s:ibv oiibi :o

:ui :uiovv oi
xoxiv axb tvibi:
Stuáy Cuiác
:o
THE THEORY OF
MONEY AND CREDIT
iibvio vox xisis
Re/crt P. Murphy
MISES INSTITUTE
LvMI
Thc Thcery ej Mency ená Crcáit was rianslareo íiom rle Ceiman ly
!.!. Barson ano pullisleo ly Jonarlan Cape (!onoon) in 1p¡¸.
Copyiiglr © :o11 ly rle !uowig von Mises !nsrirure
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isnx: p¡8-1-ó1o1ó-:¡¸-¡
C0NIlNI!
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Pieíace . . . . . . . . . . . . . . . . . . . . . . . ix
|. IklNkI0kl0|M0Nl\
1. Tle !uncrion oí Money . . . . . . . . . . . . . ¡
:. Òn rle Measuiemenr oí Value . . . . . . . . . . 11
¡. Tle Vaiious Kinos oí Money . . . . . . . . . . . :¡
¸. Money ano rle Srare . . . . . . . . . . . . . . ¡¸
¸. Money as an !conomic Cooo . . . . . . . . . . . ¸¡
ó. Tle !nemies oí Money . . . . . . . . . . . . . ¸p
||. IklVk|0l0|M0Nl\
¡. Tle Concepr oí rle Value oí Money . . . . . . . . ¸¡
8. Tle Ðereiminanrs oí rle Òljecrive !xclange Value,
oi Puiclasing Powei, oí Money . . . . . . . . . . ó¡
v
vi Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
p. Tle Piollem oí rle !xisrence oí !ocal Ðiffeiences
in rle Òljecrive !xclange Value oí Money . . . . . 8¸
1o. Tle !xclange Rario Berween Money oí Ðiffeienr
Kinos . . . . . . . . . . . . . . . . . . . . . p1
11. Tle Piollem oí Measuiing rle Òljecrive
!xclange Value oí Money ano Vaiiarions in !r . . . pp
1:. Tle Social Consequences oí Vaiiarions in rle
Òljecrive !xclange Value oí Money . . . . . . . . 1o¸
1¡. Moneraiy Policy . . . . . . . . . . . . . . . . 11¸
1¸. Tle Moneraiy Policy oí !rarism . . . . . . . . . 1:¸
|||. M0Nl\kN08kNK|N6
1¸. Tle Business oí Banking . . . . . . . . . . . . . 1¡¸
1ó. Tle !volurion oí !iouciaiy Meoia . . . . . . . . 1¸¸
1¡. !iouciaiy Meoia ano rle Ðemano íoi Money . . . . 1¸¡
18. Tle Reoemprion oí !iouciaiy Meoia . . . . . . . 1ó¸
1p. Money, Cieoir, ano !nreiesr . . . . . . . . . . . 1¡¸
:o. Piollems oí Cieoir Policy . . . . . . . . . . . . 18¡
|V. M0NlIkk\klC0N!Ik0CI|0N
:1. Tle Piinciple oí Souno Money . . . . . . . . . . 1p¡
::. Conrempoiaiy Cuiiency Sysrems . . . . . . . . . :o¸
:¡. Tle Reruin ro Souno Money . . . . . . . . . . . :1¡
Centcnts vii
k||lN0|Cl!
a. Òn rle Classificarion oí Moneraiy Tleoiies . . . . ::¸
n. Tianslaroi’s `ore on rle Tianslarion oí Ceirain
Teclnical Teims . . . . . . . . . . . . . . . . :¡1
Clossaiy . . . . . . . . . . . . . . . . . . . . . . . :¡¡
!noex . . . . . . . . . . . . . . . . . . . . . . . . :¸p
|kl|kCl
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\len “Joe rle Plumlei”—a small lusiness ownei wlo lecame a
leio among conseivarives wlen le clallengeo canoioare Baiack
Òlama’s pioposeo rax likes in rle :oo8 piesioenrial campaign—
compileo a lisr oí Cliisrmas look iecommenoarions íoi Thc Hmcr-
i.en Spc.teter, le incluoeo Thc Thcery ej Mency ená Crcáit, saying ir
was “impoiranr ieaoing íoi rlese rioulleo rimes.” Alrlougl Aus-
riians weie glao rlar someone was liinging arrenrion ro Mises’s
classic woik, many weie unoeisranoally skeprical. Aírei all, Thc
Thcery ej Mency ená Crcáit is a herá look ro ieao.
Tle piesenr sruoy guioe seeks ro clange rlar common impies-
sion. !n piepaiing ir, ! lave íouno rlar Mises’s woik can le oifficulr
ar rimes, lur rleie is a oefinire mctheá lelino ir. !n orlei woios,
ií rle ieaoei will pur in rle effoir ro woik rliougl rle look
merlooically, le oi sle will see rlar Mises sysremarically luilos
lis aigumenr íiom one claprei ro rle nexr. \irl rle lelp oí rlis
sruoy guioe, even rle laypeison will le alle ro unlock rle amazing
insiglrs conraineo in rlis rome, fiisr pullisleo a cenruiy ago.
Òne oí rle mosr enjoyalle suipiises íoi me was ro oiscovei
jusr low impiessive an economisr !uowig von Mises ieally was,
even ar a ielarively young age. !n rlis single woik, Mises inre-
giareo (wlar we now call) micioeconomics wirl macioeconomics.
!e successíully applieo suljecrivisr, maiginal uriliry rleoiy ro rle
case oí money—a rask rlar lao eluoeo eailiei rleoiisrs in rle Aus-
riian riaoirion. As ií rlar weien’r enougl, Mises gave a sysremaric
explanarion oí rle loom-lusr cycle, llaming ir on rle airificial
ix
x Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
expansion oí lank cieoir ano rle coiiesponoing ieoucrion oí rle
money iare oí inreiesr lelow rle “naruial” iare.
Tlese accomplislmenrs alone woulo lave eaineo Mises an
impoiranr sear in rle lisroiy oí economic rlouglr. Yer upon my
mosr iecenr ieaoing, ! iealizeo rlar Mises slowcases mucl moie oí
lis ralenr. !oi one rling, le oisplays a rloiougl commano oí rle
ielevanr lireiaruie, nor only in puie economic rleoiy lur also in
applieo ropics sucl as money ano lanking. !e also slows a piacri-
cal unoeisranoing oí acrual financial maikers, wlicl oíren lelave
oiffeienrly íiom rle oepicrion in acaoemic wiirings. !n rle final
secrion oí rle look (wiirren aírei rle oiiginal ielease), Mises offeis
veiy wise policy iecommenoarions íoi ieruining ro souno money.
Tle íoimar oí rle sruoy guioe íollows rle 1p¸¡ eoirion oí Thc
Thcery ej Mency ená Crcáit pullisleo ly rle Mises !nsrirure. ! íol-
low Mises’s woik veiy closely, oown ro rle inoivioual secrion leao-
ings. !acl claprei conrains an oveiall summaiy (excepr íoi veiy
sloir clapreis), íolloweo ly a oeraileo ourline. Tlen ! incluoe a
secrion on eirlei “`oralle Conriilurions” oi “Teclnical `ores.”
Tleie is also a lisr oí new reims íoi eacl claprei (wirl a íull lisr
incluoeo in rle lack as a glossaiy) ano finally a lisr oí five sruoy
quesrions ro ensuie rlar rle ieaoei is giasping rle essenrial poinrs
oí eacl claprei.
!n oioei ro mooeinize rle sryle, lyplens lave leen oioppeo,
ano in a íew insrances, spelling las leen upoareo. !owevei, no
conrenr las leen alreieo íiomrle !nglisl rianslarion as pullisleo
ly rle Mises !nsrirure.
! lope rlar rlis sruoy guioe eases rle unoeisranoalle “inrimioa-
rion íacroi” ano allows a new geneiarion oí ieaoeis ro expeiience
rle wealrl oí wisoom conraineo in Mises’s fiisr majoi woik. As an
insiglríul plumlei (ano laypeison) las iemaikeo, ir is impoiranr
ieaoing íoi rlese rioulleo rimes.
Roleir P. Muiply
`aslville, Tennessee
July, :o11
..
vav: i
Ikl NkI0kl 0| M0Nl\
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tuav:iv 1
Ikl |0NCI|0N 0| M0Nl\
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Summary
Money is necessaiy in a sociery laseo on piivare piopeiry ano
rle oivision oí laloi. Tle íuncrion oí money is ro íacilirare rlese
riaoes: Money is a commonly useo meoium oí exclange.
!n a direct exchange, people accepr gooos in riaoe rlar rley
inreno ro peisonally use, wlerlei íoi consumprion oi piooucrion.
Tleie is no meoium oí exclange involveo in rle riansacrion.
!n an indirect exchange, ar leasr one peison in rle riansacrion
acceprs a gooo rlar le inrenos ro riaoe away in rle íuruie íoi some-
rling else. Tle irem rlar is accepreo in rle fiisr riaoe is a meoium
oí exclange.
!ven leíoie rle use oí money, riaoeis woulo lave quickly ois-
coveieo rle lenefirs oí inoiiecr exclanges, ano rle use oí meoia
oí exclange ro íacilirare rlem. Some gooos woulo lave lao a íai
lioaoei maiker rlan orleis. A riaoei wlo came ro maiker wirl an
unmaikeralle gooo woulo place limselí in a moie aovanrageous
laigaining posirion ií le engageo in an inoiiecr exclange, ly riao-
ing lis gooo íoi somerling rlar was moie maikeralle.
Because eveiy riaoei woulo acr in rlis íaslion, rlose gooos
rlar weie inirially moie maikeralle, woulo see rleii maikeraliliry
enlanceo even íuirlei. Òvei rime, a communiry woulo giavirare
ro one oi a íew commooiries rlar woulo le accepralle ro eveiy-
one in riaoe. Tlis is low money emeigeo íiom an inirial srare oí
¡
¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
lairei. !isroiically rle maiker las oíren closen golo ano silvei as
money.
Alrlougl orlei wiireis ourline orlei “íuncrions” oí money—
sucl as a sranoaio oí oeíeiieo paymenrs oi a sroie oí value—rlese
all flowíiomirs oefinirion: money is a commonly accepreo meoium
oí exclange.
Cheptcr 1: Thc Fun.tien ej Mency ¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe 6eaera| lceaem|c Cea6|t|eas fer the 0se ef Meae¡
A peison living ly limselí on a riopical islano woulo nor neeo
money. Seveial people living in rle same louselolo woulo nor
neeo money eirlei, so long as rley pioouceo eveiyrling rley
neeoeo wirlin rle louselolo. !ven an enriie communiry—con-
sisring oí rlousanos oi millions oí louselolos, eacl oí wlicl spe-
cializeo in piooucing oiffeienr gooos ano seivices—coulo ger ly
wirlour rle use oí money, assuming rleie weie a cenrial gioup oi
peison wlo acreo as a “plannei” ano rolo eveiyone wlar ro make,
ano oecioeo wlicl poirion oí rle roral ourpur eacl peison woulo
ger ro consume.
!owevei, in a sociery laseo on rle division of labor, ano wleie
piivare inoiviouals own lorl consumprion gooos (TVs, iaoios,
Big Macs) ano piooucei gooos (riacrois, íacroiies, coppei mines),
money is essenrial. !n sucl a sociery, rleie is no one peison oi
gioup wlo oecioes low scaice iesouices will le oeployeo. !acl
inoivioual musr make lis oi lei own plans, wlicl usually iequiie
exclanging piopeiry íoi orlei people’s piopeiry. Tle íuncrion oí
money is ro íacilirare rlese riaoes: Money is a commonly useo
mediumof exchange.
z. Ihe 0r|q|a ef Meae¡
!n a direct exchange, people accepr gooos in riaoe rlar rley inreno
ro peisonally use, wlerlei íoi consumprion oi piooucrion. !oi
example, suppose Alan las a muffin lur le is ieally lungiy íoi
fisl. Bill, on rle orlei lano, las a ner (wlicl can le useo ro carcl
fisl) rlar le ooesn’r ieally wanr, lur le rlinks Alan’s muffin looks
ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
oelicious. !í Alan riaoes lis muffin íoi Bill’s ner, rlis is a oiiecr
exclange. Tleie is no meoium oí exclange involveo in rle rians-
acrion.
!n an indirect exchange, ar leasr one peison in rle riansacrion
acceprs a gooo rlar le áecsn’t inreno ro consume oi use limselí in
piooucrion. Rarlei, rle peison acceprs a gooo lecause le plans on
riaoing ir away again in rle íuruie. !oi example, suppose rleie is
a woman wlo las knirreo a quilr, ano sle wanrs ro exclange ir íoi
a ceirain paiakeer. !níoirunarely, rle man wlo owns rle paiakeer
ooesn’r wanr a quilr, lur is insreao inreiesreo in olraining a new
iaoio. Tle ownei oí rle iaoio, lowevei, lares liios, lur is veiy
colo ar niglr. Tle woman wirl rle quilr, uníoirunarely, is veiy
laio oí leaiing ano las no use íoi a iaoio.
!n rlis scenaiio, no oiiecr exclange is possille. !owevei, rle
woman coulo riaoe away lei quilr íoi rle iaoio—even rlougl sle
peisonally las no use íoi ir—ano rlen riaoe rle iaoio in ruin íoi
rle paiakeer. Tlese rwo successive riaoes woulo make all rliee
people lappiei. !n rlis example, rle iaoio woulo le a meoium oí
exclange.
!ogically, rleie musr lave leen a rime wlen people lao gooos
ano riaoeo wirl eacl orlei, lur leíoie money lao aiisen. !ven
leíoie rle use oí money, riaoeis woulo lave quickly oiscoveieo rle
lenefirs oí inoiiecr exclanges—ano rle use oí meoia oí exclange
ro íacilirare rlem.
Some gooos (eggs, milk, learlei) woulo lave lao a íai lioaoei
maiker rlan orleis (relescopes, plilosoply looks, maclineiy). A
riaoei wlo came ro maiker wirl an unmaikeralle gooo sucl as
a relescope piolally woulon’r le alle ro quickly fino someone
wlo (e) lao rle irems rlar rle fiisr riaoei lopeo ro acquiie ano
(/) wanreo a relescope. !n rlis case, rle riaoei coulo impiove lis
laigaining posirion ly riaoing away lis relescope íoi somerling
moie maikeralle, sucl as eggs, even ií rle riaoei lao no oesiie ro
ear rle eggs.
Cheptcr 1: Thc Fun.tien ej Mency ¡
Because eveiy riaoei woulo acr in rlis íaslion, rlose gooos
rlar weie inirially moie maikeralle, woulo see rleii maikeralil-
iry enlanceo even íuirlei: Tley woulo le oemanoeo nor only ly
people inrenoing ro use rlem oiiecrly, lur also ly people inreno-
ing ro use rlem as meoia oí exclange. !n any pairiculai inoiiecr
exclange, a riaoei woulo naruially pieíei ro sell lis own waies in
exclange íoi rle mosr maikeralle meoium oí exclange, lecause
rlis woulo place lim in rle mosr aovanrageous posirion as le con-
rinueo looking íoi rle gooos le ulrimarely oesiieo. Òvei rime,
a communiry woulo giavirare ro one oi a íew commooiries rlar
woulo le accepralle ro eveiyone in riaoe. A commonly accepreo
meoium oí exclange is money.
!isroiically, golo ano silvei lave leen rle rwo commooiries
mosr íiequenrly employeo as money. Tley lave veiy similai piop-
eiries ano aie lorl excellenr meoia oí exclange.
¡. Ihe “!ecea6ar¡” |aact|eas ef Meae¡
Money is, ly oefinirion, a common meoium oí exclange, wlicl
rleieíoie seives ro íacilirare rle exclange oí gooos ano seivices.
!n a maiker economy, rlis is a ciucial “íuncrion” ano we see
money’s impoirance ly íocusing on ir. Alrlougl orlei wiireis our-
line orlei “íuncrions” oí money—sucl as a sranoaio oí oeíeiieo
paymenrs, oi a íaciliraroi oí cieoir riansacrions, oi a sroie oí value
rliougl rime—rlese all flow íiom irs use as a common meoium oí
exclange.
..
8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• Mlses references Carl Menger, whose :8;: Grundsätze (translated
as Principles of Economics) ls the foundlng work of what ls called
“Austrlan” economlcs. Among hls other contrlbutlons, Menger ls
credlted ln the annals of the hlstory of economlc thought wlth glv-
lng the first satlsfactory explanatlon of the orlgln of money. Pather
than assumlng that money must have been created by an edlct
lssued by a powerful klng or wlse trlbal leader, Menger showed
that step-by-step evolutlon froman lnltlal state of barter to a mon-
etary economy, where each person only seeks to lmprove hls own
posltlon at each step ln the process.
• Lven ln modern textbooks, wrlters wlll llst several “functlons” of
money. Thls canbeconfuslng, becauselt makes lt hardtoplndown
exactly what money is andwhy lt solmportant. Menger’s approach
—followed by Mlses—ls refreshlngly clear: Money ls defined as a
commonly accepted medlum of exchange, and thls characterlstlc
enables all of the other “functlons” attrlbuted to lt.
..
Cheptcr 1: Thc Fun.tien ej Mency p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Direct exchange: An exclange in wlicl lorl pairies inreno ro oi-
iecrly use rle ieceiveo gooo, eirlei in consumprion oi pio-
oucrion.
Indirect exchange: An exclange in wlicl ar leasr one pairy inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir away in rle
íuruie íoi somerling else.
Division of labor: Tle siruarion in wlicl people specialize in pai-
riculai occuparions, piooucing íai moie rlan rley peisonally
can consume, ano riaoe away rleii suiplus ro ieceive some
oí rle suiplus cieareo ly orleis.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion oí riaoing ir away ro acquiie somerling else in rle
íuruie.
Money: A meoium oí exclange rlar is geneially accepreo in rle
communiry. Money rypically sranos on one sioe oí viirually
eveiy exclange.
..
1o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \oulo a sociery laseo on roral cenrial planning in lorl
piooucrion ano consumprion neeo money? \ly oi wly
nor? (p. :p)
:. \ly ooesn’r a oiiecr exclange involve rle use oí a meoium
oí exclange? (p. ¡o)
¡. Can you rlink oí ieasons rlar riaoeis evenrually giavirareo
rowaio golo ano silvei as money, as opposeo ro orlei irems
sucl as carrle oi aluminum?
¸. Ðio meoia oí exclange exisr /cjerc rle exisrence oí money?
(pp. ¡o–¡:)
¸. !oi rle vaiious seconoaiy íuncrions oí money lisreo ly
Mises, explain loweacl is ielareo ro money’s iole as a com-
monly accepreo meoium oí exclange. (pp. ¡¸–¡ó)
tuav:iv :
0N Ikl Mlk!0klMlNI 0| Vk|0l
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Summary
Tle classical economisrs ielieo on an objective theory of value, ano
naruially rlouglr rlar money was a measuiing ioo oí rlis oljecrive
value. Mooein economics is laseo on a subjective theory of value,
wlicl riaces rle souice oí value ro rle mino oí rle inoivioual acroi.
Value is rle significance given ro a pairiculai gooo ly a peison.
Suljecrive value is louno up wirl rle ioea oí exclange. !acl
pairy ro a volunraiy riaoe gives up an iremrlar is lowei on lis value
ianking (oi scale of values), in exclange íoi an irem rlar is liglei
on lis ianking. !xclanges will occui unril rleie aie no moie muru-
ally leneficial riaoes. !noiviouals’ suljecrive valuarions give iise ro
e/¡c.titc exclange iarios oi prices.
Tle law of diminishing marginal utility srares rlar rle value oí
rle lasr unir oí a commooiry oecieases as rle peison acquiies a
giearei quanriry oí rle commooiry. Tle vaiious sclemes ro oefine
an oljecrive measuiemenr oí sarisíacrion—a “uril”—cannor ger
aiouno rle íacr rlar value scales involve a ianking (1sr, :no, ¡io,
erc.) ano nor a measuiemenr oí rle inrensiry oí value. !r is impossi-
lle ro peiíoim aiirlmerical opeiarions on rle maiginal uriliries oí
vaiious unirs in oioei ro compure rle “roral uriliry” oi roral value
oí rle enriie srock oí rle gooo. !í someone says, “Ðiamonos aie
moie valualle rlan warei,” wlar le means is rlar ií íoiceo ro give
up enc oiamono oi enc gallon oí warei, le woulo cloose ro give up
rle larrei.
11
1: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Knowleoge oí oljecrive money piices causes people ro ievise
rleii suljecrive value scales. Òljecrive money piices piovioe a
“common oenominaroi” íoi rle maiker exclange values oí all rle
vaiious gooos ano seivices availalle.
!owevei, money piices rlemselves aie consranrly clanging.
Tlar is wly Mises ano Mengei pieíei ro say rlar money is an inoex
(nor a measuiemenr) oí piices, since ir is less lialle ro coníusion.
Cheptcr :: On thc Mcesurcmcnt ej íe/uc 1¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe |mmeasara||||t¡ ef !a|[ect|ºe 0se
·
Va|aes
Tle classical economisrs (sucl as Aoam Smirl) ielieo on an objec-
tive theory of value, wlicl lelo rlar rle value oí a commooiry
was laseo on an oljecrive ciireiion (sucl as rle amounr oí laloi
iequiieo íoi irs piooucrion). !n rlis minoser, ir was naruial ro view
money as a measuiing ioo oí rlis oljecrive value. Jusr as a rlei-
momerei slows a liglei ieaoing on a lor oay rlan on a colo
oay—ieflecring rle oljecrively waimei rempeiaruie—so roo oio
rle classical economisrs rlink rlar a liglei piice rag inoicareo rlar
a moie expensive gooo lao a liglei oljecrive value rlan a cleapei
gooo.
!owevei, mooein economics is laseo on a subjective theory of
value, wlicl riaces rle souice oí value ro rle mino oí rle inoivio-
ual acroi. !n mooein economics, value ooesn’r iesioe in plysical
rlings pei se, lur insreao is an arriilure asciileo ro plysical rlings
ly suljecrive pieíeiences. Value is rle significance given ro a pai-
riculai gooo ly a peison, wlo can imagine ways ro use rle gooo
ro lecome moie sarisfieo.
Suljecrive value is louno up wirl rle ioea oí exclange. !í a
man values a piece oí iion moie rlan a piece oí lieao, ir means
rlar le woulo cloose rle íoimei ií íaceo wirl a cloice lerween
rle rwo. !ven Rolinson Ciusoe, alone on lis oeseir islano, ieveals
lis valuarions ly lis “exclanges” wirl naruie. !oi example, le may
value sarisíying lis lungei moie rlan le values sarisíying lis oesiie
ro lounge on rle leacl, ano rlar is wly le “exclanges” lis leisuie
rime íoi coconurs (ly climling riees).
\irl moie rlan one peison, valuarion guioes exclanges maoe
in rle maikerplace. !acl pairy ro a volunraiy riaoe gives up an
1¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
irem rlar is lowei on lis value ianking (oi scale of values), in
exclange íoi an irem rlar is liglei on lis ianking. Tlis appai-
enr conriaoicrion—wleie eacl peison gives up somerling “less
valualle” in exclange íoi somerling “moie valualle”—is peiíecrly
sensille lecause value is in rle eye oí rle leloloei, i.e., value is
suljecrive.
