Does Money Need Intrinsic Value? What the Austrians Got Right, and What History Complicates

The Austrian economists gave us the most coherent account of money’s origins that Western economic thought has produced. Menger explained how money emerges spontaneously from market exchange. Mises proved, logically, that money must trace back to something that was valued before it became money. Rothbard sharpened both arguments and added the political implications: that government manipulation of money corrupts the very institution that makes economic life possible.

It is a compelling framework. It is also, when you look at the full sweep of monetary history, incomplete in one important and instructive way.

The Austrians, particularly in their application of Mises’s Regression Theorem, have often argued that money must have intrinsic value: a non-monetary use that anchors the chain of value back to something real. Gold is the paradigm case. Gold can be worn as jewelry, used in electronics, and fashioned into objects of beauty. It was desired for those uses long before anyone started treating it as money, and that pre-monetary desirability is what, in the Austrian account, gives it legitimate monetary standing.

The argument is internally consistent. It also fails to explain a twelve-foot limestone disk at the bottom of the Pacific Ocean that people considered perfectly good money.

What the Austrians Got Right

Before turning to the complications, it is worth being precise about what the Austrian framework actually achieves, because it achieves a great deal.

Carl Menger (1840-1921), in his 1871 Principles of Economics (https://mises.org/library/principles-economics) established that money is not a government invention. It is a market institution that emerges spontaneously when individuals, searching for more efficient ways to trade, begin converging on the most marketable goods as intermediaries. No authority made the decision. No philosopher designed the system. Countless individual choices, each made for personal reasons, produced the institution of money as an unintended collective outcome.

Menger writes:
There is no better method of enlightening each person about his economic interests than that he perceive the economic success of those who use the right means to achieve their economic ends. From this it follows that nothing furthered the interests and progress of society more than that, with the progressive development of goods into money-goods, each economizing individual was instructed by his own economic interest to exchange his less saleable goods for the most saleable goods, even if he did not require these for any immediate consumption purpose.

This is a genuinely important insight. It means that money is prior to the state, not a creation of the state. It means that the qualities money needs, divisibility, durability, portability, scarcity, recognizability, are not arbitrary bureaucratic requirements but properties that the market selects for organically. And it means that when governments try to override those market selections by decree, declaring something money that the market would not otherwise choose, they are working against a deep institutional grain.

Ludwig von Mises built on this foundation with his Regression Theorem, stated in The Theory of Money and Credit (1912) (https://mises.org/library/theory-money-and-credit) The theorem holds that the value of money today depends on yesterday’s purchasing power, which depends on the day before that, and so on back through time, until you reach the point where the good being used as money was first valued for non-monetary purposes.

Mises writes:
No good can be employed for the function of a medium of exchange which at the outset, at the moment when it was first used as a medium of exchange, did not have exchange value on account of other employments. And the theory also furnishes a complete explanation of the present-day exchange value of money.

The theorem is doing something precise and important. It is not saying that money must always be physically useful. It is saying that money cannot be conjured from nothing. Its value must have a history, a chain of acceptance that runs backward in time to something that was valued for reasons independent of its use as money. That chain of historical acceptance is what distinguishes money from a promise, which is only as good as the promisor, and from a declaration, which is only as good as the institution making it.

Murray Rothbard extended the analysis further in Man, Economy, and State (1963), available at https://mises.org/library/man-economy-and-state-power-and-market, arguing that sound money is not just an economic preference but a moral one. When governments inflate the money supply, they are transferring wealth from people who saved in good faith to the institutions that issued the new money.

As Rothbard writes:
Inflation is not an act of God; it is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy…one that can be introduced by one group of men and halted by them whenever they so decide.

The Austrian framework is at its most powerful precisely here. It explains why every fiat currency in history has tended toward debasement, why central banks consistently err on the side of expansion, and why the people who pay the price of inflation are rarely the people who benefit from it.

Where the Argument Gets Complicated

The concept of intrinsic value seems intuitive. Gold has it. Paper dollars do not. Case closed.

Except that the history of money does not cooperate with this tidy conclusion. If intrinsic value, meaning material usefulness independent of monetary function, were actually the criterion that determines what works as money, then the monetary record of human civilization would look very different from the one we have.

