Obverse of $100 note, 2009 series

Mulling about intrinsic value

By Eduardo Salazar

One of the themes that keeps coming up when people speak about money is about its “intrinsic value” and, as a corollary, about why would anyone have those nicely designed paper notes in their wallets.

Take, for example, the recent entry by Christine Smith in the St. Louis Fed Open Vault blog about Bitcoin (and “digital currencies” [1] in more general terms; see https://bit.ly/2FpqUtJ). It’s a summary intended for the wider public (the target audience of the St. Louis Fed blog) of some key points brought by Aleksander Berensten and Fabian Shar in a paper published by the St. Louis Fed Economic Review, A Short Introduction to the World of Cryptocurrencies (vol. 100, Nr. 1). In many ways, an aperitif to the thought-provoking piece both authors published in the subsequent issue of the Economic Review, also the focus of my previous entry here (see http://bit.ly/2Hvpggo).

Smith opens fire with a bullet that has as title “no intrinsic value.” Before even getting started I’ll separate the words no, intrinsic and value, and in what follows I’ll completely brush aside the latter, value. Simply because “value” (perhaps defying intuition) is a rather convoluted concept, one that has given economic theorists more than one headache (or shall I say migraine?) than otherwise thought. So, I’m not going to get into a discussion about value as it would require miles more than a humble blog entry. [2]

Noting the caveats above, let’s focus on Smith’s assertion that “in economic terms, something lacking intrinsic value means it has no value of its own” (emphasis mine). That’s indeed true, but she then goes on to Berentsen and Schar’s piece and their argument that “[s]tate monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either” (op.cit., p. 9; emphasis mine). That’s the point when it all becomes, let’s say, less straightforward.

To understand why, I shall now focus on the word intrinsic because it’s relevant even before making any attempt to tackle the question of value, again, something which I will dare not to do here for all of the right reasons.

My starting place is to look at its etymology. The origin of the word intrinsic can be traced back to the Latin adverb intrinsecus. It adds to the term intrim (meaning inside, inwards or from within) the suffix -secus (as such, implying location, or to come from a place). In other words, intrinsic conveys the property of being inside something (or someone), a proxy for origin (although this view might be disputed) or the act of coming from within. Perhaps no big surprises here in terms of what I believe everyone colloquially understands as being “intrinsic.”

Let’s now focus on “monopoly currencies,” as is clearly the intention by Smith when quoting from Berentsen and Schar. But first, I’ll pick on something that I highlighted in Forctis’ Research Paper (see http://bit.ly/2r5Fxhv) and summarised as follows.

Money is always a currency, but currencies are not always money.

(p. 38; highlighted in the original). So, when Berentsen and Schar talk about currencies and subsequently relate them to “the U.S. dollar, the euro, and the Swiss franc…” they are actually talking about money. Let’s also be fair by saying that, in modern economics, currency and money are treated as synonymous (ibid., p. 8 and references therein) hence Berentsen and Schar are not liable for any sins here. For what it’s worth, I still believe the difference cannot be ignored.

It’s precisely at that juncture when the word intrinsic becomes interesting. Let me try to explain.

That “piece of paper” [3] used to print dollar, euro or Swiss franc notes is nothing more than a decorative piece (perhaps for some?) that only acquires meaning by virtue of the State institutions (whether through the Treasury Department [4] in the U.S., the European Central Bank as supra-national entity, or the Swiss National Bank) giving it the quality of being legal tender. Why is this relevant? Primarily, although not exclusively, because citizens can therefore use those paper notes to cancel their obligations with the State; in other words, use them to pay their taxes. That, in fact, is the key feature (besides, or perhaps disregarding, any other considerations) supporting the acceptance of fiat money by the public. [5]

Such quality is intrinsic to money and cannot be detached from it, because it even predates its circulation. For example, when the U.S. Bureau of Engraving and Printing stamps the phrase “this note is legal tender for all debts, public and private” (hence why I wrote “not exclusively” above) to an otherwise inconsequential piece of rag paper having the face of Benjamin Franklin on the obverse and the Independence Hall on the reverse, it gives that 100 dollar note, by authority from the U.S. Treasury [6] the quality of legal tender before it even hits the street. Its circulation also depends on the wishes (or more formally, the “monetary policy”) of the Federal Reserve, but it does not make that 100 dollar note less money than otherwise.

