Showing posts with label Carl Menger. Show all posts
Showing posts with label Carl Menger. Show all posts

Sunday, June 22, 2014

The monetary economics of the roll-up

The so-called corporate "roll up" lies at the conjunction of finance and monetary economics. For those monetary economists who aren't familiar with the term, a roll-up is a company that tries to consolidate an entire industry by serially acquiring competitors, usually using its own stock as currency. Valeant Pharmaceuticals, currently in the midst of a battle to take over botox-maker Allergan for $53 billion, is one of the more well-known roll-ups in the world of finance these days, having acquired around 75 companies in the specialty pharmaceutical niche over the last six years. But there have been many others over the years who have pursued the roll-up strategy.

Plenty of analysts dislike the corporate roll-up. They criticize it for not creating value organically but merely accumulating other people's castaway businesses. Roll-up equity is generally viewed as ridiculously overvalued and destined to implode. Valeant, for instance, has been variously described as a house of cards, Kool Aid, and something from the Wizard of Oz.

I'm going to argue in this post that a roll-up is less nefarious than some people think. A roll-up does the same thing that a bank does—it is a liquidity provider. In the same way that a bank expects to be compensated for turning the illiquid into the liquid, a roll up deserves to be paid a fee for doing the same. Like banks, roll-ups are monetary phenomena.

Let's build a roll-up from scratch. Our roll-up begins its life as a regular business, say a fishing store. Like all other fishing stores in the area, the store yields its owner, Bob, about $10 a year. Fishing stores generally distribute all their earnings to their owners so that nothing is retained in the business. A store can generally be bought and sold for around 5 times earnings, or $50 ($10/year x 5), although due to their illiquidity it may take a lot of time and effort to match buyers of fishing stores with sellers.

Bob's first task is to make the ownership position in his store more liquid. He decides to divide his $50 stake into 100 shares, each worth 50 cents, thus rendering it easier for people to purchase bite-sized positions in his business rather than being required to gulp the thing whole. He hires a store manager to take care of day-to-day business, buys himself an Armani suit, and begins to canvas the land marketing his shares. He may even take the time and effort to list on a public stock exchange.

Eventually, shares in Bob's store will have attracted a large crowd of buyers and sellers. Whereas all the other fishing stores in the area remain relative illiquid, an ownership stake in Bob's store has become more moneylike. A liquidity premium attaches to the value of the shares. Each of the 100 shares is now priced at 75 cents which puts a $75 valuation on Bob's business ($0.75 x 100 shares), twenty-five bucks higher than the $50 price tag that was originally placed on Bob's store and is currently being placed on competing fishing stores. Since Bob's store continues to earn the same $10 a year that other stores make, the twenty-five buck premium is entirely related to the superior ease that owners of Bob's business enjoy in transacting with their shares. Both Bob's Armani and his hard work have paid off.

Here's another way of looking at the scenario. Whereas all fishing stores trade at around 5 times earnings, Bob's shares trade at 7.5 times earnings due to their superior liquidity.

Bob now embarks on the next stage of executing his roll-up strategy—issuing new stock to buy up his competition. He begins by printing up 66.6667 new shares and offers to buy Joe's fishing store down the street for a total value of $50 (66.6667 shares x $0.75/share) . This is where the magic of the roll up strategy begins. If Joe accepts, Bob will now have two stores earning a combined $20, each share earning $0.12 ($20 / 166.667 shares). Notice that this is an improvement over the $0.10 per share being earned prior to the deal with Joe ($10/100 shares). Since the market continues to value Bob's shares at 7.5x earnings due to their excellent liquidity, each share will now trade for 90 cents (7.5 x $0.12 earnings per share), higher than their pre-purchase price of 75 cents (7.5 x $0.10). Thus Bob's shareholders enjoy an immediate 15 cent pop in the share price once Joe's store is bought! Not bad for a day's work. This is what is called an accretive acquisition.

Intuitively what is happening here is that Joe's illiquid ownership rights are being brought under Bob's umbrella. They are immediately rendered just as liquid as Bob's ownership position, and since liquidity is a service that the market is willing to pay a premium for, Joe's ownership rights will now be worth more than before.