!n rle maiker, exclanges will occui unril rleie aie no moie
murually leneficial riaoes. Tle unoeilying suljecrive valuarions
áriting acrs oí exclange oo nor involve a “measuiemenr” oí value.
(!oi an analogy, someone can iank lis íiienos in oioei oí impoi-
rance, wirlour implying rlar rleie is an oljecrive unir oí íiieno-
slip rlar rle peison measuies in eacl peison leíoie consriucring
rle ianking. Someone can iepoir, “Jim is my lesr íiieno ano Sally
is my secono-lesr íiieno” wirlour leing alle ro say, “Jim is a :¸
peicenr lerrei íiieno rlan Sally.”) All rlar is necessaiy is rlar a pei-
son le alle ro look ar any rwo possililiries, ano oecioe wlicl le
pieíeis.
!ven rlougl maiker exclanges aie oiiven ly suljecrive valu-
arions rlar aie rlemselves nonquanrifialle, nonerleless rlese ex-
clanges in ruin give iise ro e/¡c.titc exclange iarios oi prices. !oi
example, suppose Alice las rliee peais wlile Bol las rwo apples,
ano rlar on lei value scale Alice ianks “rwo apples” moie liglly
rlan “rliee peais,” wleieas Bol las rle opposire ianking. Tlese
suljecrive valuarions—wlicl oo nor involve any measuiemenr oí
rle amounr oí value oi uriliry iesioing in eacl comlinarion oí
íiuir—mean rlar rle rwo people can gain íiom riaoing rle rliee
peais íoi rle rwo apples. Tlis murually leneficial riaoe rlen esral-
lisles rlar rle oljecrive piice oí an apple is 1.¸ peais, ano rlar rle
piice oí a peai is rwo-rliios oí an apple. Tlus Alice ano Bol’s sul-
jecrive iankings oí apples ano peais, alloweo íoi rle íoimarion oí
an oljecrive maiker piice ieflecreo in rleii exclange. Bur ir woulo
le nonsensical ro oesciile rlis scenaiio as one in wlicl “an apple
gives ¸o peicenr moie value ro people rlan a peai.”
Cheptcr :: On thc Mcesurcmcnt ej íe/uc 1¸
Tle law of diminishing marginal utility srares rlar rle value oí
rle lasr unir oí a commooiry (in someone’s possession) oecieases
as rle peison acquiies a giearei quanriry oí rle commooiry. Tlis
íollows íiom rle olseivarion rlar a peison will necessaiily assign
sulsequenr unirs oí a commooiry ro rlose puiposes rlar le oeems
less ano less significanr. !oi example, ií a peison las only one gal-
lon oí warei, le will arracl a giear significance ro ir, lecause ir is
necessaiy ro srave off rliisr.
As a peison’s access ro warei lecomes giearei, lowevei, rle lasr
(oi maiginal) gallon oí warei lecomes less significanr. Tle :¸rl
gallon, peilaps, will le oevoreo ro cooking, ano is nor neaily as
impoiranr as rle 1sr rliougl :¸rl gallons, wlicl weie oevoreo ro
oiinking. Ano rle 1,ooorl gallon miglr le useo ro wasl rle cai, a
ielarively unimpoiranr goal.
Tle vaiious sclemes ro oefine an oljecrive measuiemenr oí
sarisíacrion—a “uril”—cannor ger aiouno rle íacr rlar value scales
involve a ianking (1sr, :no, ¡io, erc.) ano nor a measuiemenr oí
rle inrensiry oí value. Tle ienowneo Clicago Sclool economisr
!iving !islei, íoi example, oeviseo a clevei aigumenr ly wlicl
le equareo rle uriliry oí rle 1oorl loaí oí lieao wirl rle uriliry
oeiiveo íiom rle lasr ano secono-lasr unirs oí íuel oil. Ar rle same
rime, rle uriliry oí rle 1¸orl loaí oí lieao was equal ro rle uriliry
oí only rle lasr unir oí íuel oil. !islei concluoes rlar rle 1¸orl loaí
oí lieao musr lave only one-lalí rle uriliry oí rle 1oorl loaí. Bur
rlis assumes away oiminisling maiginal uriliry in rle íuel oil.
z. Ieta| Va|ae
!í ir is impossille ro measuie rle value in a single unir oí a gooo, ir
is olviously impossille ro peiíoim aiirlmerical opeiarions on rle
maiginal uriliries oí vaiious unirs in oioei ro compure rle “roral
uriliry” oi roral value oí rle enriie srock oí rle gooo. Òne piollem
wirl rlis appioacl is rlar a free good (sucl as aii) woulo eno up
1ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
wirl a roral value oí zeio, since rle maiginal uriliry oí one culic
merei oí aii is zeio in mosr ciicumsrances.
!r musr le iepeareo rlar uriliry oi value is a concepr ielareo
ro rle acrs oí cloice rlar a pairiculai inoivioual conremplares. !í
someone says, “Ðiamonos aie moie valualle rlan warei,” wlar le
means is rlar ií íoiceo ro give up enc oiamono oi enc gallon oí warei,
le woulo cloose ro give up rle larrei. Bur ií an inoivioual lao ro
cloose lerween all rle warei in rle woilo, oi all rle oiamonos,
rlen le woulo cloose ro ierain rle warei (ar leasr ií le wanreo
ro live longei rlan a íew oays). Ònly in rlis conriiveo case can we
meaningíully speak oí rle “roral value” oí rle enriie srock oí warei,
lecause in rlis siruarion rle “roral value” ano rle “maiginal value”
aie rle same, rle unir unoei consioeiarion is all rle warei in rle
woilo.
¡. Meae¡ as a |r|ce |a6ex
Ar rlis poinr, ir sloulo le cleai rlar money cannor seive as a mea-
suiing ioo oí suljecrive value. Tleie is a sense in wlicl money is
a measuie oí oljecrive maiker exclange value, lowevei. !oi exam-
ple, ií a cai riaoes íoi s:o,ooo wlile a moroicycle riaoes íoi s1o,ooo,
rlen rle cai las rwice as mucl exclange value. Someone liinging
a cai ro maiker can olrain “rwice as many gooos ano seivices” íoi
ir, wleie rle amounr is measuieo in money piices.
Knowleoge oí oljecrive money piices causes people ro ievise
rleii suljecrive value scales. Someone wlo oespises smoking ano
loves vegeralles may nonerleless place a liglei value on an
unopeneo cairon oí cigaierres rlan on a romaro, lecause sle can
sell rle cairon íoi money, ano rlen use rle money ro luy a romaro
as well as many orlei irems. !n rlis way, oljecrive money piices
piovioe a “common oenominaroi” íoi rle maiker exclange values
oí all rle vaiious gooos ano seivices availalle.
Cheptcr :: On thc Mcesurcmcnt ej íe/uc 1¡
!owevei, lecause money piices rlemselves aie oereimineo
ly rle unoeilying suljecrive valuarions oí rle riaoeis, rley aie
consranrly clanging. Tle vaiious comlinarions oí gooos rlar one
moroicycle can “luy” rooay, may le oiffeienr romoiiow, nor only
lecause rle piice (quoreo in money) oí rle moroicycle can clange,
lur also lecause rle piices (quoreo in money) oí all orleis gooos
can clange. Tlar is wly Mises ano Mengei pieíei ro say rlar
money is an inoex (nor a measuiemenr) oí piices, since ir is less
lialle ro coníusion.
..
18 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• The replacement of the classlcal economlsts’ labor (or cost) theory
of value, wlth sub[ectlve value theory, was a true revolutlon ln eco-
nomlc theory. The classlcal theory explalnedthe prlce of a goodby
the amount of labor or (more generally) the cost of produclng the
good. Although such an approach explalned the fact that prlces
and productlon costs tended to be slmllar, there were many prob-
lems. Por example, lt was clear that the actual day-to-day prlces
of goods were not determlned by productlon costs, so at best the
cost theory explalned long-run tendencles, not the determlnants
of actual market prlces. worse stlll, “costs” are themselves prlces,
and so to explaln the prlce of a good by the costs of produclng lt,
only pushes the problemback one step. 8y explalnlngthe prlces of
consumer goods through the lnteractlon of sub[ectlve valuatlons
ln the market—and then uslng these consumer prlces to explaln
the prlces of the producer goods needed to make them—the sub-
[ectlve value theorlsts resolved these problems. Although other
economlsts partlclpated ln the Sub[ectlvlst /Marglnal Pevolutlon,
lt was the Austrlan economlsts who worked out the loglcal foun-
datlons of the new approach, as Mlses’s frequent references to
Menger, 8öhm-8awerk, and wleser testlfy.
• |rvlng Plsher was an lncredlbly lnfluentlal economlst from the
Chlcago School, and arguably one of the founders of modern,
malnstream economlcs. Although economlsts pald llp servlce
to the sub[ectlvlst revolutlon ln value theory, nonetheless they
often fell back lnto the old hablt of vlewlng utlllty as a cardlnal,
measurable substance. Mlses’s crltlque of Plsher ls a good lllustra-
tlon of thls tendency. Modern Austrlan economlsts also chlde thelr
..
Cheptcr :: On thc Mcesurcmcnt ej íe/uc 1p
malnstream peers for relylng on mathematlcal models of “utlllty
functlons” that can easlly lead the economlst lnto forgettlng that
modern prlce theory only assumes that lndlvlduals can rank varl-
ous comblnatlons of goods frombest to worst. There ls no need to
assume that a consumer has an lntenslty of preference for varlous
goods that could be measured by unlts of utlllty.
..
:o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Free good: A gooo rlar las a piice oí zeio, lecause ir is nor scaice.
Tleie is enougl oí rle gooo ro sarisíy all luman wanrs rlar
ir can reclnically íulfill.
Lawof diminishing marginal utility: Tle iule, oeoucille íiom rle
naruie oí economizing acrion, rlar eacl aooirional unir oí
a gooo oi seivice will lave a lowei value, lecause a peison
will allocare successive unirs ro sarisíying enos rlar aie less
ano less impoiranr.
Objective theory of value: An explanarion oí value rlar ielies on rle
oljecrive piopeiries oí a gooo, sucl as irs cosr oí piooucrion
oi rle amounr oí laloi rlar wenr inro irs consriucrion. (Tle
classical economisrs, sucl as AoamSmirl ano Ðavio Ricaioo,
lelo an oljecrive rleoiy oí value.)
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiy economy, piices aie rypically quoreo in
reims oí rle money gooo.
Scale of values: An analyrical rool ly wlicl rle economisr inrei-
piers rle acrions oí an inoivioual, wlo suljecrively ianks pai-
riculai unirs oí gooos ano seivices in oioei íiommosr ro leasr
impoiranr.
Subjective theory of value: An explanarion oí value rlar ielies on
inoiviouals’ suljecrive iankings oí pairiculai unirs oí gooos
ano seivices. (Tle so-calleo Maiginal Revolurion oí rle
eaily 18¡os—speaileaoeo ly Cail Mengei, \illiam Sranley
Jevons, ano !éon \alias—oveiruineo rle oljecrive rleoiy
oí value ano usleieo in rle suljecrive rleoiy.)
Value: Tle impoirance rlar an inoivioual places on a pairiculai
unir oí a gooo oi seivice.
..
Cheptcr :: On thc Mcesurcmcnt ej íe/uc :1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “!n rle oloei polirical economy, rle seaicl íoi a
piinciple goveining rle measuiemenr oí value was ro a cei-
rain exrenr jusrifialle.” (p. ¡8)
:. \ly woulo an isolareo inoivioual srill neeo ro engage in
a “compaiison oí values” leíoie raking acrion wirl iespecr
ro scaice gooos? (p. ¡8)
¡. \ly ooes an exclange oí rwo irems iequiie rlar rle people
making rle exclange place rle irems in ieveise oioei on
rleii value scales? (p. ¡p)
¸. !xplain: “Tle unrenaliliry oí |\iesei’s] aigumenr is slown
ly rle íacr rlar ir woulo piove rlar rle roral srock oí a íiee
gooo musr always le woirl norling.” (p. ¸¸)
¸. !ow ooes money aio rle enriepieneui? (pp. ¸8–¸p)
tuav:iv ¡
Ikl Vkk|00! K|N0! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
A money substitute is a peiíecrly secuie ano immeoiare claim on
money. Because rle claims rlemselves can íacilirare inoiiecr ex-
clange, rley lecome a “sulsrirure” íoi rle oiiginal commooiry
money.
Tle oefinirion oí mency sloulo seive rle puiposes oí economic
rleoiy, rle mosr impoiranr leing rle explanarion oí rle purchas-
ing power oí money. !oi economics, wlar marreis is rle acrual
piacrices ano expecrarions oí inoiviouals in rle maiker, iarlei rlan
legal íoimaliries.
Commodity money is a common meoium oí exclange rlar is
also an economic gooo in irs own iiglr. !oi example, golo, sil-
vei, ano even rolacco lave lisroiically leen useo as money, ano
yer people also valueo ano riaoeo rlese commooiries íoi orlei
ieasons.
Fiat money is accepreo as a common meoium oí exclange net
lecause oí irs reclnological piopeiries, lur lecause oí a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !oi exam-
ple, in rle cuiienr !nireo Srares “gieen iecrangulai pieces oí
papei” lecome money wlen ceirain ink parreins aie placeo on
rlem.
Credit money occuis wlen a claim on a plysical oi legal peison,
íalling oue in rle íuruie, is irselí useo as a meoium oí exclange.

:¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Some rleoiisrs explain rle value oí money as oue ro Srare
commanos. Bur rle goveinmenr cannor íoice people ro aoopr a
pairiculai irem as rle commonly accepreo meoium oí exclange,
ler alone ro accepr ir wirl a pairiculai puiclasing powei. Tle gov-
einmenr can use irs riemenoous powei ro make ir moie likely rlar
people will aoopr a pairiculai irem (sucl as gieen pieces oí papei
wirl ceirain ink parreins) as money, lur economically somerling
is money lecause oí irs usage ly people in rle maiker. A govein-
menr eoicr pei se cannor riansíoim ir inro money.
Cheptcr ¸: Thc íerieus Kinás ej Mency :¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meae¡ aa6 Meae¡ !a|st|tates
A money substitute is a peiíecrly secuie ano immeoiare claim on
money. !oi example, suppose rle commonly accepreo meoium oí
exclange is golo, ano a iepuralle lank issues a papei ricker enri-
rling rle leaiei ro one ounce oí golo. So long as people in rle com-
muniry aie ceirain rlar rley will le paio in plysical golo wlenevei
rley piesenr rle ricker ro a liancl oí rle lank, rlen sucl rickers
aie money sulsrirures ano may clange lanos ouiing puiclases rle
same way plysical golo woulo.
!n rle maiker economy, people can issue peiíecrly secuie ano
immeoiare claims (i.e., ieoemprion rickers) ro all soirs oí gooos,
nor jusr money. Bur rle ciucial íearuie oí sucl claims on money is
rlar rle claims rlemselves can íacilirare inoiiecr exclange, ano so
lecome a “sulsrirure” íoi rle oiiginal commooiry money. !n orlei
woios, pieces oí papei enrirling rle ownei ro an ounce oí golo
can ciiculare in rle maiker rle same way acrual 1 oz. golo coins
woulo (so long as eveiyone is assuieo oí immeoiare ieoemprion).
!n piinciple meiclanrs miglr nevei acrually ruin rle rickers in, ro
ieceive rle plysical golo. !n conriasr, people miglr riaoe papei
claims guaianreeing rle ownei ro a loaí oí lieao, lur rley woulo
evenrually ieoeem rlem. Sucl rickers coulo nevei lecome “lieao-
sulsrirures” lecause rle papei coulon’r seive rle same íuncrion as
acrual lieao.
!oi economisrs—as opposeo ro legal rleoiisrs oi rle lusiness-
peison—rle oefinirion oí mency sloulo seive rle puiposes oí eco-
nomic rleoiy. Tle cenrial rask oí rle economic analysis oí money
is ro explain rle exclange iarios lerween money ano all orlei
gooos, i.e., ro explain rle purchasing power oí money.
:ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
!n Mises’s juogmenr, rle mosr íiuiríul classificarion scleme ois-
ringuisles lerween rle unoeilying “money in the narrower sense”
veisus peiíecrly secuie ano immeoiare ./eims ro sucl money, i.e.,
money sulsrirures. !e conceoes rlar ir woulo le logically consis-
renr ro incluoe money sulsrirures in rle oefinirion oí mency irselí,
lur lelieves lis pieíeiieo oisrincrion (i.e., lerween money ano
money sulsrirures) will make ir easiei ro explain orlei plenom-
ena (sucl as rle puiclasing powei oí money, as well as rle loom-
lusr cycle) moie cleaily in larei clapreis. (See rle Appenoix B on
page :¡1 íoi a oiagiam ourlining Mises’s classificarion scleme íoi
vaiious irems rlar aie oíren incluoeo in rle concepr oí money.)
z. Ihe |eca||ar|t|es ef Meae¡ !a|st|tates
!n rle economic analysis oí money, wlar marreis is rle acrual piac-
rices ano expecrarions oí inoiviouals in rle maiker. !oi example,
wlerlei oi nor legislarion oeclaies rlar token coins aie /cge//y /iná-
ing claims on money, ií in pre.ti.c rle loloei oí a roken can easily
exclange ir íoi rle “equivalenr” amounr oí acrual money, rlen c.e-
nemi.e//y spceling rle roken is a money sulsrirure.
Tle same piinciple applies ro banknotes. !oi example, con-
venrional accounrs say rlar Ausriia-!ungaiy íiom 1poo ro 1p1¸
possesseo a paper standard, lecause /cge//y rle Ausrio-!ungaiian
Bank lao no olligarion ro ieoeem irs papei nores íoi commoo-
iry money, ano in íacr rle nores weie oeclaieo legal tender. Yer
in piacrice ouiing rlis peiioo, rle Ausrio-!ungaiian Bank woulo
volunraiily cash irs papei nores íoi golo upon iequesr, ano so eco-
nomically speaking Ausriia-!ungaiy was on a gold standard.
¡. Cemme6|t¡ Meae¡, Cre6|t Meae¡, aa6 ||at Meae¡
Commodity money is a common meoium oí exclange rlar is also
an economic gooo in irs own iiglr. !oi example, golo, silvei, ano
Cheptcr ¸: Thc íerieus Kinás ej Mency :¡
even rolacco lave lisroiically leen useo as money, ano yer people
also valueo ano riaoeo rlese commooiries íoi orlei ieasons.
Fiat money is accepreo as a common meoium oí exclange net
lecause oí irs reclnological piopeiries, lur lecause oí a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !oi exam-
ple, in rle cuiienr !nireo Srares “gieen iecrangulai pieces oí
papei” aie nor money pei se. Tley only lecome money wlen rley
aie cur ro exacr size ano piinreo wirl rle coiiecr oesigns ly rle !.S.
Tieasuiy. Tlus rle gieen pieces oí papei appeai ro lecome money
ly “fiar” (i.e., commano) oí rle !.S. goveinmenr. !owevei, in eco-
nomics rle oefinirion oí money is a commonly accepreo meoium
oí exclange. Tle goveinmenr can only use irs poweis ro encoui-
age people ro use a pairiculai class oí irems—íoi example, gieen
pieces oí papei wirl rle appiopiiare ink parreins—as a common
meoium oí exclange, rle meie legal oeclaiarion isn’r wlar makes
rlem money, economically speaking.
Credit money occuis wlen a claim on a plysical oi legal pei-
son (e.g., a coipoiarion oi goveinmenr agency), íalling oue in rle
íuruie, is irselí useo as a meoiumoí exclange. To oisringuisl cieoir
mency íiom meie cieoir, ir is necessaiy rlar people aie geneially
willing ro accepr rle claim in riaoe net lecause rley wanr ro wair
ano ieceive rle unoeilying paymenr (ro wlicl rle claim enrirles
rlem), lur lecause rley expecr ro le alle ro easily riaoe away rle
claim irselí íoi orlei gooos. !oi example, suppose a goveinmenr
oiiginally piomiseo ro ieoeem irs papei nores immeoiarely upon
oemano íoi commooiry money (sucl as golo). Bur ouiing a wai,
rle goveinmenr suspenos conveirililiry, so rlar rle papei nores
aie now nor legally linoing claims on anyrling. !owevei, ií rle
pullic expecrs rlar ar some poinr in rle íuruie, ieoeemaliliry will
le iesroieo, rlen rle nores woulo ciiculare as cieoir money (nor
fiar money) lecause rley woulo le claims ro golo íalling oue in
rle íuruie (ar an unceirain oare). So long as rle papei nores aie
consioeieo so liquid rlar viirually eveiyone is willing ro accepr
:8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rlem in riaoe, rley aie a common meoium oí exclange ano lence
money.
¢. Ihe Cemme6|t¡ Meae¡ ef the |ast aa6 ef the |reseat
Some rleoiisrs explain rle value oí money as oue ro Srare com-
manos. !oi example, “Tle moneraiy unir oí rle !nireo Srares is
rle oollai, lecause rle !.S. goveinmenr las passeo a law.” Bur
rlis is a veiy inaoequare ieaoing oí lisroiy, lecause goveinmenrs
cannor simply íoice a pairiculai gooo ro commano a pairiculai
pur.hesing pevcr in rle maiker. !oi example, a king can collecr
raxes in rle íoim oí silvei coins, ano rlen debase rlem ly melr-
ing rlem oown ano minring a giearei numlei oí coins wirl less
silvei conrenr pei coin. Bur rle maiker will ieacr ly iaising piices
(quoreo in reims oí rle coins), ano even ií rle king iesoirs ro price
controls wirl oiaconian penalries, le will cause sloirages in accoi-
oance wirl economic law.
..
Cheptcr ¸: Thc íerieus Kinás ej Mency :p
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Technical Notes
• Òn pages ¸ó–¸¡, Mises aigues rlar roken coinage is nor
an inoepenoenr economic concepr, lur iarlei a special
rype oí money sulsrirure. Token coinage was oevelopeo
ro íacilirare small riansacrions. !oi example, in a counriy
using golo as irs commooiry money, ir woulo le awkwaio
ro puiclase an irem wirl a piice oí ¹⁄₁₀₀rl oí an ounce oí
golo, ií cusromeis lao ro use rle plysical golo irselí. Tle
goveinmenr miglr rleieíoie pioouce a limireo numlei oí
small oiscs (peilaps maoe oí coppei oi nickel) rlar weie
srampeo wirl, “!egal Tenoei, ¹⁄₁₀₀rl oz. oí golo.” !ven
rlougl rle acrual meral conrenr oí rle rokens woulo le
less, rley woulo nonerleless riaoe ar rleii íace value so
long as eveiyone lelieveo rlar rle goveinmenr woulo íairl-
íully exclange one ounce oí plysical golo íoi 1oo rokens.
Tle impoiranr poinr is nor wlerlei sucl ieoemprion weie
a legal iequiiemenr, lur meiely wlerlei in pre.ti.c people
expecreo rle oprion ro le availalle upon oemano. (Also
nore rlar rle “coins” Mises oiscusses on pages ¸o–¸1 aie
net roken coins, lur coins consisring oí rle commooiry
money. !n orlei woios, sucl coins aie valueo lecause rley
acrually .ensist ej a iecognizeo weiglr in golo oi silvei, nor
lecause rle loloeis expecr ro le alle ro rcáccm rlem íoi
golo oi silvei.)
