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What is a Medium of Exchange?

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Someone over at reddit linked to Bob Murphy’s discussion on bitcoin. He points out that Bob at around the 26 minute mark uses “medium of exchange”  to mean one person making one trade. He says this refutes my assertion that medium of exchange means tons of people using it.

Here’s my reply.

Bob makes several mistakes in that off the cuff, unprepared “ramble” [=his description].

First he claims that in Money and Credit Mises is giving a history lesson. I refuted that long ago, quoting exactly where Mises writes that he is not writing a hsitory lesson about gold, but about every money that exists, will ever exist, and ever existed: https://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/

Second, he claims that according to the regression theorem [if it is not a history lesson], it is impossible for even one person to use bitcoin as a medium of exchange. This is patently false. Murphy forgets the adage that there is a sucker born every minute. There are enough fools and suckers out there to make anything possible, on a small scale and for a short length of time. I have a long list of things that were used as money, not just a medium of exchange, for a short time and on a small scale. And they all collapsed for the very reason that Mises pointed out in the regression theorem: https://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game-part-2-in-which-we-shew-that-bitcoin-has-never-not-even-once-been-used-as-a-medium-of-exchange/

But I will be honest and say that the phrase “medium of exchange” is used in two ways by economists. Sometimes it is used the way Murphy did, to mean a one-off use by one person. I have pointed this out in the forums and on my blog.

But let’s have a look see at this quote from Timothy Terrel [=associate professor of economics at Wofford College in Spartanburg, SC, and an adjunct scholar with the Ludwig von Mises Institute], who writes:

One of the consequences of the regression theorem is that money must arise from a commodity already in general use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange. As Mises’s student Murray Rothbard wrote, money “cannot be created out of thin air by any sudden ‘social compact’…”

Widespread demand before it can even be a medium of exchange? All it takes is three people willing to use it one time, a la Bob Murphy. Whatever can this adjunct professor with the Mises Institute possibly mean?

Obviously, he understands “medium of exchange” to mean “non trivial medium of exchange”. Which is the way I use it, as well.

Bitcoin can only become a money in the future of it at first “in general use“. It must have a “widespread demand” before it is used as a medium of exchange, if by medium of exchange we mean non trivial medium of exchange.

But really, it’s just a question of semantics. Whether the phrase “medium of exchange” includes the concepts of being in general use with widespread demand, and whether it doesn’t, is of no importance. What does count is that in order to have a chance at ever being money, the thing in question “must arise from a commodity already in general use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use” as money. We have explained why this is many times on our humble blog. Do a search for bitcoin.


  1. Smiling Dave says:

    1. Now Pete, you know I invited you to repost politely.

    2. This last post is a teeny bit better in that respect, not much, but since I see you made an effort, I’ll let this comment in.
    The next one, though, will have to be still more professional.

    3. So there exist secondary media of exchange. So what?
    The regression theorem applies to them, as well.
    They pass the requirements of the theorem. Bitcoin doesn’t.
    It never had intrinsic value.


  2. Smiling Dave says:

    To spell it out:
    Satisfy the reasons I listed as relevant and satisfy regression theorem = medium of exchange.
    Do not satisfy my reasons but satisfy regression theorem = secondary medium of exchange.
    Satisfy neither, and thus has no chance of ever becoming a medium of exchange nor of ever becoming a secondary medium of exchange = bitcoin.

    The reasons I list as relevant are not mine, but Mises’.
    You may recall that he writes that the difference between a medium of exchange and money is one of degree [of acceptance] only.
    [See Money and Credit, Chapter 1, section 2 and especially Human Action Chapter 17, Section 1].
    What the heck, I’ll quote it for you:
    A medium of exchange which is commonly used as such is called money. The notion of money is vague, as its definition refers to the vague term “commonly used.” There are borderline cases in which it cannot be decided whether a medium of exchange is or is not “commonly” used and should be called money. But this vagueness in the denotation of money in no way affects the exactitude and precision required by praxeological theory. For all that is to be predicated of money is valid for every medium of exchange. It is therefore immaterial whether one preserves the traditional term theory of money or substitutes for it another term. The theory of money was and is always the theory of indirect exchange and of the medium of exchange

    Your deleted post wrote that I confuse a medium of exchange with money. No, I am using Mises’ criteria for medium of exchange.
    According to him, they are to be confusable at times, the line between them not clearly drawn.
    Of course the distinction between a secondary medium and money is crystal clear, as we both agree.

    But lest someone think we are now reduced to mere semantic distinctions, and thus bitcoin is as good as anything else, no.
    It still does not satisfy the regression theorem.
    There were those who argued that the regression theorem has been proved wrong because bitcoin is a medium of exchange as we speak.
    I pointed out that it is not a medium of exchange.
    You argue that it acts as a secondary medium of exchange. In a trivial amount of transactions. maybe.
    Makes no difference to the essential argument, that it violates the regression theorem..


