Section 1.1
The Nature and Purpose of Money
Learning Objective
To understand money as a spontaneous, social technology that enables cooperation across time — and to see Bitcoin not as an anomaly, but as the next logical step in that 5,000-year evolution.
Introduction: Why Study the Nature of Money?
Most people use money every day without ever asking what it is.
We assume it’s just “currency” — numbers on a screen, printed paper, or balances in an account. But money is far older and deeper than banking or government.
The Austrian School teaches that money is not a political construct. It is a cultural and informational tool — one that evolved to help humans cooperate and allocate scarce resources across time. It sits at the center of civilization because it enables strangers to trust one another’s promises.
“Money is one of the greatest instruments of freedom ever invented by man.”
— F.A. Hayek, Denationalisation of Money (1976)
Understanding money, therefore, is not simply an economic question. It’s a philosophical one — about how societies organize knowledge, discipline, and time.
Bitcoin, properly understood, is not a “new” form of money, but a return to the principles that made civilization possible: voluntary exchange, scarcity, and accountability.
The Spontaneous Origin of Money
In 1871, Carl Menger, founder of the Austrian School, published Principles of Economics.
He observed that barter economies are limited by what economists call the double coincidence of wants — both parties must desire what the other offers.
Over time, certain goods emerge as more saleable — easier to exchange for anything else.
“Money has not been generated by law. In its origin it is a social, and not a state institution.”
— Carl Menger, Principles of Economics (1871)
Menger’s Insight:
Money is a market discovery, not a government invention.
Individuals experimenting in trade gradually converge on goods that are most useful as intermediaries. These goods become money because the market selects them, not because rulers decree them.
Historically, gold, silver, and copper filled this role because they possessed six superior attributes:
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Scarcity
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Divisibility
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Portability
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Durability
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Recognizability
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Fungibility
Bitcoin Parallel
Bitcoin mirrors these properties perfectly — digitally:
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Scarce: Only 21 million coins
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Divisible: 100 million sats per BTC
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Portable: Transferable globally in minutes
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Durable: Information stored on thousands of nodes
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Recognizable: Verified cryptographically
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Fungible: Every sat interchangeable within protocol rules
Thus, Bitcoin represents the same market-driven emergence that Menger described — only this time, it is driven not by merchants in ancient marketplaces but by cypherpunks and engineers seeking incorruptible money for the digital age.
“It might make sense just to get some in case it catches on.”
— Satoshi Nakamoto, 2009
Money As a Tool for Cooperation
Money is the language of value — a communication medium that allows human beings to coordinate production, specialization, and exchange.
Without money, societies can only operate locally through barter or tribal reciprocity.
With money, the range of cooperation expands to millions of people who will never meet. It transforms the chaos of individual desires into the harmony of a market.
“Money is the most marketable good, which can therefore be readily exchanged for any other good. Its function is to facilitate trade and cooperation.”
— Carl Menger, Principles of Economics (1871)
Austrians see money as the culmination of spontaneous order — like language or law, it evolves from below, not from above.
It emerges whenever humans need to solve the problem of trust in deferred exchange.
Bitcoin Parallel
Bitcoin solves the same problem — trust — but does so mathematically rather than socially.
Whereas gold required vaults and banks, Bitcoin relies on proof-of-work and distributed consensus.
In both cases, money acts as an impartial referee for human cooperation — but Bitcoin removes the need to trust any third party.
“With e-currency based on cryptographic proof, without the need to trust a third party, money can be secure and transactions effortless.”
— Satoshi Nakamoto, 2009
Interpretation
Bitcoin restores money to its original purpose: a neutral, voluntary medium of coordination.
It allows for peaceful cooperation on a planetary scale without political coercion.
The Three Functions of Money
Ludwig von Mises formalized money’s roles into three interlocking functions:
Medium of Exchange, Store of Value, and Unit of Account.
“Money is not a measure of value or prices; it is the common medium of exchange, through which economic calculation becomes possible.”
— Ludwig von Mises, The Theory of Money and Credit (1912)
1. Medium of Exchange
Money lubricates trade. It allows specialization by eliminating barter inefficiencies.
Every innovation in human society — from agriculture to the internet — rests on this ability to exchange and store value efficiently.