It makes sense for Bob and his shareholders to push for the deal with Joe since they enjoy an immediate gain. But what about Joe? Why would he agree to the deal? Consider that before the agreement was struck, Joe was comfortably earning $10 a year selling rods and hooks. After the transaction is over, he'll own 66.6667 shares of Bob's business, each share yielding $0.12 in earnings, for a total of just $8 a year vs $10 before. So if he signs on the dotted line, he'll be earning $2 less each year. A terrible deal for Joe, right?

Not necessarily. The reason Joe may very well take the deal despite earning less finds an answer in Carl Menger. For finance types, Menger was a 19th century economist who pretty much nailed down the idea of liquidity, or what he preferred to call marketability, the fact that "different goods cannot be exchanged for each other with equal facility." Menger gives the example of a black smith who, when going to market with his newly made armour, has difficulties locating someone willing to trade food and fuel. Rather than seeking to directly trade, it is in the smith's interest to take an indirect route by accumulating some good that though useless to him, has greater marketability than the armour he has produced. In this way, the smith gives up his less saleable commodity for others of greater marketability since "possession of these more saleable goods clearly multiplies his chances of finding persons on the market who will offer to sell him the goods that he needs."

Returning to our story, let's say that Joe is tired of working and wants to retire so that he can travel around the world. Travel will require cash, but Joe's business isn't very easy to sell. In a strategy that Menger would approve of, Joe may choose to give up his shares in exchange for other, more saleable, shares, even if he doesn't not need them, because it brings him closer to the final position he desires. So while Joe doesn't get cash when he signs the bottom line, he does get the next best thing, Bob's liquid shares, which are far easier to turn into cash than his own. The amount that Bob asks as a fee for superior liquidity is the forfeiture of $2 a year in potential earnings, hardly a large price for Joe to stump up if he is desperate for a getaway from the fishing industry.

After gobbling up Joe's store, Bob continues rolling up the fishing store industry by constantly printing up new shares to buy out folks like Joe who want an exit. Bob and his merry band of shareholders are content to fabricate this desired liquidity as long as they get a portion of each exiting store owners' earnings and the ensuing boost to the share price. The Joe's of the world are happy to give up a bit of earnings to Bob for a bit of his liquidity.

This is exactly what a bank does. Just like Bob buys up illiquid ownership positions in fishing stores, banks buy up illiquid IOUs that have been issued by individuals and businesses. Where Bob issued new shares in exchange, a bank offers a different sort of financial asset; the bank's own highly-liquid IOUs, or deposits. Bankers don't engage in liquidity creation for free. In the same way that Bob requires that Joe give up some earnings in return for the liquidity benefit of Bob's shares, bankers require that the person who initially receives the bank's deposits pays an ongoing fee to enjoy the benefits of their superior liquidity, a fee that is otherwise known as interest. The only difference between a banker and Bob is that one is using debt, or bank deposits, as their liquidity carrot, while the other is using equity.

Banks spend large amounts of capital to ensure the superior liquidity of their deposits. Branch networks, ATMs, card payment infrastructure, and secure internet systems must all be built and maintained. Should a bank's deposits lose their liquidity advantage, the benefit of owning those deposits will diminish to the point that no one will willingly pay a fee to purchase them. Individuals will costlessly convert their illiquid deposits into liquid deposits of competitors (banks typically offer free 1:1 conversion among each others deposit brands). If this continues indefinitely, the bank will eventually go bankrupt.

Bob too faces these same sorts of limitations. His roll-up strategy can only continue as long as his shares are more liquid than those of his universe of targets. Once they are no longer special, folks like Joe won't see it worthwhile to forfeit a bit of their earnings to Bob for his shares. Put differently, Bob can continue rolling-up fishing stores only as long as the multiple that the market is willing to pay for his earnings remain significantly elevated relative to those stores that he wants to buy.

Like banking, rolling-up an industry requires continued investment in the mechanisms that promote share liquidity. Bob must buy ever fancier suits, travel ever further afield to advertise the quality of his shares, and list on more stock markets. One of the threats he must constantly face is that of competing roll-ups who also spend to promote the liquidity of their own shares. If the cost of suits is driven too high by the roll-up competition, it may no longer be profitable for Bob to maintain his shares' liquidity.

Roll-ups will also compete for acquisition opportunities. When folks like Joe who want to exit the fishing business receive multiple bids from roll-ups like Bob interested in buying him out, Joe can play Bob off against his competition so that Bob must sell Joe liquidity for less than he would otherwise prefer, perhaps below his cost of creating that liquidity.