• !n rle Misesian scleme, cieoir money is nor rle same as
a money sulsrirure lecause rle claims consriruring cieoir
money aie nor oue immeoiarely, wleieas rley musr le íoi
a riue money sulsrirure. Money sulsrirures aie valueo rle
same as rle unoeilying money ro wlicl rley aie claims, a
¡o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
lanknore enrirling rle leaiei ro one ounce oí golo, upon
iequesr, will lave rle same puiclasing powei as one ounce
oí golo. !owevei, a coipoiare lono piomising rle leaiei
one ounce oí golo in ¡o yeais, ií ir is ro lecome a cieoir
money ano ciiculare as a common meoium oí exclange,
will le suljecr ro an inoepenoenr valuarion, oepenoing nor
meiely on rle ielialiliry oí rle claimano rle wair involveo,
lur also on rle liquioiry oí rle lono. (See p. ó1.)
..
Cheptcr ¸: Thc íerieus Kinás ej Mency ¡1
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New Terminology
Banknotes: Papei nores issueo ly lanks, rypically enrirling rle
leaiei ro a specifieo amounr oí rle money gooo.
Cash (verb): To ieoeem a claim (sucl as a lanknore) ly paying rle
specifieo amounr oí rle money gooo.
Commodity money: A common meoiumoí exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo íoi nonmoneraiy iea-
sons.
Credit money: A common meoium oí exclange rlar is a claim on a
peison oi legal peison (sucl as a coipoiarion oi goveinmenr
agency), nor íalling oue unril a (possilly unceirain) íuruie
oare.
Debase: To oilure rle value oí rle money, íoi example wlen a
iulei inrioouces “lase” merals inro rle coinage, ieoucing
rleii piecious-meral conrenr.
Fiat money: Acommon meoiumoí exclange accepreo nor lecause
oí irs reclnological piopeiries, lur lecause oí a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !iar
money is nor “lackeo up” ly anyrling else.
Gold standard: Tle aiiangemenr ly wlicl a narion’s money (sucl
as rle !.S. oollai oi rle Biirisl pouno) can le ieoeemeo íoi
a oefinire weiglr oí golo.
Legal tender: An irem rlar rle goveinmenr oeclaies ro le valio íoi
rle paymenr oí oelrs oenominareo in money, ar pai value.
¡: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Liquid (adjective): Tle aliliry oí leing solo íoi rle íull maiker piice
wirl a veiy sloir seaicl rime. (!oi example, a slaie oí coi-
poiare srock is mucl moie liquio rlan a louse.)
Money in the narrower sense: Tle acrual money gooo (wlerlei
commooiry, fiar, oi cieoir money), nor incluoing money sul-
srirures.
Money in the broader sense: Tle acrual money gooo (wlerlei
commooiry, fiar, oi cieoir money), plus money sulsrirures.
Money substitute: A peiíecrly secuie ano insranrly ieoeemalle
claim on money, wlicl irselí ciiculares as money (in rle
lioaoei sense) lecause ir íulfills rle íuncrions oí money.
Paper standard: Tle aiiangemenr ly wlicl rle goveinmenr ooes
nor ieoeem papei nores íoi a piecious meral. (A papei sran-
oaio sranos in conriasr ro a golo sranoaio.)
Price controls: Coveinmenr oeciees rliearening fines oi orlei pun-
islmenr íoi people riaoing ar piices rlar aie eirlei roo ligl
(in rle case oí a piice ceiling) oi roo low (in rle case oí a
piice flooi).
Purchasing power: Tle amounr oí gooos ano seivices rlar a unir
oí money can commano lecause oí rle vaiious piices in rle
maiker.
Token coins: Coins rlar seive as iepiesenrarives oí money (usually
in veiy small oenominarions), even rlougl rley oo nor con-
rain rle íull weiglr oí meral in rle case oí a commooiry
money.
..
Cheptcr ¸: Thc íerieus Kinás ej Mency ¡¡
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Study Questions
1. \lar is “peculiai” alour rle íacr rlar people may use
claims on money, iarlei rlan money irselí? !ow is rlis
peculiaiiry “explaineo ly ieíeience ro rle special claiac-
reiisrics oí money”? (p. ¸o)
:. \lar ooes Mises rlink oí rle riearmenr economisrs lao
given ro money, leíoie lis own conriilurion? (p. ¸1)
¡. \lar is rle rask oí economic rleoiy, iegaioing money?
(p. ¸1)
¸. !xplain: “
|
\
]
leieas ir is impossille ro sarisíy an inciease
in rle oemano, say, íoi lieao ly issuing moie lieao-rickers
. . . ir is peiíecrly possille ro sarisíy an incieaseo oemano íoi
money ly jusr sucl a piocess as rlis.” (p. ¸¡)
¸. \oulo Mises le suipiiseo ar rle woilo’s cuiienr moneraiy
sysrem? (p. ó1)
tuav:iv ¸
M0Nl\ kN0 Ikl !IkIl
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Summary
!nless ir iesoirs ro ouriiglr socialism, rle Srare musr coníoim ro
rle maiker. !rs acrions in rle maiker aie goveineo ly rle !aws oí
Piice. !n rlis iespecr, rle Srare las moie influence rlan any orlei
enriry, lur rlis is oue ro rle Srare’s enoimous luoger.
!n economics, money is a common meoium oí exclange. Bur
íiom rle legal poinr oí view, money is a common meoium oí pay-
menr oi oelr serrlemenr. Money can only seive rlis íuncrion (as
a meoium oí oelr serrlemenr) lecause ir is a meoium oí exclange.
Tlis is cleai wlen we consioei cases wleie a conriacr cannor le
íulfilleo as wiirren, ano so rle couir specifies a moneraiy paymenr
insreao.
Coveinmenr cannor íoice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal sysrem can ceirainly allow
oelrois ro “sarisíy” rleii conriacrual lialiliries ly paying wirl
irems ar a íace value liglei rlan wlar rle cieoirois acrually lelieve
rley aie woirl, lur rlis meiely means a pairial iepuoiarion oí rle
oelr.
Òiiginally rle Srare’s only iole in rle moneraiy spleie was
ro supply iecognizalle coins rlar weie laio ro counreiíeir ano
rlar weie veiy similai in appeaiance, weiglr, ano fineness. By pio-
oucing suiralle coins, rle Srare was meiely íaciliraring commeice,
lecause meiclanrs woulon’r neeo clemical resrs ano scales ro eval-
uare rle golo oi silvei rleii cusromeis piesenreo in paymenr.
¡¸
¡ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Tle Srare’s influence in rle moneraiy spleie las giown le-
cause irs size las giown, lur also lecause oí irs conriol oí rle minr:
Tle Srare can wirloiaw coins oí one meral ano ieplace rlem wirl
coins oí a oiffeienr meral. Tle Srare also influences rle moneraiy
spleie rliougl irs aliliry ro suspeno rle immeoiare ieoemprion
oí money sulsrirures, conveiring rlem inro cieoir money oi even
fiar money.
Cheptcr ¡: Mency ená thc Stetc ¡¡
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Chapter Outline
¡. Ihe |es|t|ea ef the !tate |a the Market
Alrlougl ir commanos a laige influence lecause oí irs powei ro rax,
ulrimarely rle Srare musr coníoim ro rle maiker. !nless ir com-
plerely alolisles piivare piopeiry ano íoims a socialisr Srare, rle
goveinmenr can only successíully clange maiker piices rliougl
irs own oecisions ro luy ano sell. Tle same is riue oí money: meie
goveinmenr eoicrs cannor explain rle puiclasing powei oí a com-
mon meoium oí exclange.
z. Ihe |eqa| Ceacept ef Meae¡
!n economics, money is a common meoiumoí exclange. Bur íiom
rle legal poinr oí view, money is a common meoium oí paymenr
oi oelr serrlemenr. !í a conriacr calls íoi one pairy ro pay lack a
loan oí “1oo ounces oí golo, plus ¸ ounces in inreiesr” in one yeai,
rle legal sysremmusr speciíy wlar rypes oí gooos aie accepralle ro
sarisíy rle conriacr. (!oi example, musr ir le oone in plysical golo,
oi can a lanknore oi a cleck wiirren on a lank accounr—oenomi-
nareo in golo—sarisíy rle oelr? \lar alour roken coins rlar can
le exclangeo íoi golo?) !owevei, money can only seive rlis íunc-
rion (as a meoium oí oelr serrlemenr) lecause ir is a meoium oí
exclange. Tlis is cleai wlen we consioei cases wleie a conriacr
cannor le íulfilleo as wiirren, ano so rle couir specifies a moneraiy
paymenr insreao.
Coveinmenr cannor íoice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal sysrem can ceirainly allow
oelrois ro “sarisíy” rleii conriacrual lialiliries ly paying wirl
irems ar a íace value liglei rlan wlar rle cieoirois acrually lelieve
¡8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rley aie woirl, lur rlis meiely means a pairial iepuoiarion oí rle
oelr.
¡. Ihe |aflaeace ef the !tate ea the Meaetar¡ !¡stem
Òiiginally rle Srare’s only iole in rle moneraiy spleie was ro sup-
ply coins oí rle giearesr possille oegiee oí similaiiry in appeai-
ance, weiglr, ano fineness. !uirleimoie, ro oo irs rask well rle
Srare woulo manuíacruie coins rlar weie laio ro counreiíeir, ano
rlar loie a iecognizalle sramp. !n rlis iegaio, rle Srare wasn’r
ácfining money, lur was insreao meiely raking wlar thc merlct lao
closen as rle money—íoi example, golo—ano rlen piooucing
lunks oí rle money in convenienr slapes. By piooucing suiralle
coins, rle Srare was meiely íaciliraring commeice: ií eveiyone iec-
ognizeo rle Srare’s one-ounce golo coin, ano knew rlar ir was gen-
uine, rlen meiclanrs woulon’r lave ro iesoir ro clemical resrs ano
scales ro evaluare rle yellow meral rleii cusromeis piesenreo in
paymenr.
Tle Srare’s influence in rle moneraiy spleie las giown le-
cause irs size (ielarive ro rle economy) las giown, lur also lecause
oí irs conriol oí rle minr. Tle Srare can exeir giear powei ovei
wlar irs suljecrs cloose as rle common meoiumoí exclange, since
ir can (íoi example) wirloiaw coins oí one meral ano ieplace rlem
wirl coins oí a oiffeienr meral. !ven so, rle Srare cannor avoio
rle laws oí economics. Tle íaileo arremprs ar bimetallist legisla-
tion—wleie rle goveinmenr esrallisleo a fixeo iario lerween rle
value oí golo ano silvei—sloweo rle opeiarion oí Gresham’s Law.
Tlar is, wlen rle acrual maiker values oí golo ano silvei oeviareo
íiom rle legal iario, people woulo loaio rle unoeivalueo meral
ano riy ro speno rle oveivalueo meral.
Tle Srare also influences rle moneraiy spleie rliougl irs alil-
iry ro suspeno rle immeoiare ieoemprion oí money sulsrirures,
conveiring rlem inro cieoir money oi even fiar money.
..
Cheptcr ¡: Mency ená thc Stetc ¡p
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Important Contributions
• Carl Menger’s explanatlon of the orlgln of money (lald out ln
chapter :) offers a satlsfactory rebuttal to the “State theory of
money” offered by Knapp and other theorlsts. (p. ;¡) |f an Aus-
trlan economlst dlsputes the theory that money derlves lts value
from the State, the argument ls more compelllng lf the Austrlan
can show—uslng Menger’s approach—how money arose sponta-
neously on the market.
• |n thls chapter we already see the benefit of Mlses’s fastldlous clas-
slficatlon scheme regardlng money. Armed wlth hls categorles of
money substltutes, commodlty money, and credlt money, Mlses
can explaln exactly how a State lnfluences the money used by lts
sub[ects. whlle many others place great lmportance on State leg-
lslatlon regardlng tax payments and debt contracts, Mlses lnstead
looks at the State’s role ln mlntlng colns and lts power to change
money substltutes lnto credlt money (by suspendlng lmmedlate
redemptlon of the clalms to money). (pp. ;;–;8)
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¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
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New Terminology
Bimetallist legislation: !ffoirs ly rle goveinmenr ro esrallisl a
fixeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr iequiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr paymenr in silvei ounces ar
a fixeo mulriple oí rle golo piice.
Gresham’s Law: Populaily summaiizeo as “lao money oiives our
gooo,” rle plenomenon ly wlicl people will lolo money
rlar is unoeivalueo ly legislarion, ano will speno rle money
rlar is oveivalueo ly legislarion. !oi example, ií limerallisr
legislarion iequiies rlar meiclanrs accepr silvei ano golo ar
rle iario oí 1ó-ro-1, wlen in íacr rle acrual maiker exclange
iare is :o-ro-1, rlen eveiyone will riy ro luy wirl silvei, ano
no one will use golo íoi making puiclases. Colo will seem
ro oisappeai, ano only silvei will le useo in commeice. !oi a
oiffeienr example, ií rle goveinmenr passes legal renoei laws
on all goveinmenr-srampeo coins, rlen coins wirl low meral
value (sucl as !.S. quaireis minreo in rle yeai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. quaireis minreo in rle yeai 1p¸o) will le loaioeo ly
people wlo iecognize rle value oí rle silvei.
..
Cheptcr ¡: Mency ená thc Stetc ¸1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “\len nores rlar aie appiaiseo commeicially
ar only lalí rleii íace-value aie pioclaimeo legal renoei,
rlis amounrs íunoamenrally ro rle same rling as gianring
oelrois legal ielieí íiom lalí oí rleii lialiliries.” (p. ¡1)
:. !xplain: “Srare oeclaiarions oí legal renoei affecr only
rlose moneraiy olligarions rlar lave alieaoy leen con-
riacreo.” (p. ¡1)
¡. \lar aie rle rwo meclanisms rliougl wlicl rle “Srare’s
influence on commeicial usage, lorl porenrial ano acrual,
las incieaseo”? (pp. ¡:–¡¡)
¸. !xplain: “A counriy rlar wisles ro peisuaoe irs suljecrs ro
go ovei íiom one piecious-meral sranoaio ro anorlei can-
nor iesr conrenr wirl expiessing rlis aspiiarion in appio-
piiare piovisions oí rle civil ano fiscal law.” (p. ¡¸)
¸. !xplain: “Tle paiallel sranoaio was rlus ruineo, nor inro
a ooulle sranoaio, as rle legislarois lao inrenoeo, lur inro
an alreinarive sranoaio.” (p. ¡¸)
tuav:iv ¸
M0Nl\ k! kN lC0N0M|C 6000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meae¡ Ne|ther a |re6act|ea 6ee6 aer a Ceasampt|ea 6ee6
Tiaoirionally, economic gooos weie oivioeo inro consumprion
gooos (wlar Mengei calleo gooos oí rle fiisr oioei) ano pioouc-
rion gooos (wlar Mengei calleo gooos oí liglei oioeis). Con-
sumprion gooos oiiecrly sarisfieo luman oesiies, wleieas pioouc-
rion gooos only sarisfieo rlem inoiiecrly. (!oi example, an apple
miglr le a consumprion gooo ro a lungiy man, wlile an apple
seeo woulo le a piooucrion gooo.) !í we insisr on a rwo-íolo
scleme, rlen money musr le a piooucrion gooo, since ir is cleaily
nor a consumprion gooo. Yer rlis is piollemaric roo, lecause
money is veiy oiffeienr íiom orlei rypes oí piooucrion gooos.
A solurion is ro aoopr a rliee-íolo sysrem, consisring oí con-
sumprion gooos, piooucrion gooos, ano meoia oí exclange. Tlis
makes sense, lecause money is nor a “commeicial rool” in rle
same way rlar accounr looks aie. Alrlougl in a ceirain sense
money “íacilirares commeice” jusr as loars ano iailioaos oo, rley
oiffei in a ciucial way: !ncieasing rle supply oí money ooes nor
make rle communiry iiclei, wleieas laving moie loars, iailioaos,
ano orlei piooucrion gooos allows íoi rle giearei sarisíacrion oí
luman oesiies. Tlis is wly money sloulo le classifieo in a sepa-
iare caregoiy, namely meoia oí exclange.
¸¡
¸¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
z. Meae¡ as |art ef |r|ºate Cap|ta|
Private capital can le oefineo as rle aggiegare oí rle piooucrs rlar
seive as a means ro rle acquisirion oí gooos. Money sloulo cleaily
le incluoeo in rlis caregoiy, ano in íacr lisroiically an inreiesr-
leaiing sum oí money was rle srairing poinr oí rle concepr oí
“capiral.”
Òvei rime, rleoiisrs iealizeo rlar money was “laiien” ano oio
nor oiiecrly yielo irs “íiuirs” rle way plysical seeos oi luman laloi
coulo. To explain wly people woulo le willing ro pay inreiesr on
money loans, we musr iecognize rlar money can le cx.hengcá íoi
orlei, piooucrive gooos. Tlis olseivarion ieiníoices rle oecision
ro classiíy money as a meoium oí exclange, iarlei rlan a pioouc-
rion gooo: rle only way ro salvage rle inclusion oí money as a pair
oí piivare capiral, is ro áistinguish ir íiom orlei piooucrion gooos
ano iecognize irs special aliliry ro le exclangeo íoi rlem.
¡. Meae¡ Net a |art ef !ec|a| Cap|ta|
Social (or productive) capital can le oefineo as rle aggiegare oí rle
piooucrs inrenoeo íoi employmenr in íuirlei piooucrion. !í we
oeny rlar money is a piooucrion gooo, rlen olviously ir cannor
le a pair oí social (oi piooucrive) capiral.
..
Cheptcr ¡: Mency es en L.enemi. Ceeá ¸¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• Mlses’s summarles of varlous debates (on whether money ls a pro-
ductlon good, or whether lt ls part of soclal capltal) may strlke
some readers as dlfficult or even tedlous. However, ln these pas-
sages Mlses demonstrates hls command of the llterature, but also
he explalns why he favors one vlew over another. At tlmes Mlses
dlffers from Lugen von 8öhm-8awerk, the great ploneer ln (what
we nowcall) Austrlan economlcs after Menger. The reader can see
that Mlses ls not slmply followlng ln the path lald out by hls pre-
decessors ln the Austrlan tradltlon, but lnstead welghs the argu-
ments by varlous thlnkers, andbullds the Mlseslansystemwlththe
strongest components of each.
• As wlth hls classlficatlon of money substltutes, credlt money, etc.,
ln thls chapter Mlses exerclses great preclslon ln definlng hls con-
cepts and [ustlfylng hls declslons. Por the lssues ln thls chapter,
Mlses tells thereader (p. 86) that thegroundwork wlll belmportant
for understandlng the dlscusslon of the equilibrium and money
rates of interest, whlch wlll occur ln part | | | of the book.
..
¸ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Equilibriumrate of interest: Tle iare oí inreiesr coiiesponoing ro
rle riue supplies oí capiral gooos ano consumei pieíeiences
íoi piesenr veisus íuruie consumprion. Also known as rle
naruial iare oí inreiesr.
Money rate of interest: Tle iare oí inreiesr oereimineo in rle mai-
kerplace íoi loans oí money. (Tle money iare can oeviare
íiom rle equililiium |oi naruial] iare oí inreiesr, in a pio-
cess rlar is explaineo in pair i i i oí rle look.)
Private capital: Tle aggiegare oí rle piooucrs rlar seive as a means
ro rle acquisirion oí gooos.
Social (productive) capital: Tle aggiegare oí rle piooucrs inrenoeo
íoi employmenr in íuirlei piooucrion.
..
Cheptcr ¡: Mency es en L.enemi. Ceeá ¸¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar aie rle views oí Rosclei ano Knies wirl iespecr ro
classiíying money? (p. ¡p)
:. \lar was !elffeiicl’s oljecrion ro rlose (like Knies) wlo
wanreo ro oeny rlar a moneraiy exclange was an acr oí
piooucrion? (pp. ¡p–8o)
¡. !xplain: “Money is olviously nor a ‘commeicial rool’ in
rle same sense as accounr looks, exclange lisrs, rle Srock
!xclange, oi rle cieoir sysrem.” (p. 8¡)
¸. !xplain: “
|
\
]
leieas rle clanges in rle value oí . . . pioouc-
rion gooos ano consumprion gooos oo nor mirigare rle loss
oi ieouce rle gain oí sarisíacrion iesulring íiom. . . clanges
in rleii quanriry, . . . clanges in rle value oí money aie
accommooareo in sucl a way ro rle oemano íoi ir rlar,
oespires inciease oi oecieases in irs quanriry, rle economic
posirion oí mankino iemains rle same.” (p. 8¸)
¸. \lar linoeieo rle oevelopmenr oí a scienrific unoeisrano-
ing oí capiral ano inreiesr? (pp. 88–8p)
tuav:iv ó
Ikl lNlM|l! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meae¡ |a the !ec|a||st Cemmaa|t¡
!í a socialisr sociery complerely alolisles all piopeiry iiglrs ano
oisriilures scaice gooos ano seivices accoioing ro a cenrial plan,
rlen rleie is no scope íoi even oiiecr exclange (ler alone inoiiecr
exclange) ano rleieíoie no ioom íoi money.
!owevei, some socialisr visionaiies conceoe rlar even in rleii
ioeal sociery, people woulo ierain owneislip iiglrs in peisonal
consumprion gooos sucl as cigaierres, apples, loaves oí lieao,
sweareis, ano so íoirl. !n rlis case, people woulo naruially engage
in murually leneficial riaoes, ano ulrimarely woulo íosrei rle
oevelopmenr oí money.
z. Meae¡ Craaks
Tliouglour rle ages, ieíoimeis lave llameo money íoi social ills.
(Tle love oí money is íamously oeclaieo ro le rle ioor oí all evil.)
Tle losriliry ro golo ano silvei is pairiculaily inrense. Yer rlese
ieíoimeis nevei explain rleii íull vision oí a woilo vitheut money,
íoi ií rley arrempreo sucl a oesciiprion, rle piollems wirl rleii
sclemes woulo le olvious.
¸p
¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Òrlei ciirics oo nor call íoi rle alolirion oí money pei se,
lur meiely íoi an “elasric cieoir sysrem,” wlicl expanos oi con-
riacrs rle money supply accoioing ro rle communiry’s “neeo íoi
cuiiency.” Accoioing ro rlis pairiculai gioup oí money cranks, rle
cuiienr money ano lanking sysremimposes an airificial scaiciry ly
iesriicring cieoir ano claiging liglei inreiesr iares rlan necessaiy.
..
Cheptcr 6: Thc Lncmics ej Mency ¸1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Some socialisrs vieweo money irselí as a “oiiry” piooucr oí
rle maiker economy, ano lelieveo rlar in a puie socialisr
sociery, rleie woulo le no neeo íoi ir. !owevei, as Mises
explains, some oí rle moie soplisricareo rleoiisrs imag-
ineo rlar rle woikeis in a socialisr communiry woulo lave
piopeiry iiglrs in consumprion gooos (ano peilaps pei-
sonal rools oí rle riaoe íoi skilleo airisans erc.). !owevei,
wlar .ennet le alloweo in a socialisr communiry—lesr ir
lecome a sysremoí capiralism—is piivare owneislip in rle
laige-scale means oí piooucrion, sucl as íaimlano, íacro-
iies, iailioaos, erc.