2. Store of Value
For money to function, it must retain purchasing power over time.
Austrian economists stress that this property aligns incentives toward saving, planning, and investment. When money loses value, people are forced into speculative behavior — chasing assets just to stay ahead of inflation.
3. Unit of Account
Money must provide a consistent standard for pricing goods and settling debts.
Inflation distorts this, turning the economic map upside down. When the measuring stick (money) changes constantly, rational planning becomes impossible.
“Sound money is what protects people’s savings and allows for civilization to progress.”
— Saifedean Ammous, The Bitcoin Standard (2018)
Bitcoin Parallel
Bitcoin satisfies all three roles:
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Medium of Exchange: Borderless, frictionless digital transfer.
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Store of Value: Scarcity enforced by code and energy.
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Unit of Account: Internally consistent (1 BTC = 100,000,000 sats) and increasingly used in Lightning-based commerce.
“Bitcoin is the first monetary system in history whose supply is perfectly inelastic and whose rules are enforced by its users, not rulers.”
— Ammous, The Bitcoin Standard
Subjective Value and the Regression Theorem
Austrian economics rests on one profound truth:
Value is subjective. It does not exist in things, but in minds.
“Value is not intrinsic. It does not exist in things. It is within us; it is the way in which man reacts to the conditions of his environment.”
— Ludwig von Mises, Human Action (1949)
This insight separates Austrian thought from Marxist and Keynesian traditions. Value cannot be dictated by a government, an algorithm, or a central bank. It is discovered through countless voluntary exchanges, each revealing what individuals actually value.
The Regression Theorem
Mises extended this reasoning with his regression theorem — answering a question that puzzled economists:
“If money has value only because it is accepted, how did it become accepted in the first place?”
His answer: every money must have originated as a commodity valued for its own sake before it was used as money.
Gold, for example, was prized for its beauty and malleability long before it became currency.
Bitcoin critics often cite this to argue that Bitcoin cannot be money because it had no pre-monetary use.
But early adopters did value Bitcoin — for its monetary properties: its digital scarcity, censorship resistance, and independence from authority. Those qualities were themselves useful in a world of monetary debasement and financial surveillance.
“Bitcoin did not need to have prior commodity use. Its value arose from the unique property of being the first digitally scarce object.”
— Saifedean Ammous, The Bitcoin Standard (2018)
Interpretation
The regression theorem does not disqualify Bitcoin — it explains it.
Bitcoin’s initial subjective value was based on the freedom it enabled — freedom to transact without permission, to hold value without confiscation, and to verify truth without trust.
“In a sense, the regression theorem ends where Bitcoin begins.”
— Parker Lewis, Gradually, Then Suddenly (2019)
Economic Calculation and the Role of Prices
Friedrich Hayek argued that the price system is humanity’s most sophisticated form of collective intelligence.
Prices communicate information about supply, demand, scarcity, and opportunity — all without central coordination.
“The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people are made to use the material more sparingly.”
— F.A. Hayek, The Use of Knowledge in Society (1945)
For this system to function, money must be sound.
When the state manipulates interest rates or prints money, it distorts these vital signals — leading to malinvestment.
Entrepreneurs make decisions based on false price information, building projects that appear profitable under cheap credit but collapse once reality asserts itself.
“The business cycle is caused by credit expansion which lowers the interest rate artificially and thereby misleads businessmen into malinvestments.”
— Ludwig von Mises, Human Action (1949)
These cycles — boom and bust — are not natural features of capitalism; they are symptoms of monetary distortion.
Bitcoin’s Correction
Bitcoin corrects this by restoring truth to prices.
Its supply is fixed. Its issuance schedule is known to all. It cannot be manipulated by decree.
As such, it reintroduces real scarcity into a digital world otherwise dominated by infinite replication.
“Bitcoin’s monetary policy is more credible than any central bank, because it is rooted in thermodynamics and mathematics, not politics.”
— Michael Saylor, 2021
When money reflects real scarcity, prices once again become reliable signals. Investment decisions can be made on honest time horizons, and savings regain moral dignity.
Interpretation
Sound money is information fidelity.
Inflation is information corruption.
Bitcoin restores signal integrity to the global economy — ensuring that the “map” of prices once again matches the “territory” of reality.