To recap, money does have an intrinsic value in the “service” that it provides to individuals by virtue of being legal tender, a value acquired by authority and embodied into it. The primary service it provides is enabling individuals to discharge their fiscal obligations. How material is that “value” to you, or I, is a separate issue altogether.

So, before it even “reveals its existence,” before we’re even able to “grab it” [7] and thus it acquires significance in everyday use, money has already been given such quality.

A value that comes from within; in this case, from within the system “producing” it. It’s therefore an “intrinsic” property. [8]

In order to assimilate this concept, however, it becomes key to understand the difference between money and currency.

Precisely my point above.

To conclude, some Q&A. Is Bitcoin (and other “virtual currencies”) like “regular currency”? One thing I’m sure of is that it’s not money, which is what Smith seems to otherwise suggest in the St. Louis Fed blog when using the adjective “regular.” Does money (as opposed to simply talking about currency, with no “additives”) have “no intrinsic value”? I have very succinctly provided my take on this issue, and hope clearly enough; that said, our Research Paper [9] provides a more comprehensive discussion and good factual evidence, when required. Is Bitcoin, then, a “currency”? The answer is no, plain and simple; here, once again, refer to our Research Paper [10] for a rationale.


[1] The curious reader might want to have a look at the IMF Staff Discussion Note SDN/16/03 by Dong He and co-workers (2016) for a taxonomy (not necessarily the only one, but handy) of “virtual” currencies, and how “digital” currencies fit in.

[2] Once again for those interested souls, a peek into, e.g. the contributed articles in The Oxford Handbook of Value Theory by Hirose and Olson (Oxford Univ. Press, 2015; particularly ch. 3, 14 and 17) should provide a good sense of the inherent difficulties. Turning to the economics debate (taking place under the heading “theories of value” rather than “value theory,” to provide some separation from the philosophical and political discussion) see Maurice Dobb’s Theories of Value and Distribution since Adam Smith: Ideology and Economic Theory (Cambridge Univ. Press, 1973). Dobb, however, seems to believe that such “separation” is meaningless, hence his opening chapter is about “ideology” as a means to frame the debate.

Quite a contrast with, e.g. Debreu’s approach in Theory of Value (Yale Univ. Press, 1972; originally published in 1959) where he defined value simply as price times quantity, saying

the value of an action a relative to the price system p is … the inner product p . a

(2.6, p. 33). To Debreu, “an action is a specification for each commodity of the quantity that [an economic agent] will make available or that will be made available to him” (2.5, p. 32). In other words: price times quantity.

Be that as it may, talking about “value” is an invitation to have a stroll through a minefield.

[3] In reality it’s a blend typically made of 75% cotton and 25% linen, known as “rag paper”; in the UK, it’s being gradually replaced by a polymer.

[4] Contrary to popular misconception, the Treasury Department in the U.S. (and not the Federal Reserve) is responsible for the creation of physical money through the U.S. Bureau of Engraving and Printing and the U.S. Mint (paper notes and coins, respectively). That’s due to the simple fact that the Treasury is the entity actually paying for any expenditures approved by Congress and collecting taxes from the private sector, be it corporations or individuals. The net effect usually goes by the name of primary expansion. The Fed, in turn, operates the levers of monetary policy and normally does so using open market operations to steer interest rates, otherwise engaging in secondary expansion (in other words, the Fed’s policy is all about modifying, if necessary, private balance sheets) and is also responsible for providing liquidity to the banking sector.

By the way, those dollar bills and coins in people’s pockets are, strictly speaking, a title to money.

[5] As we all know, things can get a bit messy during hyperinflationary episodes or periods of political turmoil (many times both go hand in hand).

Let me add here that although legal tender is indeed used to settle obligations between the public, it’s a property derived from its ability to cancel fiscal obligations (only because of the latter it’s used for the former).

[6] That’s why the dollar notes are only signed by the U.S. Secretary of the Treasury and the U.S. Treasurer, and not by the head of the Federal Reserve.

[7] Here, “grabbing” is used in a “wide sense” to encompass both in physical and digital forms such as, e.g. an entry in a banking account ledger (as you “own” the balance in that ledger; it’s a “property” from which rights are derived).

[8] Whether those notes and coins would eventually be accepted as a general medium of exchange and unit of account depends on different factors, as e.g. hyperinflations have taught us.

[9] Sections 2 and 3, and the notes to them, hopefully help to provide a rationale for our assertion in this blog entry.

[10] See sections 7 and 8 of our Research Paper.

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