How money was born without government's help

21.04.2026

The following series of articles presents the Austrian School of economics, 1000 words at a time. Nine economists. Twenty-seven articles. One coherent tradition that the establishment has been trying to ignore for 150 years. They were right.

Article 2/27

Vienna. 1884.

Carl Menger opens the review and reads it slowly.

Gustav von Schmoller — the most powerful economist in the German-speaking world, head of the German Historical School, gatekeeper of every significant academic appointment from Berlin to Munich — has responded to Menger’s latest book with something between contempt and fury. The review is not an engagement with the argument. It is a dismissal. Schmoller declares that Menger and his followers are unfit to hold teaching positions at any German university. He coins a phrase for them, intended as an insult: the Österreichische Schule. The Austrian School. Backward. Provincial. Out of step with modern science.

Menger sets the review down. Then he picks up his pen and begins to write.

Not a formal rebuttal. Not an academic rejoinder. He writes a pamphlet in the form of letters to a friend — conversational, precise, and according to Hayek, one of the most devastating intellectual counterattacks in the history of economics. Of Schmoller, he writes that it is “grievous to ridicule the ridiculous” — but that some opponents leave you no other choice.

He also does something Schmoller never anticipated. He keeps the name. The Austrian School. Takes the insult, wears it as a badge, and builds the most important tradition in economics around it.

Here is the idea he was fighting to defend.

No king made money

Menger’s theory of the spontaneous emergence of money is one of the most elegant ideas in all of economics — and one of the most subversive. Because if he’s right, then governments didn’t create money. They didn’t design it, decree it, or bestow it upon grateful populations. They found it already existing, appropriated it, debased it, and spent the next several centuries telling everyone they’d invented it.

The standard story — the one that conveniently flatters every state that has ever existed — goes roughly like this: primitive people bartered clumsily. Barter was inefficient. So wise rulers introduced money to solve the problem. The state gave us money, and money made civilisation possible. Aren’t you grateful?

Menger read this story as a market analyst reads a bad financial report: with the immediate suspicion that something important is being hidden.

The double coincidence problem

Start from scratch. No money exists. You have fish. You want bread.

Under pure barter, you need to find someone who has bread and wants fish, at the same time, in roughly the quantities you both need. Economists call this the “double coincidence of wants.” It sounds manageable until you think about it for thirty seconds. You’re a carpenter who wants shoes. The cobbler wants a haircut, not furniture. The barber wants vegetables, not a haircut right now. Everyone has something. Almost nobody has the exact thing the person they’re standing in front of actually needs.

Barter works in tiny communities where everyone knows everyone. The moment trade expands beyond that circle, it becomes a logistical nightmare. Something needs to bridge the gap.

Menger’s question wasn’t “what should the government use as money?” It was: “what would individuals, acting in their own interest, naturally start using as an intermediary good?”

The answer follows from simple logic.

The most saleable commodity

If you have fish and can’t find anyone who wants fish right now, your best strategy is to trade your fish for something that more people want — even if you don’t want it yourself — because that gives you a better chance of completing the trade you actually need.

Over time, in any trading community, certain goods emerge as the most saleable — the most widely wanted, most easily transported, most durable, most divisible. Not because anyone planned this. Because individuals, making individual decisions in their own interest, kept converging on the same goods as intermediaries.

Gold and silver didn’t become money because kings declared them money. They became money because they were — across every culture, every continent, every era — the most saleable commodities available. They don’t rot. They don’t rust. They’re portable. They’re divisible without losing value. They’re scarce enough to hold value but available enough to circulate. Every civilisation that encountered them independently reached the same conclusion: this is what we use.

Money, in Menger’s framework, emerged out of spontaneous order. Like language. Like law. Like trade routes. Nobody designed it. Nobody approved it. It emerged from the interaction of millions of individuals, each making rational choices in their own circumstances, and it converged on gold and silver the same way languages converge on efficient grammars — not by decree, but by the ruthless selection of what works.

The Methodenstreit — What happened

This is where Schmoller comes back in — because the fight wasn’t really about manners.

The German Historical School believed that economics was too complex for general laws. You couldn’t deduce how money emerged from first principles. You had to study history, collect data, observe each specific case. Every economy was different. Every institution was a product of its unique historical circumstances. General economic laws — the kind Menger was building — were, in Schmoller’s view, an abstraction disconnected from reality.

Menger’s position was the opposite: that economic laws derived from the nature of human action are universal. They apply in Vienna and in ancient Rome and in a Polynesian fishing village. You don’t need to collect ten thousand data points about monetary history to understand why money emerges — you need to understand what human beings do when they face the problem of exchange. The data confirms the theory. The theory doesn’t wait for the data.

This wasn’t a polite academic disagreement. Schmoller used his institutional power to block the careers of anyone associated with Menger. He declared the Austrian School unfit for serious academic life. He had the connections to make it stick — and he did, for decades. Menger’s students couldn’t get German university posts. The school was forced to develop in Vienna, at the margins of the mainstream.

But here is the thing about being right: you don’t need the mainstream’s permission to remain right. The German Historical School produced Schmoller, and Werner Sombart, and a lot of government-friendly historical data collection — and then it died. No economist today calls himself a member of the German Historical School. The ideas Schmoller championed mutated and reemerged in various forms, but the school itself is gone.

The Austrian School, named as an insult by the most powerful man in German economics, is the one still standing.

What Menger proved

Put these two things together — subjective value theory from Article 1, and the spontaneous emergence of money from Article 2 — and you have something significant.

If value is subjective, then prices are the aggregated judgements of individuals. If money emerged spontaneously from individual choices without government design, then the monetary system is also the aggregated result of millions of individual decisions made over centuries. Neither value nor money requires a central authority to exist. Both predate the state. Both function better without it.

This is not a political preference. It’s a logical conclusion from a theory of human action.

And it raises a question that the next generation of Austrian economists would spend their careers answering: if value and money both emerge spontaneously from human action — what happens when a government decides to manage the money supply? What happens when it sets the interest rate? What happens when it inflates the currency?

A young Viennese economist named Eugen von Böhm-Bawerk read Menger’s Principles as a student in the 1870s. He understood the implications immediately. He spent the rest of his life working them out.