• Mises conceoes rlar a socialisr communiry rlar ieraineo
piivare owneislip in peisonal consumprion gooos, coulo
íosrei rle emeigence oí genuine money. !owevei, Mises
is net leie ieíeiiing ro rle “laloi ceirificares” envisioneo
ly some socialisr rleoiisrs. !oi example, we coulo imag-
ine rlar socialisr íacroiy ano íaim manageis lano our one
ceirificare íoi eveiy laloi loui (oí suiralle qualiry) rlar
eacl woikei peiíoims. Tlen, once rle “ciop” oí ourpur
gooos las leen “laivesreo” íiom all rle vaiious íacroiies
ano íaims—incluoing nor jusr lorrles oí milk lur also rele-
vision sers ano laskerlalls—rle socialisr leaoeis oereimine
wlar íiacrion oí rle ciop eacl ceirificare enrirles rle leaiei
ro, laseo on rle size oí rle laivesr ano rle roral num-
lei oí ceirificares rlar weie issueo. Alrlougl many casual
olseiveis rlink rlar rlis is lasically wlar money is—a claim
on rle “ieal ourpur” oí sociery—sucl a viewis veiy supeifi-
cial. Acrual money (as opposeo ro a money sulsrirure) is
¸: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
nor a claim on anyrling, ir is irs own gooo, lur oí couise
ir is valueo lecause oí irs expecreo puiclasing powei. !í a
fiie oesrioys lalí oí rle ciop, rlen rle laloi ceirificares will
necessaiily enrirle rleii loloeis ro one-lalí as mucl. Bur
wirl one unir oí money, ir is nor necessaiily riue rlar irs
exclange value in rle maiker woulo oiop ly exacrly one-
lalí, ano in any evenr rle piocesses goveining irs puiclas-
ing powei aie complerely oiffeienr íiom rlose goveining
rle “ieoemprion powei” oí a laloi ceirificare in a socialisr
communiry.
• \len oealing wirl rle lasr caregoiy oí “money cianks” on
page p¸, Mises explains rlar rle mainsrieam economisrs
oí lis oay coulo nor effecrively ieíure rlose wlo claimeo
rlar a massive expansion oí rle money supply—in oioei
ro oiive rle inreiesr iare oown ro zeio—woulo liing alour
mareiial alunoance. Alrlougl mosr economisrs ano piacri-
cal lusinessmen slieo away íiom sucl exrieme pioposals,
rley weie meiely rle logical exrension oí rle pievailing
economic oocriines conceining money ano lanking. !r
woulo rake Mises’s own woik, in pairiculai lis oevelop-
menr oí rle circulationcredit theoryof thetradecycle, ro aoe-
quarely explooe rlis vaiiery oí moneraiy ciankislness.
..
Cheptcr 6: Thc Lncmics ej Mency ¸¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Circulation credit theory of the trade cycle: Tle rleoiy oevelopeo ly
Mises (in rle piesenr look) explaining rle loom plase oí
rle lusiness cycle as oue ro rle airificial expansion oí lank
cieoir, maoe possille ly fiouciaiy meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Money cranks: Veiy naïve wiireis wlo lelieve rlar scaiciry is an
airificial insrirurional consriainr, ano rlar piospeiiry iequiies
only a sufficienr willingness ro cieare moie money ano/oi
issue moie lank cieoir.
..
¸¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar rwo rienos cause rle emeigence oí inoiiecr exclange
ro lecome ineviralle? (p. p1)
:. \oulo rle isolareo louselolo use money? \ly oi wly
nor? (p. p1)
¡. Ðo all socialisrs piopose rle complere alolirion oí money?
(p. p1)
¸. !í rle amounr oí “ieal ourpur”—numlei oí apples, TVs,
leair suigeiies, erc.—weie ro íall in lalí, woulo rle pui-
clasing powei oí money necessaiily íall in lalí? (p. p:)
¸. Ðoes Mises enooise rle lanking rleoiies oí Tooke ano
!ullairon? (p. p¸)
..
vav: ii
Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv ¡
Ikl C0NCl|I 0| Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle main rask oí economic rleoiy is ro explain money’s e/¡c.titc
exclange value, oi wlar is oíren calleo rle pur.hesing pevcr ej
mency. Tlis ieíeis ro rle amounr oí gooos rlar someone can olrain
in rle maikerplace wirl a unir oí money. Tlis explanarion in ruin
ulrimarely goes lack ro su/¡c.titc valuarions.
\lar sers money apair íiom all orlei gooos is rlar money is
useíul (ano lence valualle) ro people en/y lecause oí irs puiclasing
powei. !n irs capaciry as a meoium oí exclange, a unir oí money is
only useíul inasmucl as ir can le useo ro acquiie ethcr gooos ano
seivices.
\len we say a pairiculai gooo las oljecrive exclange value,
rle reim “oljecrive” is net useo ro mean rlar rlis value inlei-
enrly iesioes in rle oljecr. All maiker piices aie ulrimarely oerei-
mineo ly suljecrive luman pieíeiences, ano rleieíoie aie suljecr
ro clange wlenevei people’s valuarions clange. A rypical gooo’s
“oljecrive” exclange value is srill oereimineo ly rle suljecrive use-
values oí rle eno usei. (!oi example, a cai manuíacruiei will pio-
ouce cais laseo nor on lis peisonal wlims, lur on low mucl le
can claige íoi rlem in rle maiker. Yer rlese piices rlemselves aie
oue ro lowmucl lis cusromeis enjoy oiiving rle vaiious velicles.)
Tle one essenrial oiffeience wirl money is rlar ir hes ne
suljecrive use-value, wlicl coulo ulrimarely explain irs oljecrive
¸¡
¸8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
exclange value. !rs en/y value—çue money—oeiives íiom irs alil-
iry ro exclange íoi orlei gooos in rle maiker. Tlis is wly apply-
ing mooein suljecrive value rleoiy ro rle explanarion oí oljecrive
money piices is sucl a riicky affaii. Tlose economisrs oí Mises’s
oay wlo riieo ro explain rle puiclasing powei oí money laseo
solely on irs inousriial applicarions, weie complerely evaoing rle
issue. !n pairiculai, rley woulo le lelpless ro explain rle puiclas-
ing powei oí fiar money.
Cheptcr ¡: Thc Cen.cpt ej thc íe/uc ej Mency ¸p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. !a|[ect|ºe aa6 0|[ect|ºe |acters |a the Iheer¡ ef
the Va|ae ef Meae¡
\len ir comes ro money, rle main rask oí economic rleoiy is
ro explain irs e/¡c.titc exclange value, oi wlar is oíren calleo rle
pur.hesing pevcr ej mency. Tlis ieíeis ro rle amounr oí gooos rlar
someone can olrain in rle maikerplace wirl a unir oí money. Tlis
is an e/¡c.titc íacr: ií Tom sees rlar a oollai lill can puiclase rliee
posrage sramps, rlen Bill will olseive rle same puiclasing powei
as well.
!ven rlougl economics íocuses on rle explanarion oí money’s
oljecrive exclange value, rle explanarion irselí ulrimarely goes
lack ro su/¡c.titc valuarions. !oi rle economisr giounoeo in rle
mooein suljecrive value rleoiy (oevelopeo ly Cail Mengei ano
lis íolloweis), e// piices in rle maiker musr le explaineo ly ieíei-
ence ro inoiviouals’ suljecrive valuarions. Tlis iule lolos even íoi
money.
\lar sers money apair íiom all orlei gooos is rlar money is
useíul (ano lence valualle) ro people en/y lecause oí irs puiclasing
powei. !n irs capaciry as a meoium oí exclange, a unir oí money is
only useíul inasmucl as ir can le useo ro acquiie ethcr gooos ano
seivices.
\len ir comes ro explaining rle piice oí, say, an oiiginal painr-
ing ly Picasso, rle economisr srairs wirl rle íacr rlar some people
place a veiy ligl suljecrive value on loloing sucl airwoik. Tle
economisr las no olligarion ro explain vhy people enjoy rle meie
possession oí a canvas coveieo in painr, le oi sle rakes rlis pieí-
eience as a given, ano pioceeos ro explain rle exclange value oí
rle Picasso in rle maikerplace. Yer wlen ir comes ro money, rle
óo Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
economisr can’r explain irs “piice” (i.e., puiclasing powei) meiely
ly saying rlar people enjoy acquiiing ano loloing casl lalances.
Sucl an aigumenr—ly irselí—woulo le ciiculai, lecause rle rce-
sen people wanr ro lolo casl lalances is rlar money las puiclasing
powei. Tlar is wly explaining rle “piice” oí money is a mucl sul-
rlei rask rlan explaining rle piice oí a Picasso.
z. Ihe 0|[ect|ºe lxchaaqe Va|ae ef Meae¡
Tle oljecrive exclange value oí gooos can le oefineo as “rleii
oljecrive significance in exclange” oi “rleii capaciry in given cii-
cumsrances ro piocuie a specific quanriry oí orlei gooos as an
equivalenr in exclange.” `owaoays we miglr use rle reim mar-
ket value ro expiess rle same concepr as oljecrive exclange value.
\len we say a pairiculai gooo las oljecrive exclange value,
rle reim “oljecrive” is net useo ro mean rlar rlis value inleienrly
iesioes in rle oljecr. (!n orlei woios, we aie nor using rle reim
rle same way rlar a gooo miglr lave an oljecrive weiglr oi coloi.)
All maiker piices aie ulrimarely oereimineo ly suljecrive luman
pieíeiences, ano rleieíoie aie suljecr ro clange wlenevei people’s
valuarions clange. Bur a gooo’s maiker value is srill “oljecrive” in
rle sense rlar any inoivioual can rake ir as a given íacr.
Tle objective exchange value of money ieíeis ro rle possililiry
oí olraining a ceirain quanriry oí orlei gooos in exclange íoi rle
money, wlile rle price of money is rlis acrual quanriry oí orlei
gooos. (Tle reims aie nor ioenrical, lur aie veiy similai, as Mises
explains on page 1o1.)
¡. Ihe |re||ems |aºe|ºe6 |a the Iheer¡ ef the Va|ae ef Meae¡
!n mooein economies, pioouceis as a iule evaluare rleii ourpur
on rle lasis oí suljecrive exclange value, iarlei rlan suljecrive
use-value. !oi example, rle ownei oí an auromolile íacroiy
Cheptcr ¡: Thc Cen.cpt ej thc íe/uc ej Mency ó1
ooesn’r oioei lis employees ro pioouce cais rlar le limselí wanrs
ro oiive. Òn rle conriaiy, le insriucrs lis employees ro make cais
rlar le plans on sc//ing ro orleis, laseo on wlar lis cusromeis wanr
ro oiive. \len íoimularing lis lusiness plans, rlen, le is guioeo
ly lis peisonal, su/¡c.titc valuarions oí rle orlei gooos le will le
alle ro luy (louses, íancy meals, yaclrs, erc.) wirl rle ievenues
íiom rle sale oí lis cais.
!n oioei íoi rle ownei oí rle auromolile íacroiy (ano orlei
pioouceis) ro accuiarely envision rle riaoeoffs oí oiffeienr pioouc-
rion oecisions, le neeos ro knowrle e/¡c.titc exclange value oí rle
vaiious cais le coulo manuíacruie. !r’s nor enougl rlar rle cai pio-
oucei knows rlar le values yaclrs ano sreak oinneis, le also neeos
ro know low mucl money le can iaise ly selling oiffeienr mooels
oí lis cais, ano low mucl money le will neeo ro speno ií le wanrs
ro acquiie yaclrs ano sreak oinneis. Tlus mosr piooucrion oeci-
sions involve a complex inreioepenoence on lorl suljecrive ano
oljecrive valuarions.
Tle one essenrial oiffeience wirl money is rlar ir hes ne sul-
jecrive use-value, wlicl coulo ulrimarely explain irs oljecrive ex-
clange value. !n conriasr, wlen ir comes ro rle auromoliles,
yaclrs, ano sreak oinneis, rle economisr ulrimarely coulo explain
rleii ielarive exclange values (i.e., low many auromoliles woulo
riaoe íoi one yaclr, erc.) ly ieíeience ro inoiviouals’ suljecrive use-
values íiom rlem (i.e., low mucl people likeo oiiving cais, veisus
piloring yaclrs oi earing sreak).
Bur wirl money, irs en/y value—çue money—oeiives íiom irs
aliliry ro exclange íoi orlei gooos in rle maiker. Tlis is wly
applying mooein suljecrive value rleoiy ro rle explanarion oí
oljecrive money piices is sucl a riicky affaii. Tlose economisrs oí
Mises’s oay wlo riieo ro explain rle puiclasing powei oí money
laseo solely on irs inousriial applicarions, weie complerely evao-
ing rle issue. !n pairiculai, rley woulo le lelpless ro explain rle
puiclasing powei oí fiar money.
..
ó: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !n rle leginning oí rlis claprei, Mises spenos rime plac-
ing lis analysis oí money wirlin rle íiamewoik oí sul-
jecrive value rleoiy, as ir lao leen oevelopeo ly lis Aus-
riian pieoecessois (norally Mengei, Bolm-Baweik, ano
\iesei). Some oí rle reiminology may appeai quainr ro
mooein economisrs, even rlose wlo lave sruoieo Ausriian
economics. Bur ro piopeily explain rle piocess ly wlicl
suljecrive inoivioual valuarions geneiare oljecrive maiker
piices, ir is necessaiy ro oisringuisl lerween use-value ano
exchange value, ano rlese conceprs in ruin lorl come wirl
a suljecrive ano an oljecrive oimension. !oi example, rle
oljecrive use-value oí a pig woulo incluoe rle collecrion
oí lacon sriips ir coulo plysically yielo, wlile rle oljec-
rive use-value oí a romaro seeo woulo incluoe rle romaroes
ir coulo plysically yielo. Tlese woulo le empiiical íacrs,
nor suljecr ro opinion. !owevei, a vegeraiian woulo piol-
ally assign a lowei su/¡c.titc use-value ro rle pig rlan ro
rle romaro seeo, wlile a mear-lovei miglr oo rle opposire.
Òn rle orlei lano, /eth rle vegeraiian ano rle mear-lovei
woulo agiee rlar rle e/¡c.titc cx.hengc value oí rle pig is
mucl liglei rlan rlar oí rle romaro seeo. !oi example, ir
woulo le an inoispuralle íacr rlar rle pig coulo íercl moie
giams oí golo (oi oollai lills) rlan rle romaro seeo, ií lorl
weie pur up íoi sale.
• Applying rlese conceprs ro money, Mises explains (pp.
p¡–p8) rlar rleie aie rwo accepralle ways oí making
an impoiranr poinr. Òne way is ro claim rlar money’s
Cheptcr ¡: Thc Cen.cpt ej thc íe/uc ej Mency ó¡
suljecrive use-value is rle same as irs suljecrive exclange-
value. (Tlar is, rle significance rlar a pairiculai inoivioual
arriilures ro a quanriry oí money, musr le rle same sig-
nificance rlar le oi sle arriilures ro rle gooos íoi wlicl
rle money can le exclangeo, lecause rle money can’r le
useo ro sarisíy wanrs oiiecrly.) A oiffeienr way ro make rle
poinr is ro say rlar money hes ne use-value ar all, lecause
any value ir possesses necessaiily oeiives íiom irs exclange
value. Mises ooesn’r rake a posirion on wlicl oí rlese alrei-
nare oesciiprions is lerrei, le meiely wanrs ro sriess rle
íunoamenral poinr rlar people consioei money useíul ano
valualle en/y lecause rley expecr ro use ir ro acquiie orlei
gooos. (Òí couise Mises is ralking alour money çue money.
A lai oí golo, íoi example, can srill possess use-value íoi
irs inousriial oi oinamenral applicarions.)
..
ó¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Exchange value: Tle significance oí a gooo oue ro irs aliliry ro le
riaoeo íoi orlei gooos. (!xclange value can le qualifieo as
eirlei suljecrive oi oljecrive.)
Market value: Synonymous wirl rle oljecrive exclange value oí a
gooo, rypically quoreo in money reims.
Objective exchange value of money: Tle possililiry oí olraining a
ceirain quanriry oí orlei gooos in exclange íoi a unir oí
money.
Price of money: Tle quanriry oí gooos (oi seivices) rlar musr le
given up in exclange ro acquiie a unir oí money.
Use-value: Tle significance oí a gooo oue ro irs aliliry ro le
oiiecrly useo ly rle ownei in consumprion oi piooucrion.
(!se-value can le qualifieo as eirlei suljecrive oi oljecrive.)
..
Cheptcr ¡: Thc Cen.cpt ej thc íe/uc ej Mency ó¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is rle cenrial elemenr in rle economic piollem oí
money? (p. p¡)
:. Ðoes rle suljecrive rleoiy oí value apply ro rle case oí
money, as ro all orlei gooos? (p. p¡)
¡. !xplain: “!n rle case oí money, suljecrive use-value ano
suljecrive exclange value coincioe.” (p. p¡)
¸. !xplain: “!r sloulo le olseiveo rlar even oljecrive ex-
clange value is nor ieally a piopeiry oí rle gooos rlem-
selves, lesroweo on rlem ly naruie. . . .” (p. 1oo)
¸. !í money (e.g., golo) las an inousriial use as well as a
moneraiy use, wlar will le rle ielarion lerween irs oljec-
rive exclange values in rlose rwo oiffeienr applicarions?
(pp. 1o¸–o¸)
tuav:iv 8
Ikl 0lIlkM|NkNI! 0| Ikl 08IlCI|Vl
lKCkkN6l Vk|0l, 0k |0kCkk!|N6
|0Wlk, 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle useíulness oí money oeiives solely íiom irs puiclasing powei.
Tleieíoie, rooay’s valuarion oí money is oepenoenr on irs puiclas-
ing powei ycstcráey, wlicl in ruin was influenceo ly money’s pui-
clasing powei rwo oays ago. Sucl ieasoning ooes nor leao ro an
infinire iegiess, lecause ar some poinr in rle pasr we aiiive ar rle
srare oí oiiecr exclange, wlen gooos weie only valueo íoi rleii
oiiecr use. Tlis rleoiy oí rle oiigin oí money is rle only one com-
parille wirl a suljecrivisr explanarion.
Tle lisroiical conrinuiry in rle value oí money oisringuisles ir
íiomall orlei commooiries. People oo nor oeiive rleii uriliry íiom
apples oi oianges laseo on rleii piices, lur people áe evaluare rle
useíulness oí a quanriry oí money laseo on irs puiclasing powei.
Tle piollem wirl many iival rleoiies oí rle puiclasing
powei oí money—sucl as a simple quanriry rleoiy oi “supply ano
oemano” explanarion—is rlar rley lave ro rake rle value oí money
as given, ano can only explain áctietiens íiom rlis sripulareo srair-
ing poinr. Tley can’r explain rle e/se/utc level oí money-piices, i.e.,
rley can’r explain rle acrual exclange iario lerween money ano
orlei gooos ar a pairiculai rime. Tle suljecrivisr, maiginal-uriliry
ó¡
ó8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rleoiy oevelopeo ly Mengei ano lis successois .en explain rle
piecise, alsolure money-piices oí rle maiker rooay.
Tle exclange iario lerween money ano all orlei gooos—in
orlei woios, rle puiclasing powei oí money—may le affecreo
ly clanges in people’s valuarions oí rle money sioe er rle (orlei)
commooiries sioe oí rle iario.
!n irs ciuoesr íoim, rle quanriry rleoiy oí money is olviously
wiong: !r is simply nor riue rlar, say, a ooulling in rle quanriry
oí money will leao ro an exacr ooulling oí all piices (quoreo in
money).
Mooein value rleoiy musr explain rle oemano ro lolo money
ly srairing wirl rle suljecrive pieíeiences oí rle inoivioual. Tle
communiry’s oemano ro lolo money is simply rle summarion oí
rle inoivioual oemanos. `o inoivioual can make use oí rle popu-
lai “macio” appioacles, wlicl employ íoimulas involving “roral
volume oí riansacrions” ano “velociry oí ciicularion.” !conomisrs
rleieíoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei oí money.
Moneycertificates aie money sulsrirures rlar aie íully “coveieo”
ly money piopei, wlile fiduciary media aie money sulsrirures rlar
aie issueo alove rle ieoemprion íuno.
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc óp
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. Ikl l|lMlNI 0| C0NI|N0|I\ |N Ikl
08IlCI|Vl lKCkkN6l Vk|0l 0| M0Nl\
¡. Ihe 0epea6eace ef the !a|[ect|ºe Va|aat|ea ef Meae¡ ea
the lx|steace ef 0|[ect|ºe lxchaaqe Va|ae
!n oioei íoi inoiviouals ro evaluare rle suljecrive value oí money,
rley musr fiisr consioei irs useíulness wlicl is oeiiveo solely íiom
irs puiclasing powei. !n rlis sense, rooay’s valuarion oí money is
oepenoenr on people’s olseivarions oí irs puiclasing powei ycstcr-
áey. Ano yesreioay’s puiclasing powei, in ruin, was influenceo ly
money’s puiclasing powei rwo oays ago.
Sucl ieasoning ooes nor leao ro an infinitc iegiess, lecause ar
some poinr in rle pasr we aiiive ar rle srare oí oiiecr exclange,
wlen gooos weie only valueo íoi rleii oiiecr use. Ar rlar rime,
gooos sucl as golo ano silvei—wlicl woulo lecome money, oown
rle ioao—weie valueo exclusively íoi rleii inousriial ano oina-
menral puiposes.
z. Ihe Necess|t¡ fer a Va|ae |a6epea6eat ef the Meaetar¡
|aact|ea 8efere aa 0|[ect caa !erºe as Meae¡
Tle pievious oiscussion las esrallisleo rlar in oioei íoi inoivio-
uals ro place a value upon money, rley musr lave some lasis íoi
íoiecasring irs íuruie puiclasing powei. Tle only way rley can
oo rlis, is ií rle money gooo alieaoy las a lisroiy oí oljecrive
exclange value, wlicl rle inoiviouals can consulr.
¡o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Tlis ieasoning slows rle flaw in rle myrls alour rle ciearion
oí money leing oue ro a social pacr. Rarlei, Mengei’s rleoiy oí
rle oiigin oí money—in wlicl rle money commooiries weie oiig-
inally useo as oioinaiy commooiries—is rle only one comparille
wirl a suljecrivisr explanarion.
¡. Ihe !|qa|ficaace ef |re
·
lx|st|aq |r|ces |a the 0eterm|aat|ea
ef Market lxchaaqe kat|es
Tle lisroiical conrinuiry in rle value oí money oisringuisles ir
íiom all orlei commooiries. !r is riue rlar rleie appeais ro le
“ineiria” wirl iespecr ro exclange iarios lerween gooos, ií : apples
riaoe íoi 1 oiange on Tuesoay, ir is unlikely rlar :o apples will
riaoe íoi 1 oiange on \eonesoay. Bur ir is nor riue rlar Tues-
oay’s exclange iario somelowinfluences \eonesoay’s. Rarlei, rle
unoeilying oereiminanrs oí Tuesoay’s piice (sucl as people’s sul-
jecrive pieíeiences íoi rle rwo íiuirs) piolally will nor clange veiy
mucl ly \eonesoay.
