A Simple Model of the Demand for Money and the Demand for Secondary Media of Exchange

Mises (1953, 1990, 1998) put the theory of money on a sound basis by integrating it with marginal utility theory and clearly explaining its value in these terms. One of Mises’s important conclusions is that demand for money is always demand to hold—that is, money’s value comes from being held (Hutt 1956; Hoppe 2012), not from being exchanged. What Mises termed secondary media of exchange (Mises 1998, 459) are partial substitutes for money. A person holds various claims and commodities to economize on the need to hold money, their high degree of secondary marketability making them suitable for this purpose. Salerno (2010a), building on Rothbard’s (2009) extension of Misesian monetary theory, presents a simple model distinguishing between the exchange demand for money and the reservation demand for money. We aim, first, to clarify some points in this model to in turn clarify our claim that demand for money is always demand to hold. Second, expanding on Žukauskas and Hülsmann (2019), who apply the Rothbard–Salerno model to the demand for financial assets and its relationship to the demand for money, we try to extend that model to incorporate close substitutes for money—what Mises calls secondary media of exchange. The model allows us to better understand what has been called the quality of money (Bagus 2009, 2015; Bagus and Howden 2016; Žukauskas 2021)—the idea that high-quality money will have a higher reservation demand, while lower quality money will have a lower reservation demand. Similarly, the higher the quality of money, the lower the demand for secondary media of exchange, and vice versa. In this way, we can consider the existence and importance of secondary media of exchange to be a proxy for the quality of money.