Consider cowrie shells. For roughly four thousand years, across China, India, Africa, and much of the rest of the ancient world, cowrie shells were the dominant form of money. They are beautiful objects, but their non-monetary uses are essentially decorative. They cannot be eaten. They have no industrial application. They are not particularly rare as a raw material. Yet they functioned as money across vast geographic distances and multiple civilizations for millennia. The Austrian would reply that their scarcity relative to the need for a medium of exchange, combined with their durability, portability, and uniformity, gave them monetary value. This is true, but notice what has happened: we have quietly shifted from “intrinsic value” as the criterion to something closer to “fitness for monetary function.” Those are not the same thing.

Now consider the Rai stones of Yap Island, in what is today Micronesia. The Yapese used massive limestone disks, some twelve feet in diameter, quarried from the island of Palau more than 250 miles away, as their primary form of money. The stones were not native to Yap, had no material utility, and many of them were too heavy to move. Their value came entirely from the combination of their size, their history, and the extraordinary effort required to produce and transport them.

As William Henry Furness III, who traveled to Yap in 1903 and wrote the first detailed English account of the system in The Island of Stone Money: Yap of the Carolines (https://www.gutenberg.org/ebooks/72830) documented:
The value of these stone discs does not depend on their size alone, but is fixed by the history of each individual stone. If the stone is large and heavy, and if in the making or transport of it someone was killed, or if it was made by a celebrated quarrier, then the stone is more valuable than another stone of the same size with no such history.

And in perhaps the most famous passage in the history of monetary anthropology, Furness describes a stone that had sunk to the bottom of the ocean during a storm in transport, and yet retained its full monetary value because everyone in the community agreed on who owned it:
There was in the village a family which was, and for generations had been, reputed to be very wealthy…Their wealth consisted of a large fei, or stone money…the ancestors of the present owners had brought it over from Anap, but on the way home the boat was upset in a storm, and, although the crew got safely to shore, the stone was lost and is supposed to be lying at the bottom of the sea. As the removal of the stone was witnessed by all, everyone is satisfied that it is where it sank, and that no one else has laid claim to it. Therefore, it is still the property of the family, and they are considered wealthy.

There is no material object in anyone’s possession. There is no gold in the vault. There is only the community’s shared memory and mutual agreement. The stone works as money because the community says it does, and because they trust each other enough to act on that agreement across generations.

This is not a failure of the monetary system. It worked. For centuries.

In Shells to Satoshi: The Story of Money and the Rise of Bitcoin Heikkinen and Marquez summarize what the Rai stones reveal:
It is clear that this form of money could only exist in a culture with a high degree of social cohesion and trust reinforced by centuries of tradition…But it also demonstrates that it is possible to have a kind of money whose value does not lie exclusively with the possession and custody of a physical object. In the case of the Rai stones, their value was rooted as much in the stories told about them, the enormous effort expended for them, and the social consensus that determined ownership, as in the physical stones themselves.

The Rai stones also offer a lesson about what actually needs to be scarce. When the Irish American sailor David O’Keefe arrived on Yap around 1871 and began quarrying new stones cheaply with better tools and boats, the Yapese rejected or devalued them. The limestone was identical. What was missing was the proof of work, the irreversible expenditure of effort that the original stones encoded. Scarcity of effort, not scarcity of material, was the monetary anchor.

Bitcoin and the Regression Theorem

The intrinsic value debate has returned with full force in the twenty-first century, because on October 31, 2008, Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System,” (https://bitcoin.org/bitcoin.pdf) and proposed a form of money with no physical substance whatsoever.

Bitcoin is a protocol. It runs on millions of computers around the world. A bitcoin cannot be worn, eaten, used in manufacturing, or touched. Some Austrian-influenced critics have argued on precisely these grounds that Bitcoin fails the Regression Theorem and therefore cannot be legitimate money. If there is no pre-monetary commodity value, the chain of historical acceptance cannot be established, and the whole edifice collapses.

The counter-argument, made at length in by Heikkinen and Marquez in Shells to Satoshi, is that Bitcoin does satisfy Mises’s actual criterion, properly understood, even if it does not satisfy a naive version of the intrinsic value requirement:
One of the biggest intellectual attack vectors against Bitcoin, often held by those who were influenced with Austrian economic ideas, is the belief that Bitcoin does not have ‘intrinsic value.’ The argument that Bitcoin has no intrinsic value is based on the idea that, unlike physical commodities or traditional currencies, Bitcoin is not backed by any tangible asset. Critics argue that Bitcoin’s value is purely speculative and derived solely from the belief that others will continue to find it valuable. They point out that Bitcoin does not have inherent utility, like gold, which can be used in jewelry and electronics. Yet, neither is fiat currency, which requires trust in a centralized authority, the government, and central banking system.