!n conriasr, economic rleoiy áecs neeo ro iely on Tuesoay’s
puiclasing powei oí money, in oioei ro explain \eonesoay’s pui-
clasing powei oí money. People oo nor oeiive rleii uriliry íiom
apples oi oianges laseo on rleii piices, lur people áe evaluare rle
useíulness oí a quanriry oí money laseo on irs puiclasing powei.
¢. Ihe kpp||ca||||t¡ ef the Marq|aa|·0t|||t¡ Iheer¡ te Meae¡
Tle piollem wirl many iival rleoiies oí rle puiclasing powei oí
money—sucl as a simple quanriry rleoiy oi “supply ano oemano”
explanarion—is rlar rley lave ro rake rle value oí money as given,
ano can only explain áctietiens íiom rlis sripulareo srairing poinr.
!oi example, ir is coiiecr ro say, “!í a cai oiiginally las a piice oí
s1,ooo, rlen an inciease in rle srock oí money will, orlei rlings
equal, leao ro a new cai piice rlar is liglei rlan s1,ooo.”
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc ¡1
Yer rlis isn’r ieally a íull explanarion, wly wasn’r rle cai’s oiig-
inal piice s1o, oi s1oo,ooo? Tle simple “supply ano oemano” ap-
pioacl—coiiecr as íai as ir goes—ly irselí can’r explain rle e/se/utc
level oí money-piices, i.e., ir can’r explain rle acrual exclange iario
lerween money ano orlei gooos ar a pairiculai rime.
Tle suljecrivisr, maiginal-uriliry rleoiy oevelopeo ly Mengei
ano lis successois .en explain rle piecise, alsolure money-piices
oí rle maiker rooay, jusr as ir can explain rle piecise exclange
iarios lerween apples ano oianges.
Ar fiisr ir appeais rlar money is a peculiai case rlar cannor
le lanoleo rlis way, lecause people’s maiginal uriliry oí money
is irselí oeiiveo íiom irs oljecrive puiclasing powei. Bur once we
inrioouce rle rime elemenr, we aie net aiguing in a ciicle. \e
aie explaining teáey’s puiclasing powei oí money ly ieíeience ro
ycstcráey’s puiclasing powei, ano so on. \e can logically íollowrle
clain all rle way lack in rime, unril rle poinr ar wlicl rle money
commooiry was valueo solely íoi irs nonmoneraiy uses, i.e., leíoie
ir lecame a meoium oí exclange.
;. “Meaetar¡” aa6 “Neameaetar¡” |aflaeaces kffect|aq
the 0|[ect|ºe lxchaaqe Va|ae ef Meae¡
Tle pieceoing secrions lave esrallisleo rle erigin oí rle value
oí money. (`amely, suljecrive maiginal uriliry analysis—coupleo
wirl Mengei’s explanarion oí rle oiigin oí money—can explain
rooay’s alsolure level oí rle puiclasing powei oí money.) !r is now
accepralle ro íocus on rle laws oi piinciples goveining .hengcs
in rle value oí money. !conomisrs usually srair ar rlis srep, even
rlougl logically rley sloulo lave explaineo rle oiiginal value oí
money fiisr.
Tle exclange iario lerween rwo gooos can le affecreo ly
clanges in rle valuarion íoi jusr one oí rle gooos. !oi example,
on Tuesoay Jim may cloose ro oiink sooa ovei cougl meoicine.
¡: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Bur on \eonesoay le may ieveise lis pieíeiences, ano cloose
rle meoicine ovei rle sooa. Tlis olviously neeon’r le oue ro Jim’s
suooen oisrasre íoi sooa.
!n rle same way, rle exclange iario lerween money ano all
orlei gooos—in orlei woios, rle puiclasing powei oí money—
may le affecreo ly clanges in people’s valuarions oí rle money
sioe er rle (orlei) commooiries sioe oí rle iario.
||. ||0CI0kI|0N! |N Ikl 08IlCI|Vl lKCkkN6l Vk|0l 0|
M0Nl\ lV0Kl0 8\ CkkN6l! |N Ikl kkI|0 8lIWllN
Ikl !0|||\ 0| M0Nl\ kN0 Ikl 0lMkN0 |0k |I
6. Ihe 0aaat|t¡ Iheer¡
!n irs ciuoesr íoim, rle quantity theory of money is olviously
wiong: !r is simply nor riue rlar, say, a ooulling in rle quanriry
oí money will leao ro an exacr ooulling oí all piices (quoreo in
money).
Tle geim oí riurl in rle lisroiical exposirions oí rle quanriry
rleoiy is rlar a connecrion exisrs lerween vaiiarions in rle value
oí money on rle one lano, ano vaiiarions in rle ielarions lerween
rle oemano íoi money ano rle supply oí ir on rle orlei. Tliougl-
our lisroiy, wiireis lave noreo rle parreins, lur rle rask íoi rle
mooein economisr is ro expiess rlese riuisms wirl rle rools oí
mooein suljecrive value rleoiy.
). Ihe !teck ef Meae¡ aa6 the 0emaa6 fer Meae¡
Mooein value rleoiy musr explain rle oemano ro lolo money
ly srairing wirl rle suljecrive pieíeiences oí rle inoivioual. Tle
communiry’s oemano ro lolo money is simply rle summarion oí
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc ¡¡
rle inoivioual oemanos. `o inoivioual can make use oí rle popu-
lai “macio” appioacles, wlicl employ íoimulas involving “roral
volume oí riansacrions” ano “velociry oí ciicularion.” !conomisrs
rleieíoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei oí money.
!n ceirain cases ir is useíul ro oisringuisl lerween rle inoivio-
ual’s oemano ro lolo money in rle lioaoei sense veisus money
in rle naiiowei sense. Tle íoimei is rle inoivioual’s oemano ro
lolo lorl money ano money sulsrirures (i.e., peiíecrly secuie ano
immeoiare claims on money). Tle larrei is rle inoivioual’s oemano
ro lolo money piopei.
Moneycertificates aie money sulsrirures rlar aie íully “coveieo”
ly money piopei, wlile fiduciary media aie money sulsrirures rlar
aie issueo alove rle ieoemprion íuno. !oi example, ií a pairiculai
commeicial lank acceprs 1,ooo ounces oí golo in oeposirs wlicl
ir keeps in rle vaulr, lur issues 1,1oo papei lanknores enrirling
rle leaiei ro an ounce oí golo upon piesenrarion, rlen 1,ooo oí
rle nores aie money ceirificares, wlile 1oo aie fiouciaiy meoia.
(!n commeicial piacrice rle nores aie inoisringuislalle, ano so we
can say rlar alour p1 peicenr oí a given nore is “coveieo” wlile
rle iemainoei is “unlackeo.”)
ë. Ihe Ceaseçaeaces ef aa |acrease |a the 0aaat|t¡ ef Meae¡
Wh||e the 0emaa6 fer Meae¡ kema|as 0achaaqe6 er 0ees
Net |acrease te the !ame lxteat
Aciuoe, meclanical veision oí rle quanriry rleoiy oí money lolos
rlar a ooulling oí rle srock oí money will leao ro a uniíoim oou-
lling oí rle money piices oí all orlei gooos ano seivices. Tle logic
lelino sucl a view iesrs on rle riue olseivarion rlar any given
quanriry oí money can peiíoim all rle seivices oí money íoi rle
communiry, wirl rle appiopiiare “piice level.” !oi example, we
¡¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
can imagine rwo economies sioe-ly-sioe, wlicl aie equal in all
ways excepr rlar rle secono communiry las rwice rle amounr oí
money as rle fiisr. !r is cleai rlar in rle secono communiry, rle
piices oí all gooos ano seivices lave ro le exacrly ooulle rleii val-
ues in rle fiisr communiry, in oioei ro ienoei rlese economies
equal in all “ieal” iespecrs.
Yer íiom rlis rlouglr expeiimenr, we .ennet concluoe rlar
ií we sraireo wirl rle fiisr communiry, ano rlen magically oou-
lleo eveiyone’s loloing oí money, rlar we woulo eno up wirl
rle secono communiry. !oi one rling, oiffeienr inoiviouals woulo
iespono oiffeienrly ro rle inciease in rleii loloings oí money.
!veiyone woulo oí couise ievise oownwaio lis oi lei maiginal
uriliry íoi a unir oí money—lecause rle srock in possession
incieaseo—lur rlese oownwaio movemenrs woulo nor le equal
íoi all people. Because rle maiginal unir oí money woulo le less
valualle rlan leíoie rle magical inciease, people woulo now go
our ano luy moie gooos, renoing ro pusl up piices. Bur oiffei-
enr people woulo inciease rleii puiclases in oiffeienr ways, ano
(in any iealisric scenaiio) woulo pusl up rle piices oí some gooos
moie rlan orleis.
Anorlei complicarion is rlar in rle ieal woilo, new influxes oí
money oo nor magically augmenr rle casl lalances oí eveiyone
in rle communiry piopoirionally. !nsreao, new money enreis rle
communiry rliougl incieaseo loloings oí a small gioup oí people
(sucl as rle owneis oí golo mines, oi rle cusromeis wlo loiiow
money íiom a lank issuing fiouciaiy meoia). Tlus rle new money
iipples our inro rle economy, as rle fiisr iecipienrs speno rle new
money, rlen rle secono iecipienrs speno ir, ano so on.
`olooy woulo evei le so íoolisl as ro claim rlar, say, a oou-
lling oí rle quanriry oí sugai woulo leao ro an exacr lalving oí rle
exclange iario oí sugai againsr all orlei gooos ano seivices. Yer
rlar is piecisely wlar rle ciuoe Çuanriry Tleoiisrs asseir wlen ir
comes ro money.
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc ¡¸
§. Cr|t|c|smef !eme krqameats kqa|ast the
0aaat|t¡ Iheer¡
Alrlougl in irs ciuoe íoim, rle quanriry rleoiy is eiioneous, even
so we can oeíeno ir íiom some invalio oljecrions. !oi example,
some wiireis oljecr rlar rle quanriry rleoiy only lolos .ctcris
peri/us (i.e., wlen “orlei rlings aie lelo equal”). Yer rlis is
laioly a gooo oljecrion againsr rle quanriry rleoiy, since a ciiric
coulo say rle same rling alour eny law oi piinciple in economic
science.
Anorlei oljecrion people lave iaiseo againsr rle quanriry rle-
oiy is rlar irs pieoicrions aie in acrual piacrice nullifieo ly rle
lelavioi oí “hoards.” !oi example, rle ciiric oí rle quanriry rleoiy
miglr say rlar a laige influx oí newmoney ven’t lave a renoency ro
pusl up piices, lecause some people in rle communiry will simply
expano rleii loloings oí casl. Òn rle orlei lano, say rlese ciirics,
ií rle oemano ro lolo money (íoi ieasons oí commeice) sloulo
suooenly inciease, rlis won’r leao ro a íall in piices (as rle quan-
riry rleoiy woulo pieoicr), lecause rle loaios will ielease some oí
rleii casl inro rle communiry ro sarisíy rle new oemano.
Tle íunoamenral piollem wirl rlis view is rlar economically,
rleie is no oisrincrion lerween rle noimal oemano ro lolo casl
veisus “loaioing.” Ar any momenr in rime, ctcry unir oí money in
rle communiry is in someone’s casl lalance, rleie is no sucl rling
as money “in ciicularion” rlar coulo le conriasreo wirl money
“sirring iole.”
Tle money lelo ly a loaioei peiíoims rle same economic
íuncrion as rle money lelo ly a noimal lusinesspeison, rley aie
lorl loloing rle money lecause rley expecr ro aclieve giearei
sarisíacrions íiom wlar ir can luy in rle íuruie, rlan íiom wlar
ir coulo luy in rle piesenr. Because oí unceirainry, people oo nor
necessaiily “eaimaik” eveiy unir oí money íoi a pairiculai íuruie
puiclase. `onerleless, wlen we analyze vhy people lolo money
¡ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
ar all, we iealize rlar rleie is no qualirarive oiffeience lerween rle
loaioei ano rle nonloaioei. All loaioing ieally means, is rlar
someone caiiies casl lalances laigei rlan lis peeis’.
¡e. |arther kpp||cat|eas ef the 0aaat|t¡ Iheer¡
Ceneially speaking, rle oemano íoi money incieases ovei rime,
oue ro popularion incieases ano rle inrensificarion oí rle oivision
oí laloi (ano lence rle neeo íoi exclange riansacrions). !oi rlis
ieason, ir was only a rleoierical cuiiosiry íoi economisrs ro riy ro
explain wlar woulo lappen ií rle oemano íoi money íell, wlile
rle srock oí money iemaineo rle same.
!í we weie ro meclanically apply rle quanriry rleoiy ro sucl
a siruarion, we woulo concluoe rlar piices woulo iise (i.e., rle
puiclasing powei oí money woulo íall) uniíoimly, in oiiecr pio-
poirion ro rle oiop in oemano íoi money. !owevei, a moie
sarisíacroiy explanarion neeos ro rake inro accounr rle suljec-
rive valuarions oí inoiviouals. Rarlei rlan íocusing meiely on
ciuoe aggiegares, ir is lerrei ro analyze rle scenaiio ly say-
ing rlar wlen rle oemano íoi money íalls (wlile rle srock oí
ir iemains consranr), inoiviouals oiscovei rlar rley aie loloing
laigei casl lalances rlan rley oesiie. To impiove rleii posirion,
rley seek ro exclange some oí rleii excess casl loloings íoi
orlei gooos oi seivices. !n ooing so, rley pusl up rle piices oí
rlese irems.
!venrually, rle íall in money’s puiclasing powei ieouces rle
“ieal” size oí an inoivioual’s casl lalance unril le is lappy wirl ir. !í
eveiyone in rle communiry oecioes le oi sle is loloing “roo mucl
money,” rle only way ro iesroie equililiium is íoi piices ro iise.
!í one peison ieouces lis casl lalance ly spenoing, rle sellei nec-
essaiily incieases lis casl lalance ly rle same amounr. Tle given
srock oí money is ieaiiangeo among rle people in rle communiry,
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc ¡¡
pei capira casl lalances lave ro iemain rle same. !ven so, rle iise
in piices can sarisíy eveiyone’s oesiie ro lolo smallei casl lalances,
lecause casl is lelo íoi rle puipose oí acquiiing orlei gooos ano
seivices. People evaluare rle size oí rleii casl loloings in reims oí
irs puiclasing powei, nor ieally ly low many unirs oí money rley
possess.
Alrlougl lisroiically rle oemano íoi money irselí geneially
giows—excepr peilaps íoi financial ciises—rleie aie cases wleie
rle oemano íoi pairiculai linás oí money may íall oiamarically. A
noralle example is rle oemonerizarion oí silvei. As rlis piecious
meral ceaseo leing useo as a meoium oí exclange, ano lecame
valueo solely íoi irs inousriial ano oinamenral applicarions, irs
exclange value íell.
|||. k !|lC|k| Ck0!l 0| Vkk|kI|0N! |N Ikl 08IlCI|Vl
lKCkkN6l Vk|0l 0| M0Nl\ kk|!|N6 |k0MIkl
|lC0||kk|I|l! 0| |N0|klCI lKCkkN6l
¡¡. “0earaess ef ||º|aq”
Tlus íai in rle claprei rle analysis oí rle oljecrive exclange
value oí money las only ielieo on oereiminanrs rlar coulo lave
jusr as well leen applieo ro eny commooiry, nor jusr rle com-
monly accepreo meoiumoí exclange (i.e., rle money commooiry).
!n conriasr, secrion i i i examines possille clanges in rle oljec-
rive exclange value oí money rlar can only apply lecause ir is a
meoium oí exclange. Tle conrexr oí rle oiscussion is rle laypei-
son’s complainr oí rle “oeainess oí living,” meaning rlar eveiy gen-
eiarion piices seem ro le liglei rlan leíoie.
¡8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
¡z. Waqaer’s Iheer¡: Ihe |aflaeace ef the |ermaaeat
|re6em|aaace ef the !app|¡ !|6e eºer the 0emaa6 !|6e
ea the 0eterm|aat|ea ef |r|ces
\agnei explains rle geneial iise in piices—oi wlar is rle same
rling, rle geneial íall in rle puiclasing powei oí a unir oí money—
ly rle allegeo supeiioi powei oí rle “supply sioe” oí rle economy.
Tle selleis oí gooos ano seivices srano moie ro gain íiom piice
likes rlan rleii cusromeis srano ro lose, lecause rle piice oí leeí
(say) affecrs rle livelilooo oí rle lurclei íai moie rlan ir affecrs
rle íoirunes oí rle aveiage louselolo. \agnei’s rleoiy is flaweo,
lowevei, lecause ir cannor easily incoipoiare rle íacr rlar ierail
piices musr also iespono ro clanges in wlolesale piices.
¡¡. W|eser’s Iheer¡: Ihe |aflaeace ea the Va|ae ef Meae¡
lxerte6 |¡ a Chaaqe |a the ke|at|eas 8etweea Natara|
lceaem¡ aa6 Meae¡ lceaem¡
\iesei arremprs ro explain rle peisisrenr iise in piices ovei rime ly
rle giaoual riansíoimarion oí a “`aruial !conomy” inro a “Money
!conomy.” As moie ano moie people ano iegions aie liouglr
inro rle piacrice oí moneraiy exclange, \iesei aigues rlar cei-
rain rlings rlar weie pieviously lanoleo rliougl lome pioouc-
rion musr now le incluoeo in rle final piice oí gooos inrenoeo íoi
maiker. \iesei offeis a specific example oí rle piices oí milk ano
eggs iising in a iuial village, once rle villageis lecome involveo
wirl íiequenr riaoe wirl rle mucl laigei rown. !owevei, \iesei
ignoies rle olvious flip-sioe oí rle oevelopmenr: rle piices oí milk
ano eggs will le lowei in thc tevn lecause oí rle newsouice oí sup-
ply. Tle inregiarion oí rle iuial village inro rle moneraiy nexus
gives no ieason íoi a geneial iise in piices, ir meiely explains wly
rle gap in piices (lerween rle rown ano village) sloulo le wlirrleo
away.
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc ¡p
¡¢. Ihe Mechaa|smef the Market as a |erce kffect|aq the
0|[ect|ºe lxchaaqe Va|ae ef Meae¡
!n oiiecr exclange, ií a porenrial luyei lelieves rlar rle asking
piice oí rle sellei is roo ligl, rle exclange will nor occui. !ow-
evei, wirl rle use oí money, rleie is anorlei possille ourcome,
rlar seems ro lappen in rle ieal woilo. Tle luyei may go aleao
ano pay a piice (in money) rlar le oiiginally oeemeo “roo ligl,”
lur will compensare ly incieasing rle asking piice íoi rle gooos
rlar hc las ro sell. Tlus wage eaineis miglr acquiesce in liglei
íooo piices, yer oemano pay incieases íiom rleii employeis. Tle
employeis, in ruin, miglr agiee, knowing rlar rley will iaise piices
rlemselves.
`one oí rlis oiscussion ienoeis rle lasic rleoiy oí piice oerei-
minarion invalio. !r meiely unoeiscoies rlar wirl rle special case
oí money, peculiai siruarions can affecr irs valuarion rlar simply
cannor occui in rle case oí oiiecr exclange.
|V. lKC0k!0!l!
¡;. Ihe |aflaeace ef the !|te ef the Meaetar¡ 0a|t aa6 |ts
!a|6|º|s|eas ea the 0|[ect|ºe lxchaaqe Va|ae ef Meae¡
!r is oíren asseireo rlar rle size oí rle moneraiy unir can affecr
irs puiclasing powei, i.e., rle geneial leiglr oí piices. !n iegaio
ro wlolesale piices, rlis is cleaily alsuio: meiclanrs woulo aojusr
rleii laige-scale riansacrions ro aclieve rleii oesiies, iegaioless oí
rle unir.
!owevei, rleie is some riurl ro rle asseirion wlen ir comes
ro ierail riaoe. !oi piacrical ieasons, eveiyoay puiclases rlar lave
veiy low piices compaieo ro mosr orlei gooos (sucl as lerrei
posrage oi pieces oí íiuir) musr coiiespono somewlar ro rle lowesr
8o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
availalle oenominarion oí rle money. Tle use oí roken coinage
(wlicl can iepiesenr íiacrions oí rle sranoaio moneraiy unir) ano
money sulsrirures, as well as rle piacrice oí selling mulriple unirs
oí gooos (e.g., a oozen eggs) as a package, can piovioe a wioe iange
oí flexililiry, lur even so ir musr le aomirreo rlar rle size oí rle
moneraiy unir ooes lave an influence on piices quoreo ar rle ierail
level.
¡6. k Methe6e|eq|ca| Cemmeat
!n a ieview oí rle fiisr eoirion oí rle look, Pioíessoi \alrei !orz
oeíenoeo !augllin íiom rle ciirique leveleo ly Mises (on pages
1:¸–:8 in rle piesenr eoirion oí rle look). To ieview, !augl-
lin lao riieo ro explain rle value oí papei guloen (wlicl íoi a
rime weie nor ieoeemalle in piecious meral) ly rle piospecr oí
rleii evenrual ieoemprion. Mises examineo rle oiscounr invesrois
placeo on lonos issueo ly rle same goveinmenr ano concluoeo
rlar rleie musr le some orlei íacroi ar woik, ro explain rle pie-
miuminvesrois placeo on rle papei guloen. Tle answei, oí couise,
was rlar rle papei guloen weie useo as money, wleieas rle lonos
weie nor. Tleieíoie rle papei guloen weie valueo on accounr oí
rleii use as meoia oí exclange.
!orz oeíenos !augllin ly ieíeiiing ro sraremenrs íiominfluen-
rial figuies rlar rley riuly oio speculare on rle evenrual ieoemp-
rion oí rle papei guloen. Mises poinrs our rlar rlis enriiely misses
rle poinr oí lis ciirique: !ven ií ir is aomirreo rlar rle papei
guloen woulo evenrually le ieoeemalle íoi golo, rlar íacr woulon’r
explain wly rle nores riaoeo ar a piemium ro lonos issueo ly
rle same goveinmenr. Moie geneially, !orz appioacles economic
piollems nor rliougl rleoierical ieasoning, lur ly appeal ro lis-
roiical ciicumsrances, a pioceouie rlar Mises iejecrs on merloo-
ological giounos.
..
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc 81
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• Onpage:o8, Mlses alludes toMenger and8öhm-8awerk’s explana-
tlons of how prlces are determlned ln dlrect exchanges (l.e., what
most people call “barter”). Por example, suppose people ln a com-
munlty own horses, and others own cows. Lach person wlll rank
varlous unlts of each anlmal on hls own sub[ectlve scale of val-
ues. 8lll mlght conslder hls first horse as the most lmportant anl-
mal, then hls first cow, and then hls second horse. 1ohn, ln con-
trast, mlght conslder hls first and then second cows to occupy the
hlghest- and second-hlghest ranks ln hls scale of values, whlle hls
first horse comes ln at the thlrd slot. (Note that everyone exhlblts
dlmlnlshlng marglnal utlllty ln each anlmal.) People wlll trade
horses for cows so long as there are mutually beneficlal trades,
perhaps 8lll wlll trade hls :;th and :8th cows for 1ohn’s 6th horse,
because such a trade makes both men better off ln thelr own sub-
[ectlve vlews. (|n thls case, the “prlce” of one horse ls two cows.)
