How does money arise? From where does it derive its value?

The following sections will expound upon the cumulative development of money, from livestock to bitcoin, by infusing the concept of legitimacy into Carl Menger’s theoretical framework as outlined in On the Origins of Money.


According to ethereum cocreator Vitalik Buterin:

Legitimacy is a pattern of higher-order acceptance. An outcome in some social context is legitimate if the people in that social context broadly accept and play their part in enacting that outcome, and each individual person does so because they expect everyone else to do the same.

From Buterin’s perspective, legitimacy operates as a hidden force that guides coordinated behavior. Legitimacy manifests itself through numerous avenues. These include brute force, continuity, fairness, process, performance, and participation. In addition to serving as an intrinsic component of blockchain technology, the concept of legitimacy can be applied as a mediating variable to explain the evolution of money.

From Protomoney to Store of Value

Barter societies revolve around economic actors who exchange goods and services directly, without a monetary medium. The impracticality of direct exchange ultimately inhibits societal prosperity and economic progress. Livestock and other agriculture products arose as protomoney within barter societies as early as eleven thousand years ago. In 1200 BC, cowry shells filled the role of a primitive money. Bronze and copper coins did the same two hundred years later in China. Furs, teeth, and wampum were utilized in a similar manner by Native American tribes for centuries.

An axiom within the marketplace is that not all goods possess the same saleability (i.e., the facility of disposing of said good at a convenient time, while it retains its purchasing power). Among modern foragers, ornamentation has been shown to be universal. The practice of collecting rare items, art, and jewelry remains prevalent worldwide today. Collectibles such as those aforementioned nonperishable commodities were not merely symbolic, however. They served a dual purpose, providing a way to transmit value through time and space, thus presenting individuals the ability to hoard value if desired. As Mises wrote in Human Action:

But one must never forget that the characteristic feature of human society is purposeful cooperation; society is an outcome of human action, i.e., of a conscious aiming at the attainment of ends. (p. 145)

A commodity’s transition into a store of value occurs spontaneously, driven by human action, without central planning. In terms of legitimacy, this shift is mainly facilitated through the avenue of participation. Paralleling an exhibition of “dollar voting,” members of barter economies actively participate in elevating the saleability of certain goods.

From Store of Value to Medium of Exchange

Over time, a commodity that achieves store-of-value status can evolve into a medium of exchange. A commodity that becomes a medium of exchange is able to procure any other good or service on the market. This monetary transition is aided by the legitimacy that coincides with the passage of time. If it’s generally accepted that a good has value at time T, through the phenomenon of continuity, one’s confidence grows that it will have value at time + 1.

To illustrate how legitimacy mediates the first two monetary transitions, imagine a village housing Alice, a potassium-deficient pig farmer, and Bob, a vegan with a banana tree. Without a third party, Alice is unable to strike a deal with her neighbor. As the village expands, more goods enter the scene, and a gold mine is discovered. Gold quickly becomes fashionable for ornamental purposes. In this scenario, it would behoove Alice and Bob to exchange their less saleable goods for those possessing higher saleability. All in the village are individually incentivized to recognize the rising saleability of gold, for doing so would provide a tremendous benefit. Aided by the legitimacy that accompanies participation, gold becomes a store of value. Gold’s portability, divisibility, durability, recognizability, and scarcity boosts the yellow metal’s legitimacy from a performance perspective. With the passage of time, gold’s saleability forms a reinforcing feedback loop wherein legitimacy is further established by continuity. At the end of the second phase, gold fulfills the role of a store of value and a medium of exchange within this village.

Medium of Exchange to Unit of Account

A commodity that transitions into a unit of account has reached a rarefied position. At this stage, all other goods in the market are priced in terms of said unit of account. Per Menger, “[M]oney has not been generated by law. In its origin it is a social, and not a state institution.” Governments in the past piggybacked on the medium-of-exchange status of precious metals and then established minting monopolies with the intention of instilling confidence in regard to the genuineness, weight, and fineness of the money supply. Through the stamping of coinage, governments were able to supply different denominations as well as more efficiently collect taxes. Regretfully, per Rothbard, “the emergence of money, while a boon to the human race, also opened a more subtle route for governmental expropriation of resources.”

The state’s monopoly on the use of violence is an ever-present threat. Legitimacy by brute force allows governments to engage in seigniorage. It similarly gave the US government the power to abandon the gold standard in 1933. Today, the enforcement of legal tender laws by governments stifle competing currencies. The legitimacy that coincides with the ability to incarcerate people facilitates the reckless monetary policies employed by central banks worldwide.


Since bitcoin’s (BTC) genesis block on January 3, 2009, we’ve been witnessing the evolution of a decentralized digital asset. While BTC has been on the receiving end of condemnations for failing to be useful as a medium of exchange, it’s imperative to recognize that this process takes time, just like it did ages ago with gold. Only recently has bitcoin transitioned from a protomoney into a store of value. If BTC becomes entrenched as a store of value, its volatility will decrease, and it will begin its transformation into a medium of exchange.

As a decentralized protocol, bitcoin has already earned legitimacy through participation and fairness. In the case of the latter, bitcoin has an open-source codebase, along with a transparent immutable ledger. Bitcoin’s participation legitimacy is evidenced by its liquidity, the size of its developer community, and its number of active addresses. With every passing year, confidence in bitcoin’s battle-tested peer-to-peer protocol grows and its brand awareness strengthens. If the Lindy effect is correct, bitcoin’s life expectancy increases proportionally with its current age. Thus, over time, BTC’s legitimacy will be further enhanced through the avenue of continuity if current trends continue.

Participation, fairness, and continuity, are not enough alone, however. Bitcoin’s transition to a medium of exchange will require legitimacy by performance. This ultimately will depend on the implementation and adoption of scalability solutions (e.g., the Lightning Network). Transactions using layer-two solutions do not occur directly on the base layer (blockchain). If perfected, this technology would exponentially increase the number of transactions per second on the bitcoin network.

The final stage in bitcoin’s evolution would necessitate a bitcoinization of our world. In this hypothetical future, large swathes of the population would transact in BTC, with no concerns for fiat exchange rates. For these individuals, the preference for sound money over inflationary fiat would be self-evident. Only time will tell if this revolutionary asset can overcome the higher-order acceptance afforded to the state by brute force legitimacy. Unrestricted currency competition opens up the possibility of bitcoin becoming a unit of account, and potentially a global reserve currency.