When competition among roll-ups creates too much liquidity then investors will start to cut the liquidity premium that they attach to Bob's shares. Bob's acquisition targets will no longer be willing to forfeit as large a piece of their earnings to Bob as they once did in order to enjoy the liquidity of which he was once the only provider. As a result, acquisitions provide ever small returns, the immediate increase in per share earnings and the good old jump in the share price that Bob once enjoyed is increasingly a thing of this past . At some point, it makes no sense for Bob to continue his roll-up strategy. His business will have lost its banking function and now operates like any other fishing store chain—it grows in line with population growth and the market's desire for fishing products.

If investors had been pricing Bob's shares on the assumption of further growth in its banking function, upon the realization that acquisitions are no longer worthwhile they will all sell in earnest, a large decline in Bob's share price being the result. The roll-up game is officially over, as are Bob's days as a banker.

But let's say that Bob successfully guards the liquidity premium that his shares have always enjoyed against the competition. At some point he'll run up against another limitation; there are only so many fishing stores he can buy. Once he has purchased every shop around him, he runs out of accretive acquisitions and the banking function he once profited from suddenly comes to an end.

If he wants to continue his roll-up strategy, one option is for Bob to expand into another line of business, say gun shops. But here he faces a disadvantage in the fact that he has no natural talent in appraising hunting stores. Where his knowledge of the fishing store industry insured him against buying lemons, the odds of him making mistakes as he rolls-up this new industry increases. This risk isn't unique to Bob. A banker who specializes in construction loans faces this same risk when he or she expands into consumer lending, or auto loans. Just like an accumulation of bad loans may cause a run on a bank, bad gun store purchases may cause a run on Bob's shares. The value of both deposits and shares as media of exchange is jeopardized when the underlying assets are in doubt.

So to wrap this up (roll it up?), there's nothing mysterious or nefarious about roll-ups. They are merely entities that provide banking services to the industries in which they operate, namely swapping illiquid assets for liquid ones. They earn a return for producing liquidity in the form of an accretive earnings bump on each acquisition. Once they reach certain natural limits, a roll-up will cease providing banking services to the industry and return to being a normal company.

The larger point I'm trying to make, however, is that there are monetary phenomena at play in all sorts of  situations that don't involve money proper. Monetary economists, those folks who study monetary phenomena, focus laser-like on a narrow range of goods they consider to be money, usually central bank notes and private deposits, thus excluding all other objects from the study of monetary phenomena. This is too bad. When we allow ourselves to think of money not as an either/or proposition but as an adjective that applies more or less to all valuable goods, then you'll see fascinating monetary phenomena all around you, such as the corporate roll-up.

Friday, December 21, 2012

Uncertainty and the demand for liquidity

In between my more practical posts, once every week or so I'll do something on the idea of moneyness. Economists have known for a long time that the concepts of uncertainty and money are intimately intertwined. George Costanza knows this too. He holds a bunch of cash to deal with all eventualities... until his wallet blows up. I'll show how we can just as easily replace money with moneyness in this two-step with uncertainty.

Uncertainty is an uncomfortable feeling one endures when thinking about an unforeseeable future. One of the ways to shield oneself from uncertainty is to devote a certain portion of one's portfolio to "money" – dollar bills, bank deposits, and such. Because these money items are liquid, it will be relatively easy for their holder to offload them in the future should some unanticipated eventuality arise. Holding money therefore alleviates discomfort about the future. This is the same sort of service that a fire extinguisher provides. Though someone may never need their extinguisher, it comforts its owner by its mere presence. On the margin, individuals are always comparing the present value of the stream of "security and comfort" that money provides to the consumption goods or durable assets that money can buy.

The link between uncertainty and the demand for money has a long heritage. We can find this idea early on in the Marshallian tradition, for instance. In 1917 Arthur Pigou, a student of Marshall, wrote that any person would be anxious to hold money "to secure him against unexpected demands, due to a sudden need, or to a rise in the price of something that he cannot easily dispense with." On the margin, people could either hold money, spend it on consumption, or exchange it for a capital asset. "These three uses," wrote Pigou, "the production of convenience and security, the production of commodities, and direct consumption, are rival to one another." (The Value of Money, 1917)

