Regression Theorem of Money

The Regression Theorem of Money is a theory presented by Ludwig von Mises in his 1912 work The Theory of Money and Credit (Theorie des Geldes und der Umlaufsmittel). It was constructed to resolve the circular reasoning problem in explaining money’s value and to consistently apply subjective value theory to the monetary domain.

The Circular Reasoning Problem

The core problem the Regression Theorem addresses is as follows. According to subjective value theory, the price of a good is determined by people’s subjective valuations of it. In the case of money, however, people value money because it can be used to purchase other goods. That is, money’s value depends on its purchasing power, purchasing power depends on prices (exchange ratios), and prices depend in turn on people’s valuations. This is a clear circular argument. Explaining money’s value appears to require presupposing money’s value.

Relationship with Menger’s Theory of Monetary Origins

Mises’ Regression Theorem logically complements the theory of monetary origins that Carl Menger presented in 1892. Menger explained that money did not arise through government decree or social contract but emerged spontaneously to solve the inconveniences of barter (the double coincidence of wants problem). The most marketable (most saleable) commodity was gradually adopted as a medium of exchange and eventually became money. Mises provided logical necessity to this historical account.

The Logical Steps of the Regression Theorem

The logic of the Regression Theorem, laid out step by step, is as follows.

Step 1: The reason you accept money X today is that, based on yesterday’s exchange ratios, you expect to be able to purchase desired goods with it tomorrow. Today’s demand for money depends on knowledge of yesterday’s purchasing power.

Step 2: The reason people accepted money X yesterday is identical — it was based on knowledge of the purchasing power from the day before.

Step 3: This regression cannot continue infinitely. Logically, it must reach some point: the moment when money X was not yet used as money, that is, the earliest point at which it held value purely for non-monetary uses (as a commodity).

Step 4: At that initial point, money X’s value is explained without circular reasoning. In gold’s case, subjective valuations arising from direct use-value — jewelry, industrial applications, and so on — are the origin. Because this non-monetary value existed, some people began to accept it as a medium of exchange as well, after which monetary demand was gradually added.

In this way, the Regression Theorem breaks the circularity through temporal regression, enabling subjective value theory to be applied consistently to money.

The Bitcoin Debate: Critics and Counterarguments

The Regression Theorem has generated one of the most fascinating theoretical debates regarding Bitcoin’s monetary status.

Critics argue the following: Gold had clear non-monetary value in jewelry and industrial uses, but Bitcoin is not a physical commodity and has no use beyond its monetary function. Therefore, according to the Regression Theorem, Bitcoin cannot become money.

Counterarguments have been offered along several lines. Konrad Graf reinterpreted the theorem as requiring not physical commodity value but rather some form of direct valuation that existed prior to use as a monetary medium of exchange. In Bitcoin’s case, the censorship-resistant, trustless digital transfer service itself provided direct value to early users. Peter Surda, in his doctoral dissertation, argued that Bitcoin’s initial value arose not from its role as a medium of exchange but from technical curiosity, experimentation within the cypherpunk community, and the direct utility of trustless transfers as a service.

The Empirical Process of Bitcoin Price Formation, 2009-2010

Empirically, Bitcoin’s price formation process follows the logic of the Regression Theorem. When Bitcoin launched in January 2009, no market price existed. Early miners mined bitcoin out of technical interest and as a cryptographic experiment. In October 2009, a user called New Liberty Standard proposed the first exchange rate (1 USD = 1,309.03 BTC) based on the electricity cost of mining. In May 2010, programmer Laszlo Hanyecz purchased two pizzas for 10,000 BTC, completing the first real-world transaction. In July 2010, the Mt. Gox exchange began operations, and a continuous market price started to form. This process follows exactly the path the Regression Theorem predicts: non-monetary value (technical utility, experimental curiosity) leads to the formation of an initial exchange rate, which is followed by the gradual addition of monetary demand.

Related Concepts

• Subjective Theory of Value — The theory that value does not originate from objective properties of goods but from individual judgment
• Sound Money — The properties of money that faithfully performs the function of storing value
• What is Austrian Economics? — An economic school based on human action