Excerpt from: Whither Gold?, by Antal E. Fekete, 1996. (Lightly edited.)
The Janus-Face of Marketability: Salability and Hoardability
In developing his theory of value, Menger described the origin of money in terms of the evolution of marketability. But as the ancient Italian god Janus (in whose honor the first month of the year is named) marketability has two faces. The first is marketability in the small — or hoardability. The second is marketability in the large — or salability. The latter is synonymous with Menger’s term Absatzfähigkeit, the cornerstone of his theory of value. Hoardability has not been independently analyzed before. In isolating this concept I propose to lay a new cornerstone for the theory of interest.
Marketability in the Large — Salability
A commodity is more marketable in the large (or more salable) than another if the bid/asked spread increases more slowly for the former than for the latter, as each is brought to the market in ever larger quantities. For example, perishable or seasonal goods show the lowest, durable goods or goods for all seasons show the highest degree of salability. It is easy to see how cattle became the most salable commodity in antiquity. People had superb confidence that there could never develop a situation in which there was a disturbing surplus of cattle.
Long before anything like that could happen, owners would drive their herds to regions where there was a shortage of cattle. The cost of transporting the unit of value represented by cattle over great distances was lower than that of transporting the same value represented by anything else, due to the self-mobility of cattle. This fact, too, is preserved in our linguistic heritage. A herd is also known as a drove of cattle, and a herdsman as a drover (both are derived from the verb to drive). Thus mobility or, better still, portability is an important aspect of salability. The more portable a commodity is, the more easily it can seek out havens where it is in greater demand.
The term salability refers to the quality of a good which allows very large quantities of it to be sold during the shortest period of time with minimal losses — which explains how the term earns its name. Among the most salable goods we find the precious stones and metals. A long historical process promoted gold to become the most salable of all goods. For gold, the spread between the asked and bid prices is virtually independent of the quantity for which it is quoted. It only depends on the cost of shipping gold to the nearest gold center. Under the gold standard the spread is constant, and is equal to the difference between the gold points. By contrast, for all other goods, different spreads are quoted for different quantities, and the larger the quantity, the wider the spread.
Thus the gold standard is seen as the product of a market process in search for the most salable commodity. Some authors deliberately confuse the issue insisting that the constant spread of gold is due to institutional factors, i.e., the statutory requirement that the central bank should stand ready to buy at the lower, and to sell at the upper gold point unlimited quantities of gold. Once again, this is a confusion of cause and effect. In reality, institutional constraints would sooner or later break down, and the commodity with less than perfect salability would be demonetized by the market, if the authorities tried to promote it to be the monetary standard — as indeed happened to silver in the 19th century, to copper in medieval times, and to iron in antiquity.
Marketability in the Small — Hoardability
It is common knowledge that, although they have a high degree of marketability in the large, precious stones have poor marketability in the small. The process of cutting up a large stone into a number of smaller pieces often results in a permanent loss of value. (This is just another illustration of the paradox that the value of a parcel is not necessarily the same as the sum total of the values forming part of that parcel.) Even for precious metals whose subdivision into smaller parts is fully reversible, marketability in the small cannot be taken for granted. A penetrating example due to a 19th century traveller is cited by Menger in the Grundsätze:
“When a person goes to the market in Burma, he must take along a piece of silver, a hammer, a chisel, a balance, and the necessary weights. `How much are those pots?’ he asks. `Show me your money’, answers the merchant and after inspecting it, he quotes a price at this or that weight. The buyer then asks the merchant for a small anvil and belabors his piece of silver with his hammer until he thinks he has found the correct weight. Then he weighs it on his own balance, since that of the merchant is not to be trusted, and adds or takes away silver until the weight is right. Of course, a good deal of silver is lost in the process as chips fall to the ground. Therefore the buyer prefers not to buy the exact quantity he desires, but one equivalent to the piece of silver he has just broken off.” (Principles of Economics, op. cit., p281.)
A commodity is more marketable in the small (or more hoardable) than another if the bid/asked spread increases more slowly for the former than for the latter, as each is brought to the market in ever smaller quantity. The term `hoardability’ refers to the quality of goods which allows large stores to be built up piecemeal through hoarding, or to be drawn down through dishoarding, with minimal exchange losses. It is this property that matters most when individuals are trying to convert income into wealth, or wealth into income. They succeed best if they employ the most hoardable commodity.
It is easy to see how salt became the most hoardable commodity in antiquity. People were confident that exorbitant surpluses of hoardable foodstuff would never develop. Everybody who could afford it would hoard it. People would recall the Biblical teaching that the seven fat years would always be followed by seven lean ones.
For the stronger reason, people were supremely confident that their hoards of salt — this foremost agent of food preservation — would not lose its value, whatever the fortune may hold in store. In antiquity it was not possible to transfer value over time with smaller losses than those involved in hoarding salt.
Other examples of commodities that have been highly hoardable at one time or another throughout history are: grains, tobacco, sugar, spirits. It is interesting to note that there has been heavy government involvement in the production and trade of all these. Thus we see that an historical process, similar to the one making gold most salable, has promoted silver to become most hoardable. Gold was the money used for paying princely ransoms and for buying territories (such as Louisiana and Alaska), and silver was the money used by people of small means for accumulating capital (Maundy money, or silver cents).