In 1921, Fred Lavington explicitly described this very same link between uncertainty and money.
the stock of money held by a business man serves not only to effect his current payments but also as a first line of defence against the uncertain events of the future. (The English Capital Market, 1921)
More explicitly, said Lavington, money provides its owner with a
return of convenience and security. His stock [of money] yields him an income of convenience, for it reduces the cost and trouble of effecting his current payments ; and it yields him an income of security, for it reduces his risks of not being able readily to make payments arising from contingencies which he cannot fully foresee. The investment of resources in the form of a stock of money which facilitates the making of payments is then in no way peculiar; it corresponds to the investment by a merchant in the office furniture which facilitates the dispatch of business, to the investment of the farmer in agricultural implements which facilitate the cultivation of his land, and indeed to investment generally. 
Like Pigou, Lavington emphasized the marginal choice between holding money, spending it on consumption, and investing it.
Resources devoted to consumption supply an income of immediate satisfaction; those held as a stock of currency yield a return of convenience and security; those devoted to investment in the narrower sense of the term yield a return in the form of interest. In so far therefore as his judgment gives effect to his self-interest, the quantity of resources which he holds in the form of money will be such that the unit of resources which is just and only just worth while holding in this form yields him a return of convenience and security equal to the yield of satisfaction derived from the marginal unit spent on consumables, and equal also to the net rate of interest.
The most famous adopter of this idea was Keynes, a friend of Pigou's and, oddly enough, Lavington's teacher.
Because, partly on reasonable and partly on instinctive grounds, our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future... The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude. (The General Theory of Unemployment, 1937)
The link between uncertainty and money isn't confined to the Marshallian and Keynesian traditions. Erich Streisler (1973) quotes Carl Menger in Geld:
The amount of money which is used in actual payments constitutes only a part, and indeed a relatively small part, of the cash necessary to a people, and . . . another part is held (in order that the economy may function without friction) in the form of various reserves as a security against uncertain payments, which in many cases in fact are never realized.
William Hutt, an Austrian "fellow traveler", described the prospective yield from money in a 1952 paper called the Yield from Money Held. According to Hutt, the value of money assets was "affected by reason of their being demanded for their 'liquidity,' i.e. for the medium of exchange services that they can perform." These monetary services that money assets provide are prospective – even though money isn't being used, much like a fire engine when there were no fires, it isn't lying idle. "The essence of all these services is availability," wrote Hutt.

Modern Austrian Hans Herman Hoppe provides a very sharp linkage between uncertainty and money holdings.
the investment in money balances must be conceived of as an investment in certainty or an investment in the reduction of subjectively felt uneasiness about uncertainty. ('The Yield from Money Held' Reconsidered, 2009)
Nor is the Auburn side of the Austrian school the only to note linkage. Steve Horwitz, a free-banking Austrian, also gives expression to the link between money and uncertainty:
The connection between Hutt and Menger lies in recognizing that the availability services that money provides flow from it being the most saleable good. To be available to be exchanged for anything at any time requires that the good have the degree of saleability that Menger describes. The nature of Hutt's availability services is that they are a subjective return to holding an item that others also subjectively value a great deal, thus permitting the item to be easily exchangeable. When one chooses to hold wealth in the form of money, one is simply purchasing these availability services. (A Subjectvist Approach to the Demand for Money, 1990)
We also find the link between uncertainty and money among monetarists. In their 1971 paper The Uses of Money, Brunner and Meltzer noted that in a world of perfect certainty, information is available for free. This effectively eliminates the main reasons for the existence of money. However, by relaxing the assumption of certainty, “transactors possess very incomplete information about the location and identity of other transactors, about the quality of the goods offered or demanded, or about the range of prices at which exchanges can be made.” Rather, they must acquire information about these characteristics. Because knowledge acquisition takes time and energy, individuals may alternatively:
search for those sequences of transactions, called transaction chains, that minimize the cost of acquiring information and transacting. The use of assets with peculiar technical properties and low marginal cost of acquiring information reduces these costs. Money is such an asset.
David Laidler, also a monetarist, describes the money as a "buffer against costly consequences of market uncertainty and inflexibility".
If money holding is a cheap and reliable buffer, then agents will find that it pays to remain relatively uninformed about the processes affecting the variability of their net receipts, and will be relativley unwilling to undertake any costly measures that might render them either more predictable or controllable. If, on the other hand, money holding itself is a costly or unreliable source of insulation from such uncertainty, then the expenditure necessary to acquire and utilise extra information is more likely to be made. (Taking Money Seriously, 1990)
It's clear from this wide variety of quotes that many economists have considered money holdings to be uncertainty-alleviating. It's not a big step to replace the concept of "money" with "moneyness". The idea here is that by selling less-liquid items for more-liquid items, individuals can increase their protection from uncertainty. All assets can be ranked on a scale according to their liquidity/moneyness, and as a corollary, by their ability to "lull our disquietude".