The key is what Bitcoin’s value was before it became money. In its earliest days, before May 22, 2010, what is now called Bitcoin Pizza Day, when developer Laszlo Hanyecz paid 10,000 bitcoins for two pizzas at a dollar value of $41, bitcoin had no market price at all. But it had non-monetary value among the small community of cryptographers and cypherpunks who built and used it: as a collectible, as a technological curiosity, as a proof-of-concept for mathematically enforced digital scarcity, and as a symbol of participation in a community with a shared set of values about privacy and sound money. Heikkinen and Marquez note: 
Bitcoin did have some worth as a collectible item, no different at this early stage than digital trading cards, apart from the immutable scarcity built into the Bitcoin network, which digital trading cards do not have. Early Bitcoin adopters would also use Bitcoin for tipping, sending bitcoins as a way to show approval for interesting and well-written posts on online forums…Participation in the Bitcoin network fostered a sense of belonging to a unique and forward-thinking community. This social aspect added a layer of non-monetary value.

In other words, Bitcoin satisfies the Regression Theorem in the same way the Rai stones do: its pre-monetary value was not material utility but something more like social and informational value, proof of work encoded in computation, scarcity enforced by mathematics, and trust established through a transparent and auditable record. The chain of acceptance can be traced. It just does not run through a jewelry counter.

What History Is Actually Teaching Us

Taken together, cowrie shells, Rai stones, paper money, and Bitcoin are all telling the same story, and it is not the story that a naive version of the intrinsic value argument would predict.

What makes money work is not the material it is made of. What makes money work is a combination of three things that the Austrians identified correctly but sometimes collapsed into a single concept: scarcity, trust, and the continuity of acceptance across time. Gold has all three, which is why it has functioned as money across such a vast range of civilizations and centuries. But it is not the only thing that can have them.

Ayn Rand, whose philosophy was deeply influenced by the Austrian tradition, asked the right question when she wrote: “Value presupposes an answer to the question: of value to whom and for what?” The Austrians are right that value is ultimately subjective, determined by individual preferences rather than by any intrinsic material property. What they sometimes underestimate is how powerfully social those individual preferences are, how much of what we value we value because others value it, how much of money’s function is grounded not in the physical world but in the shared stories and mutual agreements of communities.

The Rai stone at the bottom of the lagoon is worth something because everyone in the village remembers the story of how it got there and agrees on who owns it. The bitcoin in your wallet is worth something because millions of people around the world, running nodes on their own computers, have independently verified the same ledger and agreed that the record is correct. These are both forms of trust. They are both forms of social consensus. And they are both, in their own ways, forms of proof of work: the irreversible expenditure of effort, whether in limestone quarrying across open ocean or in computation across a distributed network, that gives money the one thing it absolutely cannot do without.

The Austrians gave us the right questions. History gives us a richer set of answers than even they anticipated.

Primary Sources Referenced in This Post

Carl Menger, Principles of Economics (1871): https://mises.org/library/principles-economics

Ludwig von Mises, The Theory of Money and Credit (1912): https://mises.org/library/theory-money-and-credit

Murray Rothbard, Man, Economy, and State (1963): https://mises.org/library/man-economy-and-state-power-and-market

William Henry Furness III, The Island of Stone Money: Yap of the Carolines (Philadelphia: J.B. Lippincott Company, 1910): https://archive.org

Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System” (2008): https://bitcoin.org/bitcoin.pdf

Deanna Heikkinen and Joel Marquez, Shells to Satoshi: The Story of Money and the Rise of Bitcoin.

Ayn Rand, For the New Intellectual. New York: Signet, 1961. 

Scott M. Fitzpatrick and Quetta Kaye, “Rai Stones: The Social Value of a 20th Century Micronesian Stone Money,” Economic Anthropology 4, no. 1 (2017): 98-115

The Money Wisdom Project is a 501(c)(3) nonprofit dedicated to teaching children, women, and communities about the history and nature of money through primary sources. Free downloadable curriculum packets launch this summer at moneywisdomproject.org.