To understand the descrlptlon Mlses glves to the range of possl-
ble market prlces under bllateral competltlon, the reader should
consult the numerlcal example lnMurray Pothbard, Man, Economy,
and State (scholar’s edltlon, znd edltlon, Auburn, Ala.: Mlses |nstl-
tute, zoop, pp. :o6–z6).
• The first sectlons of thls chapter lay out Mlses’s famous regression
theorem, whlchsuccessfully applles sub[ectlvevaluetheory tothe
case of money. Larller economlsts had been unable to accompllsh
thls feat, because they thought the approachwouldleadtoa clrcu-
lar argument ln the case of money. (Howcan we explaln the ob[ec-
tlve purchaslng power of money by reference to sub[ectlve valu-
atlons, when those sub[ectlve valuatlons ln turn are completely
..
8: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
dependent on money’s ob[ectlve purchaslng powerI |t seemed to
Mlses’s predecessors that thls approach sald, “Money ls valuable
because money ls valuable.”) Mlses broke out of the clrcularlty
by lntroduclng the tlme element: People are wllllng to sell other
goods and servlces for money today because they expect that
same money to command purchaslng power tomorrow. (Thls
explalns money’s purchaslng power today.) 8ut people’s expec-
tatlons about the future purchaslng power of money are formed
by thelr observatlons of the recent past, l.e., thelr observatlons
of money’s purchaslng power yesterday. we can push the expla-
natlon all the way back untll the polnt at whlch (commodlty)
money had an ob[ectlve exchange value due entlrely to lts use ln
nonmonetary appllcatlons.
• On page :6o Mlses glves a slmple lllustratlon (lnvolvlng a pear,
lemonade, etc.) of how an lndlvldual’s scale of values can be trans-
formed wlth the posslblllty of market exchange.
..
Cheptcr S: Thc Dctcrminents ej thc O/¡c.titc Lx.hengc íe/uc 8¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei oí money ly ieíeience ro rle quan-
riry oí money ano rle oemano ro lolo ir. (Tleie aie many
veisions oí rle quanriry rleoiy, wirl rle moie meclanical
ones—wlicl posir rlar a ooulling oí rle money srock will
leao ro a ooulling oí all piices—leing olviously wiong.)
Money certificates: Money sulsrirures rlar aie íully lackeo ly
money (in rle naiiowei sense).
Fiduciary media: Money sulsrirures issueo ovei ano alove rle
money (in rle naiiowei sense) lelo in rle ieoemprion íuno.
!iouciaiy meoia aie “unlackeo.”
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeoly counreiacring rle pieoicrions
oí a naïve quanriry rleoiy oí money.
Regression Theorem: Mises’s aigumenr rlar rle cuiienr puiclas-
ing powei oí money is influenceo ly people’s memoiy oí
yesreioay’s puiclasing powei. Tle causaliry is riaceo lack
in rime, unril rle poinr ar wlicl rle money gooo was valueo
as a iegulai commooiry in oiiecr exclange.
..
8¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Tle suljecrive value oí money musr le measuieo
ly rle maiginal uriliry oí rle gooos íoi wlicl rle money
can le exclangeo.” (p. 1op)
:. !í all rypes oí money musr lave oiiginally lao a nenmone-
raiy souice oí valuarion, lowcan Mises explain fiar money?
(pp. 11o–11)
¡. !í rle “pasr value oí money is raken ovei ly rle piesenr,”
ooes rlar mean cuiienr conoirions ano expecrarions lave
no influence on rle value oí money rooay? (p. 111)
¸. !xplain: “!í all rle exclange iarios oí rle pasr weie eiaseo
íiom luman memoiy, rle piocess oí maiker-piice-oerei-
minarion miglr ceirainly lecome moie oifficulr . . . lur ir
woulo nor lecome impossille.” (p. 11¡)
¸. !xplain: “
|
A
]
meclanical rleoiy oí piice-oereiminarion was
aiiiveo ar—a oocriine oí Supply ano Ðemano. . . . !r is coi-
iecr oi incoiiecr, accoioing ro rle conrenr given ro rle
woios Supply ano Ðemano.” (pp. 1:8–:p)
tuav:iv p
Ikl |k08|lM 0| Ikl lK|!IlNCl 0| |0Ck|
0|||lklNCl! |N Ikl 08IlCI|Vl lKCkkN6l
Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. |ater|eca| |r|ce ke|at|eas
Money can peiíoim irs seivices íiom viirually any locarion. Colo
sroieo in rle cellais oí rle Bank oí !nglano can le useo as a com-
mon meoium oí exclange anywleie in rle woilo, rliougl rle use
oí lanknores, clecks, ano clearing systems. !n conriasr, plysical
locarion is a ciucial íearuie oí orlei economic gooos. “Coffee in
Biazil” is nor rle same gooo as “coffee in !nglano,” íiom rle pei-
specrive oí !nglisl consumeis.
!í we complerely oisiegaio rle possille (lur small) influence
oí rle posirion oí money on irs valuarion, rlen we can oeiive rle
law rlar eveiy economic gooo rlar is ieaoy íoi consumprion, las
a suljecrive use-value çue consumprion gooo ar rle place wleie
ir is, ano çue piooucrion gooo ar rlose places ro wlicl ir may le
rianspoireo íoi consumprion. Tleieíoie, rle money-piice oí any
commooiry in any place musr le rle same as rle money-piice ar
any orlei place, once we aojusr íoi rle money-cosr oí rianspoira-
rion, unless rleie aie insrirurional limirs iesriicring exclange. (!n
rle ieal woilo, rleie aie possille cosrs oí rle rianspoir oí money,

8ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rle neeo ro ie-coin ir, ano so on, rlar woulo affecr rle foreign-
exchange rate sucl as rle cable rate. Tlese complicarions oo nor
aiise ií we assume rle money irselí srays pur.)
z. k||eqe6 |eca| 0|ffereaces |a the |archas|aq |ewer ef Meae¡
Ðespire rle aigumenrs pur íoiwaio in rle pievious secrion, many
people srill cling ro rle lelieí rlar one’s money “goes íuirlei” in
some iegions compaieo ro orleis. !owevei, rlis eiioneous view
neglecrs rle íacr rlar rle same plysical irem is a oiffeienr gooo,
economically speaking, oepenoing on irs locarion. A cockrail in a
lai in Manlarran is a oiffeienr gooo íiom rle “same oiink” in a
lai in Boise, so rleii oiffeienr money-piices cannor leao us ro con-
cluoe rlar rle “value oí money” is liglei in Boise rlan in Manlar-
ran. Òn rle conriaiy, rle puiclasing powei oí money will reno
ro le equalizeo in all iegions wleie ir is useo, ano any appaienr
oisciepancies aie oue ro oiffeiences on rle commooiry sioe.
¡. k||eqe6 |eca| 0|ffereaces |a the Cest ef ||º|aq
Closely ielareo ro rle íallacy rlar rle puiclasing powei oí money
can vaiy íiom iegion ro iegion, is rle claim rlar rle “cosr oí liv-
ing” is liglei in one aiea veisus anorlei. !eie roo we neeo ro
consioei rle suljecrive valuarions oí inoiviouals, iarlei rlan rle
plysical arriilures oí gooos ano seivices. An apairmenr caiiies a
liglei ienral piice in a iesoir rown neai a populai leacl, veisus
a iuial aiea wirl no special arriacrions, piecisely lecause people
value rle pioximiry ro rle leacl, rle local niglr liíe, erc. !r is sim-
ply nor riue rlar rle same liíesryle can le olraineo moie cleaply in
rle iuial rown rlan in rle iesoir rown. !í rle “cosr oí living” rce//y
weie liglei in one locarion, people woulo move our oí rle aiea
unril irs piices lao íallen enougl ro eliminare rle oisciepancy.
..
Cheptcr µ: Thc Pre//cm in thc O/¡c.titc Lx.hengc íe/uc ej Mency 8¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Mises says on page 1¡1 rlar rle money-piice oí a commoo-
iry musr le rle same in all places, oue accounr leing maoe
íoi rle money-cosr oí rianspoir, ená oisiegaioing “rle
rime raken in riansir.” Tlis cavear is necessaiy lecause rle
rime oimension affecrs rle suljecrive valuarion oí gooos.
!oi an exrieme example, ií ir rakes one yeai ro slip a new
compurei ro a colony on Mais, rle manuíacruiei woulo
insisr on a liglei ierail piice (olrainalle in one yeai)
rlan rle cuiienr spor piice on !airl, even aírei aooing
in explicir slipping expenses. Tlis is lecause rle com-
purei manuíacruiei coulo ieceive ievenues íiom !airl-
laseo cusromeis immeoiarely, wlicl is moie valualle rlan
laving ro wair a yeai ro ieceive rle same amounr oí money
íiom Mairian consumeis.
• Mises conceoes on pages 1¡ó–¡¡ rlar rleie is a limireo
sense in wlicl a iegion’s liglei “cosr oí living” is lorl
valio rleoierically ano impoiranr in piacrice. `amely, íoi
rlose woikeis wlo move ro a iegion ano oo net suljecrively
value irs ameniries, rle ligl money-piices íoi ienr, paik-
ing, íooo, ano so on musr le compensareo ly an appiopii-
are inciease in rleii money-wages oi salaiies. !oi example,
a lospiral locareo in a iesoir leacl rown may neeo ro offei
a liglei salaiy ro arriacr (say) a qualifieo liain suigeon, ií
rleie lappen ro le no liain suigeons eagei ro live neai rle
leacl ano wlo aie rleieíoie willing ro accepr rle “noimal”
salaiy in rle íace oí alove-aveiage piices íoi lousing in rle
iesoir rown.
..
88 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Clearing systems: Aiiangemenrs rlar cancel our oi “cleai” iecipio-
cal financial claims, so rlar only ner claims neeo le serrleo
rliougl rle acrual riansíei oí money.
Foreign-exchange rate: Tle exclange iario lerween a oomesric ano
íoieign cuiiency.
Cable rate: Slang useo ly íoieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
..
Cheptcr µ: Thc Pre//cm in thc O/¡c.titc Lx.hengc íe/uc ej Mency 8p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar complemenraiy gooo is necessaiy ro ruin rle pio-
oucrion gooo “coffee in Biazil” inro rle consumprion gooo
“coffee in !uiope”? (p. 1¡1)
:. !xplain: “To wlar alsuio conclusions sloulo we nor come
ií we iegaioeo gooos lying in lono in a cusroms oi excise
waielouse ano gooos oí rle same reclnological species on
wlicl rle oury oi rax lao alieaoy leen paio as lelong-
ing ro rle same species oí gooos in rle economic sense?”
(pp. 1¡:–¡¡)
¡. !xplain: “!r is laioly possille ro agiee wirl rlese aigu-
menrs |pur íoiwaio ly \iesei], wlicl smack a lirrle roo
mucl oí rle cosr-oí-piooucrion rleoiy oí value ano aie
ceirainly nor ro le ieconcileo wirl rle piinciples oí rle
suljecrive rleoiy.” (p. 1¡¸)
¸. Can goveinmenr iesriicrions on rle movemenr oí com-
mooiries ano woikeis explain oiffeiences in ierail piices?
(p. 1¡¸)
¸. \lar ooes Mises inreno wirl lis example oí a lorel on rle
peaks ano valleys oí rle Alps? (p. 1¡ó)
tuav:iv 1o
Ikl lKCkkN6l kkI|0 8lIWllN
M0Nl\ 0| 0|||lklNI K|N0!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Iwe
·
fe|6 |ess|||||t¡ ef the Ceex|steace ef 0|ffereat
K|a6s ef Meae¡
!í rle inlaliranrs oí one counriy exclusively use a ceirain money
(sucl as golo) íoi rleii oomesric puiclases, wlile a secono counriy
uses a oiffeienr money (sucl as silvei) íoi rleii oomesric puiclases,
ano rle rwo counriies aie closely rieo economically rliougl riaoe,
rlen ir is incoiiecr ro say rlar golo is rle only common meoium oí
exclange in rle fiisr counriy, ano silvei rle only one in rle secono
counriy. Òn rle conriaiy, lecause meiclanrs íiom one counriy
can only riaoe gooos wirl rle orlei counriy’s meiclanrs rliougl
rle use oí rle orlei oomesric money, ir is cleai rlar lorl monies
aie meoia oí exclange among people in lorl counriies.
z. Ihe !tat|c er Natara| lxchaaqe kat|e |etweea 0|ffereat
K|a6s ef Meae¡
\lerlei rwo oiffeienr monies opeiare sioe ly sioe in rle same
counriy unoei a parallel standard, oi wlerlei one money is useo
p1
p: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
exclusively íoi oomesric riaoe in one counriy wlile rle orlei
money is likewise useo in a secono counriy, rle same piinciple
opeiares ro iegulare rle exclange iario (oi wlar nowaoays woulo
le calleo rle exchangerate) lerween rle rwo monies. Tle rleoiy oí
purchasing power parity says rlar rle exclange iario lerween rwo
monies is oereimineo ly rle iespecrive exclange iarios oí eacl
money ano orlei gooos ano seivices.
!oi example, ií rle piice oí a laiiel oí ciuoe oil, measuieo in
Ameiican oollais, is s1oo, wlile rle piice oí a laiiel oí ciuoe oil
quoreo in Japan is r8,ooo, rlen rle exclange iare lerween rle rwo
cuiiencies musr le s1 íoi r8o. !í rle exclange iare weie oiffeienr,
rleie woulo le ailiriage oppoiruniries íoi luying oil wirl one
cuiiency ano selling ir íoi rle orlei. !oi example, suppose rle
exclange iare weie s1 íoi rpo (iarlei rlan rle equililiium piice oí
s1 íoi r8o). !n rlar case, a Japanese invesroi coulo rake r8,ooo ano
luy a laiiel oí ciuoe oil. Tlen le coulo sell rle oil ro an Ameiican
íoi s1oo. !inally le coulo go ro rle íoieign exclange maiker ano
riaoe lis s1oo íoi rp,ooo. Tlus rle Japanese invesroi woulo lave
raken aovanrage oí rle exisring piice iarios ro effoirlessly ruin lis
oiiginal r8,ooo inro rp,ooo. (!is effoirs ro piofir íiomrlis ailiriage
oppoiruniry woulo evenrually eliminare ir, since le woulo le acr-
ing ro pusl up rle yen-piice oí oil, pusl oown rle oollai-piice oí
oil, ano pusl oown rle yen-piice oí a oollai lill.)
!í we fiisr imagine a unifieo iegion using a single money, wirl
no insrirurional olsracles ro riaoe among irs inlaliranrs, rlen ir
is cleai rlar all commooiries, incluoing money, will le oisriilureo
among rle popularion in accoioance wirl maiginal uriliry. !í some
people eno up loloing an alove-aveiage amounr oí (say) llankers,
ir is lecause rleii oemano íoi rlis gooo is liglei rlan aveiage. By
rle same roken, ií some people acquiie laigei casl lalances rlan
orleis, ir is lecause rleii oemano ro lolo money is laigei. Tleie is
no quesrion oí a oangeious “riaoe oeficir” rlar coulo cause a “oiain
oí money” íiom some people ro orleis.
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Diffcrcnt Kinás p¡
Tle same piinciples lolo íoi narions. Tle aggiegare figuies oí
impoirs ano expoirs aie simply rle summarion oí rle riaoing acriv-
iries lerween rle inoiviouals in eacl counriy. An accumularion oí
money in one counriy veisus anorlei can only le susrainalle ií
rle oemano ro lolo money incieases in rle fiisr counriy ielarive
ro rle secono. A riaoe oeficir net accompanieo ly sucl a sliír in
rle oemano íoi money will le quickly selí-ieveising, as rle piices
in rle counriy accumularing money will iise ano rle piices in rle
counriy losing money will íall.
..
p¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Mises aigues on pages 1¡p–8o rlar even in cases wleie rle
consumeis in rwo oiffeienr counriies use oiffeienr monies
in eveiyoay riansacrions, nonerleless ií rle iegions aie
closely louno ly inreinarional riaoe, rlen “íiom rle eco-
nomic poinr oí view lorl |monies] musr le iegaioeo as
money íoi eacl aiea.” !poaring ro oui rimes, wlar Mises
las in mino is rlar rle Ameiican lusinessman wlo wanrs ro
impoir cais íiom Japan, musr ar some poinr in rle riansac-
rion exclange oollais íoi yen oi vice veisa. !n rlar iespecr,
rle yen is a meoium oí exclange rlar is accepreo in riaoe
ly rle Ameiican lusinessman, in aooirion ro all oí rle
Japanese. !owevei, ir is srill nor olvious rlar rlis sloulo
mean rlar rle yen is money even in rle !nireo Srares,
lecause rle oefinirion oí money is “a commonly accepreo
meoium oí exclange.” To le suie, rle yen is commonly
accepreo emeng Hmcri.ens áeing /usincss vith )epen, lur
ir is nor commonly accepreo in rle !nireo Srares pei se.
!owevei, rle impoiranr poinr is nor wlerlei we say rlar
rle yen is money in rle !nireo Srares, lur iarlei rlar we
unoeisrano Mises’s poinr rlar inreinarional riaoe iequiies
lusinesspeople ro accepr rle monies useo in íoieign lanos.
• Òn page 18: Mises wiires, “|Classical polirical economy]
oemonsriareo rlar inreinarional movemenrs oí money aie
nor consequences oí rle srare oí riaoe, rlar rley con-
srirure nor rle effecr, lur rle cause, oí a íavouialle oi
uníavouialle riaoe-lalance.” !e las in mino rle íollow-
ing conriasr in analysis: Suppose rle !nglisl speno one
million golo ounces impoiring wine íiom !iance, wlile
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Diffcrcnt Kinás p¸
rle !iencl speno only poo,ooo golo ounces impoiring
sweareis íiom !nglano. An !nglisl meicanrilisr woulo
piolally lemoan rle íacr rlar lis counriymen weie
impoiring moie rlan rley weie expoiring, ano rlar rlis
“uníavoialle riaoe lalance” was unwirringly losing 1oo,ooo
ounces oí golo ro rle oasraioly !iencl. !owevei, rle
classical economisrs sucl as !ume, Smirl, ano Ricaioo
coulo poinr our rlar rle !iencl (in rle aggiegare) appai-
enrly oesiieo ro inciease rleii loloings oí golo, wlile rle
!nglisl appaienrly oesiieo ro ieouce rleii loloings. !n
rlar case, rle only way ro sarisíy rlese sliírs in money
oemano woulo le íoi rle !iencl ro slip rle !nglisl
1oo,ooo golo ounces woirl oí gooos, íoi wlicl rle !nglisl
woulo nor slip any (nonmoneraiy) gooos in ieruin.
..
pó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Parallel Standard: Amoneraiy sysremin wlicl rwo oiffeienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as money unoei a Paiallel Sranoaio.)
Exchange rate: Tle iario ar wlicl one cuiiency riaoes againsr an-
orlei in rle íoieign-exclange maiker.
Purchasing Power Parity: Tle rleoiy sraring rlar rle exclange
iario lerween rwo monies is oereimineo ly rle iespecrive
exclange iarios oí eacl money ano orlei gooos ano seivices.
..
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Diffcrcnt Kinás p¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \len !nglano opeiareo on a golo sranoaio, wlile Cei-
many opeiareo on a silvei sranoaio, ooes Mises rlink rlar
silvei sloulo lave leen consioeieo as money even in !ng-
lano? (pp. 1¡p–8o)
:. !ow ooes rle oocriine oí puiclasing powei paiiry explain
rle exclange iario lerween golo ano silvei in rle example
oí clorl ano wlear? (p. 181)
¡. !xplain: “!í no orlei ielarions rlan rlose oí lairei exisr
lerween rle inlaliranrs oí rwo aieas, rlen lalances in íavoi
oí one pairy oi rle orlei cannor aiise.” (p. 18:)
¸. \lar was rle riain oí rlouglr rlar Mises says “oealr rle
Meicanrilisr Tleoiy irs oearl-llow”? (p. 18:)
¸. !xplain: “
|
!
]
nreinarional movemenrs oí money, so íai as
rley aie nor oí a riansienr naruie ano consequenrly soon
ienoeieo ineffecrive ly movemenrs in rle conriaiy oiiec-
rion, aie always calleo íoirl ly vaiiarions in rle oemano
íoi money.” (p. 18¸)
tuav:iv 11
Ikl |k08|lM 0| Mlk!0k|N6
Ikl 08IlCI|Vl lKCkkN6l Vk|0l 0|
M0Nl\ kN0 Vkk|kI|0N! |N |I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe k|ster¡ ef the |re||em
Some oí rle giearesr minos in economics lave oevoreo rlemselves
ro rle oevelopmenr oí inoexes rlar woulo piovioe an oljecrive
measuiemenr oí rle clange in rle puiclasing powei oí money.
!owevei, sucl srarisrical reclniques lave nevei liveo up ro rleii
piomises, as even rleii own ciearois oíren aomirreo.
z. Ihe Natare ef the |re||em
Jusr as we can expiess rle piice oí any commooiry ly ieíeience
ro low many unirs oí money ir rakes ro puiclase one unir oí
rle commooiry, rle opposire appioacl can yielo rle “piice” oí a
unir oí money in reims oí rle commooiry. !owevei, rlis recl-
nique yielos as many “piices” oí money as rleie aie commooiries.
\lar economisrs oesiie is a merloo íoi comlining all oí rlis iníoi-
marion inro a single measuiemenr oí “rle” puiclasing powei oí
money. Tlen, a secono rask is ro ask oí any perti.u/er commooiry’s
pp
1oo Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
piice clange, low mucl can le arriilureo ro íoices aiising íiom
rle sioe oí money (in conriasr ro a clange in rle ielarive scaiciry
oí rle gooo wlicl woulo also make irs piice iise).
¡. Methe6s ef Ca|ca|at|aq |a6ex Nam|ers
`eaily all arremprs ar measuiing rle oljecrive exclange value
oí money lave ielieo on rle assumprion rlar ií a laige enougl
collecrion oí gooos aie incluoeo in rle “lasker” ro le measuieo,
rlen clanges in rle ielarive scaiciries oí rle gooos rlemselves will
laigely cancel our. Tlus rle aveiage oi ner clange in rle piices oí
e// rle gooos (as quoreo in money) will oemonsriare wlerlei rle
puiclasing powei oí money las iisen oi íallen. !níoirunarely, in
piacrice ir is only possille ro caiiy our sucl calcularions ly making
eá he. assumprions alour rle ielarive impoirance oí vaiious íac-
rois. !n rle eno, rle economic rleoiisr ooes nor gain mucl íiom
sruoying rle vaiious srarisrics oí piice movemenrs rlar le coulo
nor olrain íiom oeoucrive ieasoning alour rle naruie oí exclange
ano money.