On the margin, people are constantly comparing the package of services provided by each asset in an economy, where each package consists of the real services the asset provides, its pecuniary returns (interest, capital gains, or dividends), and finally the extent to which that asset's moneyness shields the holder from uncertainty. This means that in trying to defray their worries about a cloudy future, people seek out the quality of moneyness rather than a specific instrument called money. This quality, or property, is never fully concentrated in one hypothetical asset called "money" but can be found unevenly distributed over the economy's entire range of goods.

To get up to speed, here are two previous posts dealing with the idea of moneyness
1. Why moneyness?
2. What is a non-monetary economy?

Tuesday, November 27, 2012

Explaining Stephen Williamson to the world (and himself)

Stephen Williamson catches a lot of flack on the net. Some is undeserved, some is deserved, but a big chunk is probably due to the fact that he and his fellow New Monetarists have a communications problem. People don't understand what they're up to. So here's my attempt to bring Steve down to earth and explain to the world the importance of the research being done by him and his colleagues. I'll go about this by adding a bit of historical context. After a quick tour of the history of monetary thought, readers will be able to see where in the greater scheme of things the New Monetarists fit. Now Steve doesn't know much about the history of economic thought - he thinks it's unimportant. So in a way, I'm explaining not just Steve to the world, but Steve to Steve.

Sunday, November 18, 2012

How bitcoin illustrates the idea of a liquidity premium

On November 15 @ 5:37 PM, tweeted that it would be accepting bitcoin as payment. Over the next twenty-four hours, the price of bitcoin steadily rose on Mt. Gox, the major bitcoin exchange. See chart below.

This is a great illustration of the idea of a liquidity premium.

All assets carry a liquidity premium. This premium will be smaller or larger depending on an asset's ability to be easily bought and sold, or its liquidity. The idea of liquidity is straight from Carl Menger, who figured things out back in 1872 (pdf). Keynes also knew this, read Chapter 17 of the General Theory. (This is one of those great examples of Austrians and Keynesians agreeing). Other words for liquidity include saleability and marketability. In short, the more marketable an asset, the larger its liquidity premium, which in turn means a higher price. Illiquid assets have small premiums and lower prices.

In announcing the acceptance of bitcoin, Wordpress has added yet another avenue for the use of bitcoin. And Wordpress is not just any old site. According to Alexa, is the world's 22nd in terms of traffic. Bitcoin is now more liquid, and as a result, its liquidity premium has increased by about 75 cents.

Why is liquidity worth something? The future is uncertain. Knowing that an asset you own can be readily sold should the need arise provides you with a degree of comfort. Thus liquidity shields you from the displeasure of uncertainty, and since highly liquid assets do more shielding than illiquid ones, you'll have to pay a larger premium for that benefit.

  So with the Wordpress announcement, bitcoin has become a slightly better hedge against uncertainty.  What happens if other large venues start accepting bitcoin? Bitcoin up.

Tuesday, October 16, 2012

Questions for Bob Murphy and other Austrians on the inevitability of the bust

David Glasner had some recent posts (here and here) on Ludwig von Mises and Austrian Business Cycle Theory (ABCT). Bob Murphy pushed back here with a good rebuttal. But David's general point still stands: what necessarily forces a central bank that has adopted the practice of lending at a rate below the natural rate to ever cease this practice? Why does there have to be an inevitable bust?

I consider myself an Austrian in that one of my favorite economists is Carl Menger. I've also written a thing or two for the Mises Institute, my most recent being on Menger and Leon Walras and how the two would have differed on the phenomenon of high frequency trading. On the other hand, when it comes to macroeconomics, I remain a business cycle agnostic. I'm willing to be converted though. All you've got to do is answer a few questions of mine.