  3. Smiling Dave says:

    Sure bitcoin is a secondary medium of exchange in almost all the transactions it’s used in. But all those transactions add up to a trivial amount.
    For example, if I have three rice cookies, and I say that is a trivial amount of rice, you might say, no, those rice cookies are 99.9% rice, a very non trivial amount.
    And that’s true. But the amount of rice in all three cookies together is a few grams, a trivial amount compared to the five million tons of rice consumed daily.

    I’ve written about this many times in my blog and in the mises forum, in fact right here in the article you are commenting on. The very first step for a thing to be a medium of exchange, whether primary or secondary, and certainly to be a candidate for money, is that it have widespread demand. Meaning people covet it, want it, desire it, long for it. And there have to be many, many, many people who covet it, want it, desire it, long for it. If we are talking about a local currency, like an Ithaca Hour, it has to be significant percentage of the town. If we are talking about a world wide currency, it has to be a significant percentage of the world. And that demand has to be, according to the regression theorem, for a non- monetary use. Meaning that people want it to sit in their homes, not to pass it off like the old maid card on to the next guy. Bitcoin has no non monetary use. So it is not a primary, nor a secondary medium of exchange, and certainly not a money. In addition, the regression theorem proves that it never will be.

    Not only do bitcoins have no non monetary use, the use it has at all is trivial. The market for bitcoins is teeny tiny. There a few million bitcoins scattered all over the world. The amount of people who have even heard of bitcoin is infinitesimal. The amount of people who actually use it is even less. And the amount of times they use it as a medium of exchange, whether primary or secondary, is a teeny tiny itsy bitsy [to use the technical jargon] percentage of the transactions they make daily. For every bitcoin transaction they make a week, they make tens of thousands of dollar, or euro, or yen, or whatever transactions.

    Pete, I’m going to have have to insist on something from now on, to save all time. Before you refute me, summarize my position, so that we are all on the same page. Then you can show why you think I am wrong.
    I say this because I never have to invoke anything new in response to you, just quote to you something I’ve already written many times. You claim to have read all my articles, so it should be no problem.

    How’s the Masters’ Thesis coming along?


  4. Smiling Dave says:

    What determines the potential market share? You don’t say. You just list some examples without explaining the logic behind it.

    I’ve explained the logic behind it many times, for example here: https://smilingdavesblog.wordpress.com/2011/12/20/bitcoin-and-mises-regression-theorem

    The idea is ridiculously simple. Say you are a carpenter who works many hours to make a table. You then go out and sell your table. Someone offers you some objects, X, you have never seen before. He wants to trade you his object X for your table. You say to him, “It’s a cute little cuddly object, but I made my table in order to feed my family, buy some gasoline, pay my bills, and a dozen other things. If I give you my table and take your X, I won’t be able to do all those things, because the butcher, the baker, and the candlestick maker are not willing to accept X in exchange for their wares. I want payment in dollars [or whatever the local currency is] so I can get my shopping done. Only if Object X is in wide demand, wide enough that I am certain I can trade it for everything on my shopping list, will I accept payment in X.”

    This also answers your question about what determines potential market share. It’s not a question of market share at all. That is just a misunderstanding on your part. If, for example, there is a country in which both gold and silver are used as money, it matters not what the market share of gold and silver are. What matters is will everyone accept gold? If yes, no matter the size of the market share gold has, it is a viable medium of exchange.

    So the day you can be given a paycheck in bitcoins, and then you can use bitcoins to buy everything your heart desires, that’s when bitcoin will be a medium of exchange. Until then it just isn’t.

    As for Gold, it was a medium of exchange for a given set of people if everyone in that set could buy everything he wanted using gold as payment. Thus, gold is not a counterexample.

    Even if 100% of online gambling was done in bitcoin, that would be irrelevant. Until the housewife goes out to the mall to shop and can buy everything offered there with bitcoin, bitcoin is not a medium of exchange. Even if all gambling is done in bitcoin that does not even make bitcoin a medium of exchange for gamblers, because when they leave the gaming table and go to the mall, they have to use dollars, and cannot use bitcoins.

    I hope this clarifies why liquidity and transactions costs are irrelevant. What counts is only one thing. Can I buy everything I want with bitcoin, or not?

    Glad to hear you are doing well. Link to your site?


  5. Smiling Dave says:

    You didn’t understand what I wrote.


  6. Smiling Dave says:

    You haven’t read the article.


  7. Smiling Dave says:

    You did not read the article. No contradictions.


  8. Smiling Dave says:

    You haven’t read my previous comments.


  9. Smiling Dave says:

    It’s not a contradiction.

    As you will recall, Mises in HA writes in Chapter 17 that the difference between money and medium of exchange is one of degree [of universality of use], with the possibility of borderline cases.

    In any case, a money must be, a fortiory, a medium of exchange as well. The article you quote is proving bitcoin is not money by showing it is not even a medium of exchange.

    I’ll write an article soon explaining all about secondary media of exchange. Stay tuned.


  10. Smiling Dave says:

    A degree of what? You already specify that a medium of exchange needs to be accepted for everything by everyone. So which degree is a larger with money?

    You didn’t read the comment carefully.


  11. Smiling Dave says:

    I’ll write an article soon explaining all about secondary media of exchange. Stay tuned.


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