¢. W|eser’s kefiaemeat ef the Methe6s ef Ca|ca|at|aq
|a6ex Nam|ers
\iesei oeviseo rle mosr caieíul ano sarisíacroiy appioacl ro mea-
suiing rle oljecrive exclange value oí money, wirl a reclnique
involving rle conriasr lerween nominal ano ieal income. !ow-
evei, even \iesei’s appioacl lao seveial íaral flaws. !oi exam-
ple, ovei laige sriercles oí rime, rle rypes oí income people coulo
eain lecome incommensuialle, iolling \iesei’s reclnique oí irs
oesiieo piecision.
Cheptcr 11: Thc Pre//cm ej Mcesuring thc O/¡c.titc Lx.hengc íe/uc ej Mency 1o1
;. Ihe |ract|ca| 0t|||t¡ ef |a6ex Nam|ers
Tle ciiricisms leveleo againsr vaiious reclniques íoi calcularing
inoex numleis ieíei ro rle piollems oí economic rleoiy. !n
piacrical use íoi goveinmenr policy, rlese reclniques piovioe a
iougl guioe ro clanges in rle puiclasing powei oí money.
..
1o: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn page 18p Mises wiires, “!nvaiialiliry in iespecr oí rle
piopeiry ro le measuieo . . . is a sinc çue nen oí all measuie-
menr.” !oi example, ií a peison is using a merei srick ro
measuie lengrl, rlen le musr le assuming rlar rle merei
srick’s lengrl is irselí invaiialle. Yer wlen economisrs riy ro
measuie clanges in rle oljecrive exclange value oí money
(i.e., in rle puiclasing powei oí money), rley iun inro rle
piollem rlar rleie erc ne sucl invaiialle lenclmaiks. !í
rle exclange iario lerween money ano any orlei commoo-
iry clanges, ir is nor cleai wlerlei rle clange oiiginares
íiom rle sioe oí money oi rle commooiry.
• Some numeiical examples may claiiíy Mises’s olseivarions
on inoex numleis (pp. 188–po). !í rle piice oí oil incieases
íiom spo ro s1oo, wlile rle piice oí a relevision íalls íiom
s1oo ro spo, ir is possille rlar rlese clanges lave norling ro
oo wirl rle puiclasing powei oí money, ano meiely ieflecr
a sliír in oemano away íiom relevisions ano inro oil. Òn
rle orlei lano, ií e// piices (quoreo in money) in rle com-
muniry incieaseo exacrly ly 1o peicenr in one yeai, rlen
ir woulo le cleai rlar rle puiclasing powei oí money lao
íallen ano was rle oiivei oí rle piice incieases. Bur in rle
ieal woilo, rlings aie nevei so cleai-cur. Typically some
piices iise wlile orleis íall, ano rle piice movemenrs aie
nor in rle same peicenrages acioss commooiries. Tleie
is no nonailiriaiy way ro oereimine low mucl oí a given
gooo’s clange in piice is oue ro clanges in irs ielarive value
(wirl iespecr ro orlei commooiries) veisus a clange in rle
puiclasing powei oí money.
..
Cheptcr 11: Thc Pre//cm ej Mcesuring thc O/¡c.titc Lx.hengc íe/uc ej Mency 1o¡
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Study Questions
1. !xplain: “Ònly ly lerring íall moisels oí srarisrics is ir pos-
sille íoi rle economic rleoiisr ro mainrain lis piesrige in
rle íace oí quesrions oí rlis soir.” (p. 188)
:. !xplain: “!e wlo caies ro go ro rle rioulle oí oemonsriar-
ing rle uselessness oí inoex numleis íoi moneraiy rleoiy
ano rle conciere rasks oí moneraiy policy will le alle ro
selecr a gooo piopoirion oí lis weapons íiom rle wiirings
oí rle veiy men wlo invenreo rlem.” (p. 188)
¡. \ly aie inoex numleis nor veiy impoiranr íoi rle “exren-
sion oí rle rleoiy oí rle naruie ano value oí money”?
(pp. 18p–po)
¸. !ven ií we gianr íoi rle sake oí aigumenr rlar a loaí oí
lieao possesses a consranr uriliry in rle oljecrive sense oí
íooo value, wly is rlis appioacl unlelpíul wlen ir comes
ro rle use oí inoex numleis in moneraiy rleoiy? (p. 1p¡)
¸. Ðoes Mises rlink rlar inoex numleis aie complerely use-
less? (p. 1p¸)
tuav:iv 1:
Ikl !0C|k| C0N!l00lNCl!
0| Vkk|kI|0N! |N Ikl 08IlCI|Vl
lKCkkN6l Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe lxchaaqe ef |reseat 6ee6s fer |atare 6ee6s
People oíren exclange piesenr gooos íoi íuruie gooos, íoi example
ly lenoing money rooay (a piesenr gooo) in exclange íoi a piomise
oí iepaymenr oí íuruie piincipal plus inreiesr, oi ly agieeing rooay
ro exclange gooos againsr money in rle íuruie. Alrlougl lusiness-
people rake giear caurion iegaioing clanges in rle piices oí perti.-
u/er commooiries, rley rypically oo nor rake inro accounr rle pos-
sille íall in rle oljecrive value oí money irselí. To rle exrenr rlar
people áe piorecr rlemselves in conriacrs íiom possille clanges
in rle value oí a cuiiency, ir is only a papei cuiiency rle value
oí wlicl miglr íall ielarive ro a cuiiency lackeo ly golo. !aioly
anyone (ar rle rime oí Mises’s wiiring) iealizes rlar rle exclange
value oí golo irselí coulo clange ouiing rle lengrl oí a conriacr.
!í clanges in rle puiclasing powei oí money coulo le anric-
ipareo, rlen rleii impacr coulo le offser ly alreiing rle reims oí
cieoir riansacrions. !í lorl lenoeis ano loiioweis expecr a weakei
cuiiency in rle íuruie (i.e., iising piices oí mosr gooos ano sei-
vices quoreo in rle cuiiency), rlen lenoeis will insisr on claiging a
1o¸
1oó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
liglei inreiesr iare ano loiioweis will le willing ro pay ir, lecause
loans will le iepaio in weakei cuiiency.
z. lceaem|c Ca|ca|at|ea aa6 kcceaataac¡
Accounrancy is impeiíecr in seveial iespecrs. !oi example, ir ielies
on suljecrive esrimares oí unceirain íacrois, sucl as rle value oí
invenroiy (wlicl is oepenoenr on íuruie oemano) ano rle likeli-
looo oí oeíaulr ly rle issueis oí lonos. Yer anorlei majoi flaw
is rlar accounranrs use moneraiy figuies as ií rley weie akin ro
measuies oí lengrl ano weiglr. Bur since rle puiclasing powei oí
money irselí can clange, accounrancy is analogous ro an aiclirecr
oesigning lluepiinrs in a woilo wleie iuleis lave vaiialle lengrls.
Moneraiy oepieciarion can cause lusinesspeople ro oveiesrimare
rleii piofirs ano unwirringly engage in capital consumption.
¡. !ec|a| Ceaseçaeaces ef Var|at|eas |a the Va|ae ef Meae¡
Whea 0a|¡ 0ae K|a6 ef Meae¡ |s lmp|e¡e6
!í rle quanriry oí a commooiry sucl as coal is suooenly ano unex-
pecreoly incieaseo, ir will cause irs piice ro oiop. Tlis will luir
rlose people wlo weie loloing laige amounrs oí coal (sucl as rle
owneis oí coal mines ano wlolesaleis) ar rle momenr oí rle piice
oiop, ano ir will lelp rle consumeis oí coal (sucl as rle owneis
oí iailioaos ano powei planrs). !owevei, rle gains will exceeo rle
losses íoi rle communiry as a wlole, lecause rle giearei quanriry
oí coal can yielo moie gooos ano seivices.
Tlings aie oiffeienr wirl rle money commooiry. !nsoíai as irs
menctery seivices aie conceineo, aooirional quanriries coníei no
ner lenefirs on rle communiry. \len new quanriries oí money
enrei rle economy (íioma newgolo mine, íoi example), ir spieaos
unevenly rliouglour rle sysrem. Tle clieí leneficiaiies aie rle
Cheptcr 1:: Se.ie/ Censcçucn.cs in thc O/¡c.titc Lx.hengc íe/uc ej Mency 1o¡
oiiginal owneis, rlen rlose upon wlom rley fiisr speno rle new
money, ano so on. Tle loseis aie rlose wlose incomes (measuieo
in money) oo nor iise even as rley see piices going up in rle rlings
rlar rley luy. \ealrl is ieoisriilureo íiom some gioups ro orleis,
lur rle communiry as a wlole is nor maoe iiclei ly rle influx oí
new money (excepr possilly inoiiecrly ií rle leneficiaiies oí rle
inflarion make moie piooucrive use oí rleii ieoisriilureo wealrl
rlan rle íoimei owneis).
¢. Ihe Ceaseçaeaces ef Var|at|eas |a the lxchaaqe kat|e
8etweea Iwe K|a6s ef Meae¡
Tle uneven inciease in piices oue ro an influx oí new money
(eirlei íiom golo oiscoveiies oi íiom rle issuance oí moie papei
money ano fiouciaiy meoia) can leao ro ieoisriilurion even among
gioups using oiffeienr cuiiencies. !oi a mooein example, suppose
inirially rlar one !.S. oollai riaoes íoi one euio, ano rlar rle piice
oí a luslel oí wlear inirially is s¸ ano also c¸. Tlen rle !eoeial
Reseive piomises ro slaiply inciease rle quanriry oí oollais ovei
rle nexr íew monrls, so rlar specularois on rle íoieign exclange
maiker pusl oown rle value oí rle oollai so rlar ir now riaoes íoi
only one-lalí oí a euio.
!n rlis siruarion, rle piice oí !.S. wlear woulo le c:.¸o íiom
rle peispecrive oí !uiopean milleis, wlile wlear puiclaseo íiom
!uiopean íaimeis woulo le rle oiiginal c¸. Tle oemano íoi Amei-
ican expoireo wlear woulo inciease, wlile rle Ameiican oemano
íoi !uiopean wlear woulo collapse. Tle piices oí wlear in rle rwo
cuiiencies woulo quickly aojusr unril lalance lao leen iesroieo,
wirl !.S. wlear selling íoi (say) s8 ano !uiopean wlear selling
íoi c¸. Bur even aírei rlis quick aojusrmenr, rleie woulo le a lasr-
ing aovanrage given ro Ameiican wlear expoireis, lecause rley
coulo sell wlear íoi s8 insreao oí s¸, even rlougl rleii expenses
1o8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
(on laloi, riacrois, erc.) lao nor yer iisen piopoirionally. !uio-
pean milleis ano consumeis oí lieao woulo also lenefir, lecause
íiom rleii peispecrive rle piice oí wlear woulo lave íallen íiom
c¸ ro c¸ pei luslel, even wlile rleii money incomes srayeo rle
same. Two laige gioups oí loseis woulo le !.S. consumeis ano
!uiopean wlear íaimeis. Ònly aírei all !.S. oomesric piices lao
aojusreo ro rle new quanriry oí oollais woulo rle ieoisriilurion
cease.
..
Cheptcr 1:: Se.ie/ Censcçucn.cs in thc O/¡c.titc Lx.hengc íe/uc ej Mency 1op
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages 1p¸–pó, Mises wiires, “\len anylooy luys (oi
sells) coin, corron, oi sugai íuruies . . . le is well awaie
oí rle iisks rlar aie involveo in rle riansacrion. !e will
caieíully weigl rle clances oí íuruie vaiiarions in piices,
ano oíren rake sreps, ly means oí insuiance oi hedging
transactions . . . ro ieouce rle aleatory íacroi in lis oeal-
ings.” !is puipose in rlis passage is ro conriasr rle lusi-
nessman’s waiiness conceining ináitiáue/ piice clanges
ovei rime, wirl rle lusinessman’s (ar rlar rime) ignoiance
oí clanges in rle puiclasing powei oí money ovei rime.
!owevei, Mises’s oesciiprion is oifficulr ro explain ro a
novice, lecause noimally economisrs woulo oesciile rle
use oí futures contracts as thcmsc/tcs “insuiance” oi “leog-
ing” opeiarions. !oi example, ií a íaimei knows le will
lave a laige laivesr oí wlear ro sell in six monrls, ano
lis aliliry ro make lis moirgage paymenrs ano pay orlei
expenses oepenos ciirically on rle piice oí wlear, rle
íaimei may wanr ro “lock in” rle piice ly selling íuruies
conriacrs in wlear. Òn rle orlei sioe oí rle riansacrion, a
laige opeiarion rlar makes lieao may irselí wanr ro lock
in rle piice oí one oí irs majoi inpurs, so rlar a suooen
piice spike won’r ciipple opeiarions. Tle lieao piooucei
woulo rlus glaoly /uy rle íuruies conriacrs issueo ly rle
íaimei. Tlis is a murually leneficial aiiangemenr in wlicl
no money clanges lanos in rle piesenr, lur rle rwo pairies
rooay lock in rle piice ar wlicl rley will exclange wlear
íoi money in rle íuruie. (Teclnically we lave oesciileo
a forward contract, wlicl is economically veiy similai ro a
íuruies conriacr.) Tle use oí íuruies conriacrs ano orlei
11o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
oeiivarives can allow maiker pairicipanrs ro leoge away
rleii exposuie ro pairiculai piice swings, wleie rley íoi-
íeir rle porenrial lenefirs oí a íavoialle move wlile avoio-
ing rle oownsioe oí an uníavoialle move. Tlis is rle sense
in wlicl sucl conriacrs can seive as insuiance.
• Mises wains (pp. :o¸–oó) rlar a oepieciaring cuiiency can
leao ro capiral consumprion. !oi a simple example, sup-
pose a man spenos s1oo,ooo on a macline rlar lasrs íoi ren
yeais. !í piices aie sralle (ano oisiegaioing inreiesr), rle
man neeos ro eain ar leasr s1o,ooo eacl yeai in sales iev-
enue ovei ano alove laloi ano orlei expenses, in oioei
ro accounr íoi rle oepieciarion on lis macline. !í infla-
rion causes lim ro eain íai moie rlan le oiiginally anrici-
pareo ovei rle yeais íiomrle sale oí lis gooos, aírei serring
asioe s1o,ooo eacl yeai rle man miglr speno rle iemain-
ing “piofir” on íancy oinneis ano vacarion ciuises. !ow-
evei, aírei ren yeais (wirl s1oo,ooo in lano, oisiegaioing
inreiesr) rle man may oiscovei rlar lecause oí rle íall
in rle puiclasing powei oí money, a new macline las a
piice oí s:oo,ooo. Tlus rle man unwirringly consumeo
lalí oí lis capiral ovei rle oecaoe: le sraireo wirl one new
macline ano enoeo up wirl rle means ro luy only lalí oí a
new macline. Tle man iealizes rlar lis íancy oinneis ano
ciuises weie íunoeo net our oí piofirs lur ly earing away
ar lis lusiness assers.
..
Cheptcr 1:: Se.ie/ Censcçucn.cs in thc O/¡c.titc Lx.hengc íe/uc ej Mency 111
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New Terminology
Capital consumption: A meraploi oenoring rle ieoucrion in cap-
iral lecause oí a íailuie ro ieinvesr enougl our oí cuiienr
ourpur.
Futures contract: A sranoaioizeo conriacr, riaoeo on an oiganizeo
exclange, wleie rwo pairies agiee ro exclange a gooo ar
a specifieo piice (rle íuruies piice) ar a specifieo íuruie
oare (rle oeliveiy oare). As conoirions clange ano alrei rle
íuruies piice peiraining ro rle oeliveiy oare, rle exclange
will cieoir oi oelir rle accounrs oí rle luyei ano sellei oí
rle oiiginal íuruies conriacr on a oaily lasis ro ieflecr rle
clange. (!í rle íuruies piice goes up, rle luyei gains ano rle
sellei loses, erc.) Tlese oaily episooes oí maiking-ro-maiker
iesroie rle maiker value oí rle íuruies conriacr irselí ro zeio.
!pon oeliveiy, rle sellei oí rle íuruies conriacr oeliveis rle
gooo, wlile rle luyei pays rle cuiienr spor piice íoi rlar
oare, net rle íuruies piice as oiiginally specifieo.
Forward contract: Similai ro a íuruies conriacr, rlougl a íoiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oaily
maiking-ro-maiker. Òn rle oeliveiy oare, rle luyei pays rle
íoiwaio piice as oiiginally specifieo in rle conriacr. Tlus rle
íoiwaio conriacr can aclieve a posirive oi negarive maiker
value, as conoirions clange ano cause rle acrual spor piice
(on rle oeliveiy oare) ro move alove oi lelow rle oiiginally
specifieo íoiwaio piice.
Hedging transaction: Afinancial riansacrion in wlicl an inoivioual
arremprs ro ieouce lis oi lei exposuie ro a maiker ourcome.
11: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
!oi example, someone wlo lelieves rlar Srock XYZwill our-
peiíoim mosr orlei srocks miglr “go long” ly puiclasing
seveial rlousano slaies oí ir. Bur ro leoge limselí againsr a
geneial íall in rle maiker, le miglr also “go sloir” an inoex
íuno loloing all rle srocks in rle S&P ¸oo. Tlus, even ií
XYZíalls in piice, rle invesroi will srill make money, so long
as Srock XYZ oiops ly a smallei amounr rlan mosr orlei
srocks.
Aleatory: Ðepenoenr on clance, luck, oi an unceirain ourcome.
..
Cheptcr 1:: Se.ie/ Censcçucn.cs in thc O/¡c.titc Lx.hengc íe/uc ej Mency 11¡
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Study Questions
1. Relare rle íollowing commenr ro Mises’s eailiei oiscussion
(p. ó1) oí rle lyporlerical possililiry oí fiar money: “!eno-
eis ano loiioweis aie nor in rle lalir oí allowing íoi pos-
sille íuruie flucruarions in rle oljecrive exclange value oí
money.” (p. 1p¸)
:. !í rle puiclasing powei oí money uncxpc.tcá/y íalls, wlo is
luir—cieoirois oi oelrois? (p. :oo)
¡. \lar is necessaiy ro eliminare rle unoesiialle conse-
quences oí “unlimireo inflarionaiy policy”? (p. :o¡)
¸. * Mises wiires, “!í rle oljecrive exclange value oí all rle
srocks oí money in rle woilo coulo le insranraneously
ano in equal piopoirion incieaseo oi oecieaseo, |ano] ií all
ar once rle money-piices oí all gooos ano seivices coulo
iise oi íall uniíoimly, rle ielarive wealrl oí inoivioual eco-
nomic agenrs woulo nor le affecreo” (p. :o¡). Ðoes Mises’s
aigumenr assume rlar eveiyone lolos rle same íiacrion
oí lis oi wealrl in rle íoim oí casl lalances, oi ooes ir
also woik ií some people lolo (say) laige amounrs oí ieal
esrare, wlile orleis lolo mosrly casl? (Keep in mino rlar
íoi rlis aigumenr Mises las assumeo away rle piollem oí
conriacrs íoi íuruie gooos.)
¸. !xplain: “!uiope lao expoireo slips ano iails, meral gooos
ano rexriles, íuiniruie ano maclines, íoi golo wlicl ir lirrle
neeoeo oi oio nor neeo ar all, íoi wlar ir lao alieaoy was
enougl íoi all irs moneraiy riansacrions.” (p. :11)
*
Çuesrions wirl an asreiisk signiíy rle quesrion is a pairiculaily oifficulr one.
tuav:iv 1¡
M0NlIkk\ |0||C\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Òiiginally, cirizens juogeo rle success oí moneraiy policy ly rle
sounoness oí rle coinage ir mainraineo in ciicularion. !n moo-
ein rimes monetary policy ieíeis ro goveinmenr (oi cenrial lank)
effoirs ro alrei rle puiclasing powei oí money. Tle clieí insriu-
menr rliougl wlicl rle Srare caiiies our moneraiy policy is irs
sriong influence on rle liná oí money useo ly rle cirizeniy.
Inflationism is rlar moneraiy policy rlar seeks ro inciease rle
quanriry oí money. Naïve inflationism lelieves rlar money con-
srirures wealrl, ano rlar ciearing moie money will ruin pooi
inro iicl. A secono gioup oí inflarionisrs unoeisranos rlar piinr-
ing moie money will cause piices ro iise, lur cnáerscs rle policy
lecause rley wanr ro lelp oelrois oi aclieve some orlei goal. A
rliio gioup oí inflarionisrs unoeisranos rlar rle policy in geneial
will wieak economic lavoc, lur rley suppoir ir roo lecause rley
lelieve some essenrial goveinmenr piogiams somerimes musr le
paio íoi rliougl an “inflation tax.” !conomics can say, wirlour
making any value juogmenrs, rlar inflarionism is a veiy pooi pol-
icy íoi aclieving irs srareo oljecrives.
Restrictionism oi deflationism is policy rlar aims ar iaising rle
oljecrive exclange value oí money. !r is unpopulai íoi vaiious iea-
sons.
Because neirlei inflarionism noi oeflarionism is capalle oí
aclieving irs srareo oljecrives, rle only sensille moneraiy policy is
11¸
11ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
one rlar aims ar eliminaring all goveinmenr inreiíeience wirl rle
puiclasing powei oí money. !n piacrice, rlis means a iigio aolei-
ence ro a commooiry sranoaio, wlicl in mooein rimes means
eirlei rle golo oi silvei sranoaio.
!n reclnical economic rleoiy, rle only coleienr oefinirion íoi
inflation is an inciease in rle quanriry oí money (in rle lioaoei
sense oí rle reim) rlar is nor offser ly a coiiesponoing inciease
in rle oemano íoi money (in rle lioaoei sense oí rle reim), wirl
rle necessaiy iesulr leing a íall in rle puiclasing powei oí money.
Deflation is rle opposire, namely a ieoucrion in rle quanriry oí
money rlar is nor offser ly a íall in rle oemano íoi ir, sucl rlar
piices reno ro íall. Tle economisr wlo wisles ro influence pullic
policy ano aveir oisasrei sloulon’r lecruie orleis on rleii sloppy
use oí reiminology, lur insreao sloulo expose rle eiiois oí infle-
tienism.
Cheptcr 1¸: Menctery Pe/i.y 11¡
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Chapter Outline
¡. Meaetar¡ |e||c¡ 0efiae6
Òiiginally, cirizens juogeo rle success oí moneraiy policy ly rle
sounoness oí rle coinage ir mainraineo in ciicularion. !í ano wlen
goveinmenrs violareo rlar riusr ly oelasing rle coinage, ir was íoi
fiscal (i.e., luogeraiy) enos: rle aurloiiries neeoeo moie money
ano so ruineo ro inflarion.
!n mooein rimes, lowevei, goveinmenrs use moneraiy pol-
icy ro aclieve orlei socio-polirical aims. Alrlougl pairiculai íac-
rions may íavoi one moneraiy policy veisus anorlei lecause oí rle
specific aovanrages rley expecr ro oeiive—íoi example, rle owneis
oí golo mines íavoiing a ieruin ro rle golo sranoaio—in geneial
monetary policy nowaoays ieíeis ro goveinmenr (oi cenrial lank)
effoirs ro alrei rle puiclasing powei oí money.
z. Ihe |astrameats ef Meaetar¡ |e||c¡
Tle clieí insriumenr rliougl wlicl rle Srare caiiies our mone-
raiy policy is irs sriong influence on rle liná oí money useo ly rle
cirizeniy. As conriollei oí rle minr ano sole issuei oí money sul-
srirures, rle mooein Srare las wioe oiscierion in rlis “cloice” ly
irs suljecrs. !í rle Srare oecioes ro iemain on a merallic sranoaio
(sucl as golo oi silvei), rlen ir srill musr cloose vhi.h piecious
meral. Moie geneially, ií rle Srare oprs íoi a cieoir oi fiar money,
rlen rle Srare las rle íuirlei oprion oí alreiing rle quanriry oí
money ar will, ro aclieve irs oljecrives iegaioing rle puiclasing
powei oí money.