Say a central bank decides to reduce the rate at which it lends below the natural rate. Businesses can come to it for cheap loans -- and they do. Mises points out that as long as this differential exists it'll eventually lead to a "crack-up boom". The currency enters hyperinflation stage and, at its peak, people either turn to barter or dollarization occurs. Alarmed at this prospect, the central bank will probably increase rates in order to stave off the crack up.

But say the central bank and the currency users exists on a small island far from everywhere so dollarization can't happen. Say also that the police force is vigilant about preventing people from bartering. As a result, the currency issued by the central bank continues to be used, even during hyperinflation. The inevitable flight from money — the crack-up boom — can't occur. The currency perpetually falls.

So having assumed the crack-up boom away, why should the setting of market rates below the natural rate inevitably end in a bust? Sure, in the interim there might be a redirection of capital towards projects that are only profitable at low rates. In this context, a sudden increase in rates by the central bank back up to the natural rate might show some of these projects to be unprofitable. You've got a bust of sorts. But our central bank, released from the disciplining threat of a crack-up boom, steadfastly refuses to raise rates.

So if rates can be kept perpetually too low, and a crack-up boom can be averted, what causes the bust?

To start off, one explanation for a bust occurring is that when rates are kept too low, excess resources are allocated to interest-sensitive distant projects and not enough to less interest-sensitive near-term projects. At some point there's a realization that not enough capital has been allocated to present needs and all those future projects suddenly collapse in value. Thus a bust. What causes this sudden epiphany? As David Glasner asks, are workers dying of starvation?  It can't be higher interest rates that render these projects unprofitable since, as I've already pointed out, the central bank keeps rates permanently low.

Even if capital begins to flow into projects that are only profitable at low rates, wouldn't the prices of materials required by those projects be bid up relative to other prices, thereby putting a quick end to the profitability of these distant projects? Wouldn't the relative prices of material required for near term projects fall, thereby increasing the profitability of near term projects? How can any significant capital misallocation proceed given these rapid relative price adjustments?

If you can answer all my questions, then you'll have successfully converted me.

Saturday, January 14, 2012

Mises, Smith, and the origins of money

Lord Keynes continues to squabble with the Austrians on the origins of money in two separate posts, one on Adam Smith and the other on Mises's regression theorem.

The combativeness on the blog is unproductive, but I left a few comments anyways.

On Smith:
I don't really disagree with your claims, although I think you have to read the full Wealth of Nations in order to appreciate Adam Smith's theory of money. For instance, you are quoting from book 1 chapter 4, but Smith also has a very interesting (and much more extensive) chapter describing the complex workings of the system of bills of exchange, so he was by no means focused on gold and silver as money (See book 2 chapter 2). In this way he was different from Menger, who never discusses credit. Like Henry Dunning Macleod (who I see someone has already quoted), Smith was comfortable with credit as money.
 The existence of Henry Dunning Macleod, as well as George Berkeley and James Steuart, disconfirms the thesis that classical and neo-classical economists were uniformly metallists. All advocated to various degrees a credit theory of money. Jevons credits Macleod for laying the framework for marginal utility calculus, so he was surely neoclassical.
 The "origins of money" debate is interesting but I don't know how important it is. I think it's perfectly logical to adopt a Mengerian metallist approach and a Macleodean credit approach, modifying each just enough so that they can be amalgamated. Let the anthropologists take care of the chronological order of things.
On Mises:
But there is a severe flaw underlying Mises’s whole intellectual program in producing his Regression Theorem: the truth of the assumption that money only has indirect utility.... The view that money only has utility through its exchange value is also held by neoclassicals... This idea held by Austrians and neoclassicals should be rejected."
 I think you'll find that a number of Austrians already reject this. William Hutt's paper on the Yield from Money Held is a good example.
There are plenty of problems with Hoppe's article, but it is a good example of what I am talking about. Hutt was a fellow traveler of the Austrians and his paper is very popular in Austrian circles.

See an earlier post on Menger and the origins of money.

Friday, January 6, 2012

Menger and the origins of money

Lord Keynes at the Social Democracy blog has an interesting post on Carl Menger.called Menger on the Origin of Money.

As I point out in my comments, Lord Keynes is mistaken in trying to recruit Menger to the chartalist side of the metallist vs chartalist debate. Menger always was a pure metallist:
So while Menger believed that the state might adopt metals as money, it could not legislate into existence a worthless item as money. The state could construct a system of coinage and thereby perfect an existing metallic monetary system, but not create a system based on intrinsically worthless materials.