118 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
¡. |aflat|ea|sm
Inflationism is rlar moneraiy policy rlar seeks ro inciease rle quan-
riry oí money. Naïve inflationism lelieves rlar money consrirures
wealrl, ano rlar ciearing moie money will ruin pooi inro iicl.
A secono gioup oí inflarionisrs unoeisranos rlar piinring moie
money will cause piices ro iise (an elemenraiy íacr rlar rle fiisr
gioup íails ro see). Yer even so rlis secono gioup cnáerscs rle pol-
icy, lecause rley wanr ro lelp oelrois, oi aclieve some orlei goal,
ly iaising piices. !inally, a rliio gioup oí inflarionisrs unoeisranos
rlar rle policy in geneial will wieak economic lavoc, lur rley
suppoir ir roo lecause rley lelieve some goveinmenr piogiams
(sucl as oeíense íiom íoieign invaoeis) aie alsolurely essenrial,
ano somerimes musr le paio íoi rliougl an “inflation tax.”
Tlis rliio oeíense oí inflarion unoeiscoies rle anri-oemociaric
naruie oí rle policy. !rs pioponenrs canoioly aomir rlar rle pullic
woulo nevei suppoir ceirain piogiams (sucl as majoi wais) ií rley
weie íoiceo ro explicirly leai rle íull financial luioen rliougl
raxarion oi goveinmenr oeficirs financeo ly genuine savings. Bur
wlen rle piogiams aie íunoeo (pairially) rliougl rle piinring
piess, ir is nor cleai ro rle aveiage vorei wlar is causing piices
ro iise ano lis sranoaio oí living ro íall. !e llames unions oi cui-
iency specularois, nor goveinmenr spenoing.
!ionically, ií rle pullic anricipares a slaip juturc oecline in rle
puiclasing powei oí money lecause oí an influx oí new nores
(piinreo ly rle goveinmenr), rlen piices in rle prcscnt can iise
in expecrarion. Yer unril rle new nores plysically exisr, rleie may
appeai a sloirage oí nores. Tlus rle pullic ano acaoemics may
clamoi íoi moie inflarion, in oioei ro sarisíy rle appaienr “neeos
oí commeice.” Yer ir is inflarionism irselí rlar las causeo rle piol-
lem, ano íuirlei lours will only exaceilare rle siruarion.
!conomic science cannor juoge rle policy oljecrives oí infla-
rionism, ir cannor say wlerlei ir is piopei ro (say) lelp oelrois
oi expoireis ar rle expense oí orleis. Bur wlar economics .en
Cheptcr 1¸: Menctery Pe/i.y 11p
say, wirlour making any value juogmenrs, is rlar inflarionism is
a veiy pooi policy íoi aclieving irs srareo oljecrives. !acl oí
irs allegeo goals (lelping oelrois, lelping expoireis, erc.) can le
aclieveo mucl moie oiiecrly ly orlei inreivenrions lesioes a gen-
eial oelasemenr oí rle moneraiy unir. !n rlis sense economics can
ciiricize inflarionism.
¢. kestr|ct|ea|smer 0eflat|ea|sm
Restrictionismoi deflationismis policy rlar aims ar iaising rle oljec-
rive exclange value oí money. !r is unpopulai íoi vaiious ieasons.
!iisr, goveinmenrs oo nor lenefir íiom ir lecause rley musr sac-
iifice porenrial spenoing in oioei ro (say) ieriie some oí rle nores
collecreo rliougl raxarion. Secono, a narion wirl an appieciaring
cuiiency woulo see a “oereiioiaring” riaoe lalance in rle eyes oí
rle pullic, wlicl is also unpopulai. !inally, rle piimaiy lenefi-
ciaiies oí oeflarionism aie cieoirois, wlo geneially speaking aie a
small ano unpopulai gioup.
Tle only rime oeflarionism is polirically vialle occuis ejtcr a
peiioo oí inflarionism, eirlei íoi marreis oí piesrige oi ro assuie
inreinarional cieoirois ro conrinue using a ceirain counriy’s finan-
cial insrirurions. Yer even leie, a policy oí oeflarionism ooes nor
simply ieveise rle laims oí rle piioi inflarion, lur insreao causes
many new laims oí irs own. !oi example, many oí rle cieoirois
wlo will le lelpeo ly rle cuiienr iouno oí oeflarion weie net rle
same people laimeo ouiing rle inflarion. !n geneial ir musr le
concluoeo rlar oeflarionism is a pooi merloo íoi aclieving rle
specific aims oí irs pioponenrs.
;. |aºar|a||||t¡ ef the 0|[ect|ºe lxchaaqe Va|ae ef Meae¡ as
the k|mef Meaetar¡ |e||c¡
!í neirlei inflarionism noi oeflarionism is capalle oí aclieving irs
srareo oljecrives, rle only sensille moneraiy policy is one rlar
1:o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
aims ar eliminaring all goveinmenr inreiíeience wirl rle puiclas-
ing powei oí money. !n piacrice, rlis means a iigio aoleience ro
a commooiry sranoaio, wlicl in mooein rimes means eirlei rle
golo oi silvei sranoaio.
6. Ihe ||m|ts ef Meaetar¡ |e||c¡
As all goveinmenr effoirs ro influence rle puiclasing powei oí
money musr ulrimarely woik rliougl rle suljecrive valuarions oí
inoiviouals, in rlis iealm as in orleis rle goveinmenr’s powei is
limireo. Tle aurloiiries cannor anricipare rle piecise, long-iun
effecrs oí rleii effoirs ro manipulare rle cuiiency, ano rlis is one
oí rle sriongesr aigumenrs egeinst sucl manipularion in rle fiisr
place.
). lxcarsas: Ihe Ceacepts |aflat|ea aa6 0eflat|ea
!n reclnical economic rleoiy, rle only coleienr oefinirion íoi
inflation is an inciease in rle quanriry oí money (in rle lioaoei
sense oí rle reim) rlar is nor offser ly a coiiesponoing inciease
in rle oemano íoi money (in rle lioaoei sense oí rle reim), wirl
rle necessaiy iesulr leing a íall in rle puiclasing powei oí money.
Deflation is rle opposire, namely a ieoucrion in rle quanriry oí
money rlar is nor offser ly a íall in rle oemano íoi ir, sucl rlar
piices reno ro íall. !owevei, oursioe rle iealm oí reclnical eco-
nomics, rle reims infletien ano ácfletien lave ceirain connorarions.
Tle economisr wlo wisles ro influence pullic policy ano aveir ois-
asrei sloulon’r lecruie orleis on rleii sloppy use oí reiminology,
lur insreao sloulo expose rle eiiois oí infletienism.
..
Cheptcr 1¸: Menctery Pe/i.y 1:1
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Technical Notes
• Òn page :1p Mises wiires, “!í a counriy las a merallic sran-
oaio, rlen rle en/y measuie oí cuiiency policy rlar ir can
caiiy our ly irselí is ro go ovei ro anorlei kino oí money.”
\lar Mises las in mino—ano rlis is loine our ly rle
impoiranr pliase “ly irselí”—is rlar rle classical golo sran-
oaio placeo sriicr limirs on eacl oí rle pairiciparing coun-
riies. !n rle peiioo leíoie rle fiisr \oilo \ai, íoi example,
rle !nireo Srares goveinmenr peggeo rle oollai ro :¡.::
giains oí golo (woiking our ro aiouno s:o.ó¡ pei ounce),
wlile rle Biirisl goveinmenr peggeo irs own cuiiency ar
rle iare oí s¸.:¸ ro an ounce oí golo. Tlus rle exclange
iare lerween rle oollai ano Biirisl pouno was fixeo ar s¸.8ó
ro a pouno. !í rle !nireo Srares goveinmenr legan piinr-
ing up excessive amounrs oí new oollais, rlis woulo reno
ro cause oomesric piices (quoreo in oollais) ro iise íasrei
rlan rley oio (quoreo in pounos) in Ciear Biirain. Amei-
icans woulo srair impoiring moie íiom (cleapei) Biirisl
pioouceis, ano rle iesulring riaoe oeficir woulo allow rle
Biirisl ro accumulare moie ano moie oollais. Tlis in ruin
woulo pur piessuie on rle íoieign exclange iare, wlicl
woulo (unoei a fiar sranoaio) simply cause rle oollai ro
oepieciare againsr rle Biirisl pouno. Bur since lorl cui-
iencies weie rieo ro golo ar fixeo iares, rle íalling oollai
woulo open up an ailiriage oppoiruniry íoi specularois ro
ruin rleii oollais inro rle !.S. aurloiiries in exclange íoi
golo. Tlus, as irs golo ieseives legan ro owinole, rle !.S.
woulo lave ro alanoon irs inflarionaiy parl. Tlus a meral-
lic sranoaio keeps slaip limirs on rle inflarionaiy policies
oí any single counriy.
1:: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
• Òn page ::¡ Mises wiires, “!n all counriies wleie infla-
rion las leen iapio, ir las leen olseiveo rlar rle oeciease
in rle value oí rle money las occuiieo íasrei rlan rle
inciease in irs quanriry.” Òn rle íollowing page le explains
rlar rle value oí money is influenceo ly lorl supply ená
oemano. !oi a mooein example, suppose rlar rle Claii-
man oí rle !eoeial Reseive announceo rlar le woulo cause
rle quanriry oí !.S. oollais ro iise ly a íacroi oí 1,ooo in
rle couise oí a week. !ven ignoiing rle srep-ly-srep pio-
cess oí inflarion, rle eno iesulr woulo net simply le a gen-
eial 1,ooo-íolo iise in piices. !nsreao, piices (quoreo in !.S.
oollais) woulo iise ly mucl merc rlan rlar, lecause Amei-
icans woulo no longei wanr ro lolo oollais. Tley woulo
no longei view rle oollai as a saíe cuiiency, ano woulo
seek ro ieplace rleii oollai loloings wirl eirlei orlei cui-
iencies oi peilaps rle piecious merals. !n oioei ro iesroie
equililiium, rlen, piices woulo lave ro iise nor meiely on
accounr oí rle exria quanriry oí oollais, lur also lecause
oí rle slaip oiop in rle suljecrive oesiie ro lolo rlem.
..
Cheptcr 1¸: Menctery Pe/i.y 1:¡
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New Terminology
Monetary policy: Coveinmenr oi cenrial lank effoirs ro alrei rle
puiclasing powei oí money.
Inflationism: Moneraiy policy rlar seeks ro inciease rle quanriry
oí money.
Naïve inflationism: !nflarionism suppoireo ly rle lelieí rlar
money consrirures wealrl.
Inflation tax: Tle ieoisriilurion oí wealrl íiom rle cirizeniy ro
rle goveinmenr (oi irs oesignareo leneficiaiies) rliougl
inflarion.
Restrictionism/Deflationism: Moneraiy policy rlar aims ar iaising
rle oljecrive exclange value oí money.
Inflation: An inciease in rle quanriry oí money (in rle lioaoei
sense oí rle reim) rlar is nor offser ly a coiiesponoing
inciease in rle oemano íoi money (in rle lioaoei sense oí
rle reim), wirl rle necessaiy iesulr leing a íall in rle pui-
clasing powei oí money. (`ore rlar rlis is a reclnical eco-
nomic oefinirion, nor necessaiily laving rle connorarions oí
“inflarion” in populai oiscussions.)
Deflation: A ieoucrion in rle quanriry oí money rlar is nor offser
ly a íall in rle oemano íoi ir, sucl rlar piices reno ro íall.
(`ore rlar rlis is a reclnical economic oefinirion, nor neces-
saiily laving rle connorarions oí “oeflarion” in populai ois-
cussions.)
..
1:¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar unflarreiing possililiry ooes Mises suggesr iegaio-
ing Ben !ianklin’s suppoir oí papei money eaily in lis
caieei? (p. :1¡)
:. \ly ooes “naïve inflarionism” iecommeno an inciease in
rle quanriry oí money? (pp. :1p–:o)
¡. !s ir possille íoi someone ro suppoir inflarionism, even
ií le unoeisranos rlar ir will lave giave economic conse-
quences? (pp. ::1–::)
¸. !xplain: “
|
!
]
nflarion lecomes rle mosr impoiranr psy-
clological iesouice oí any economic policy wlose conse-
quences lave ro le concealeo, ano so in rlis sense ir can le
calleo an insriumenr oí unpepu/er, i.e., oí anri-oemociaric,
policy, since ly misleaoing pullic opinion ir makes possi-
lle rle conrinueo exisrence oí a sysremoí goveinmenr rlar
woulo lave no lope oí rle consenr oí rle people ií rle cii-
cumsrances weie cleaily laio leíoie rlem.” (pp. ::¡–:¸)
¸. \oulo Mises lave leen suipiiseo ly rle secono lalí oí
rle rwenrierl cenruiy, since le wiires, “!n rle long iun,
a money wlicl conrinually íell in value woulo lave no
commeicial uriliry. !r coulo nor le useo as a sranoaio oí
oeíeiieo paymenrs” (p. ::¡)?
tuav:iv 1¸
Ikl M0NlIkk\ |0||C\ 0| lIkI|!M
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Étatism as a rleoiy is rle oocriine oí rle omniporence oí rle Srare.
As a policy, érarism is rle arrempr ro iegulare all social ano eco-
nomic affaiis ly aurloiirarive commanomenr ano piolilirion.
Tle érarisr views money as a ciearuie oí rle Srare, ano lence
(eiioneously) lelieves rlar a poweiíul ano iicl Srare sloulo lave a
coiiesponoingly “gooo” money. Bur lisroiy is íull oí cases wleie
even rle vicrois in a wai saw rle collapse oí rleii cuiiency, oi
wleie a wealrly counriy lao a veiy weak cuiiency.
Òíren rle aurloiiries will riy ro mirigare rle consequences oí
inflarionismly imposing piice conriols. !í rle conriols aie applieo
ro a small numlei oí irems, rlen shortages will oevelop lecause rle
pioouceis oí rlese irems will see orlei piices iise lur will nor le
alle ro claige appiopiiare piices íoi rle irems in quesrion. Tle
aurloiiries musr rlen eirlei alanoon rleii policy oi inreivene íui-
rlei srill, conriolling moie piices ano possilly compelling people
ro woik againsr rleii will.
A populai view lolos rlar a counriy expeiiencing a debit bal-
ance of payments cannor sralilize rle value oí irs money, unril rle
unoeilying oeíecrs aie iecrifieo. !owevei, ií a counriy uses puiely
merallic money, rlen a oelir lalance oí paymenrs will evenrually
ieveise irselí auromarically, lecause rle ourflow oí meral will leao
ro íalling oomesric piices. !oi counriies on cieoir oi fiar money, a
similai piinciple lolos. A oelir lalance oí paymenrs pei se cannor
1:¸
1:ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
unilareially cause a narion’s cuiiency ro oepieciare, lecause rle
oelir lalance irselí is causeo ly inflarion. `o marrei rle íoieign
riaoe siruarion, a counriy can always cloose souno money.
!í rle goveinmenr wisles ro avoio laving irs cuiiency “arrackeo”
ly specularois, ir neeo only alanoon inflarionisr policies.
Cheptcr 1¡: Thc Menctery Pe/i.y ej Ltetism 1:¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Meaetar¡ Iheer¡ ef ltat|sm
Étatism as a rleoiy is rle oocriine oí rle omniporence oí rle
Srare. As a policy, érarism is rle arrempr ro iegulare all social
ano economic affaiis ly aurloiirarive commanomenr ano pioli-
lirion. Alrlougl rle ourwaio appeaiances oí piivare piopeiry ano
enriepieneuislip may le leír inracr, in piacrice érarism can only
le iealizeo as Srare Socialism. Because sociology ano economics
oerail rle limirs on wlar sleei miglr can aclieve in arrempring ro
ieoesign luman sociery, érarisrs seek ro oiscieoir rlese fielos.
z. Nat|eaa| |rest|qe aa6 the kate ef lxchaaqe
Tle érarisr views money as a ciearuie oí rle Srare, ano lence (eiio-
neously) lelieves rlar a poweiíul ano iicl Srare sloulo lave a coi-
iesponoingly “gooo” money (i.e., money wirl a ligl exclange
iare). Bur lisroiy is íull oí cases wleie even rle vicrois in a wai
saw rle collapse oí rleii cuiiency, oi wleie a wealrly counriy lao
a veiy weak cuiiency.
¡. Ihe keqa|at|ea ef |r|ces |¡ kather|tat|ºe 0ecree
Òíren rle aurloiiries will riy ro mirigare rle consequences oí infla-
rionism ly imposing piice conriols, in wlicl people aie punisleo
ly fines oi piison senrences íoi asking (oi even paying) piices
alove rle legal ceiling. !í rle conriols aie applieo ro a small num-
lei oí irems, rlen shortages will oevelop lecause rle pioouceis oí
rlese irems will see orlei piices iise lur will nor le alle ro claige
appiopiiare piices íoi rle irems in quesrion. Tlis ourcome is rle
1:8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
opposire oí wlar rle aurloiiries inrenoeo, rley lao imposeo rle
piice conriols ro keep rle irems accessille ro rle pullic, nor ro
eiaoicare rlem íiom rle sroie slelves. Ar rlis poinr, rle aurloi-
iries musr eirlei alanoon rleii policy oi inreivene íuirlei srill,
conriolling moie piices ano possilly compelling people ro woik
againsr rleii will.
¢. Ihe 8a|aace
·
ef
·
|a¡meats Iheer¡ as a 8as|s ef
Carreac¡ |e||c¡
A populai view lolos rlar a counriy expeiiencing a debit balance of
payments cannor sralilize rle value oí irs money, unril rle unoei-
lying oeíecrs aie iecrifieo. !owevei, rle classical economisrs ano
larei rle Cuiiency Sclool oemonsriareo rle flaws in rlis view. !í
a counriy uses puiely merallic money, rlen a oelir lalance oí pay-
menrs will evenrually ieveise irselí auromarically, lecause rle our-
flow oí meral (sucl as golo) will leao ro íalling oomesric piices.
!venrually, iesioenrs will pieíei ro luy íiom oomesric pioouceis
iarlei rlan íoieigneis, ano íoieign puiclaseis will pieíei ro luy
moie cleaply íiom rlem as well. Tlus rle oelir lalance will ruin
inro a credit balance of payments, ano rle moneraiy meral will reno
ro flow lack inro rle counriy rlar oiiginally expeiienceo rle oiain.
!oi counriies on cieoir oi fiar money, a similai piinciple lolos.
A oelir lalance oí paymenrs pei se cannor unilareially cause a
narion’s cuiiency ro oepieciare, lecause rle oelir lalance irselí is
causeo ly inflarion. `o marrei rle íoieign riaoe siruarion, a coun-
riy can always cloose souno money.
;. Ihe !appress|ea ef !peca|at|ea
\len inflarionisr policies leao ro a oepieciarion oí a counriy’s
money againsr orlei cuiiencies, goveinmenr officials will oíren
oenounce íoieign specularois íoi “arracking rle cuiiency.” Yer
Cheptcr 1¡: Thc Menctery Pe/i.y ej Ltetism 1:p
in geneial, specularois cannor alrei rle aveiage piice oí a gooo
(incluoing money), rley simply smoorl our rle ups ano oowns.
Tle specularoi riies ro luy low ano sell ligl (oi vice veisa). By
luying unoeivalueo cuiiencies, rle specularoi pusles up rle piice
rowaio irs long-iun level, ano ly selling oveivalueo cuiiencies,
rle specularoi pusles rlem oown rowaio rle “coiiecr” level. !í
rle goveinmenr wisles ro avoio laving irs cuiiency “arrackeo” ly
specularois, ir neeo only alanoon inflarionisr policies.
..
1¡o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• On pages z(6–(8, Mlses explalns the process by whlch llmlted
lnterventlons lead to undeslrable consequences, even from the
polnt of vlew of the authorltles. These ln turn lead to further lnter-
ventlons, ln an attempt to counteract the bad consequences. The
process contlnues untll the authorltles elther abandon thelr pro-
gram or reach full-blown soclallsm. Although economlsts before
Mlses understood the undeslrable effects of prlce celllngs, thls
broader dynamlc was somethlng that Mlses stressed throughout
hls career. Mlses contrasted the vlrtues of a free market versus out-
rlght soclallsm, preclsely because he thought lt was a mlrage to
endorse a “mixed economy” that avolded elther extreme. |n fact
ln :p¡o he would dellver a speech entltled, “Mlddle of the Poad
Pollcy Leads to Soclallsm.”
• On pages z(p–¡z, Mlses showcases hls numerous talents as an
economlst. Hedemonstrates a commandof pureeconomlc theory,
the hlstory of economlc thought, and the day-to-day actlvltles ln
the actual forelgn exchange market. |t ls only because of hls mas-
tery of all three areas that he can so confidently explaln the errors
ln rlval doctrlnes, and why the buslnessman ls fooled by correla-
tlons that do not represent actual causallty when lt comes to trade
flows and exchange rates.
..
Cheptcr 1¡: Thc Menctery Pe/i.y ej Ltetism 1¡1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Étatism(as theory): Tle oocriine oí rle omniporence oí rle Srare.
Étatism(as policy): Tle arrempr ro iegulare all social ano economic
affaiis ly aurloiirarive commanomenr ano piolilirion.
Mixed economy: An economy possessing aspecrs oí lorl capiral-
ism ano socialism, in wlicl piivare inoiviouals ierain nom-
inal owneislip oí rle means oí piooucrion, lur rle gov-
einmenr exrensively iegulares rleii use oí rlis piopeiry,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Debit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriy collecrively speno moie on íoieign gooos
ano assers rlan vice veisa. !r is serrleo ly an ourflowoí money
íiom rle counriy.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriy collecrively speno less on íoieign gooos ano
assers rlan vice veisa. !r is serrleo ly an inflow oí money ro
rle counriy.
Shortages: A sloiríall in rle quanriry oí gooos offeieo íoi sale,
compaieo ro rle amounr consumeis wisl ro puiclase. Sloir-
ages aie causeo wlen a piice ceiling lolos rle piice lelow
rle maiker-cleaiing level.
..
1¡: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \ly ooes economic science pose a rliear ro érarism?
(p. :¸¡)
:. Aírei a piice ceiling is imposeo, wlar lappens once rle
srocks oí gooos rlar weie alieaoy on rle slelves lave leen
solo off? (p. :¸¡)
¡. !xplain: “!í rle iegularion oí piices lao leen successíul, ir
woulo lave paialyzeo rle wlole economic oiganism. Tle
only rling rlar maoe possille rle conrinueo íuncrioning
oí rle social appaiarus oí piooucrion was rle incomplere
eníoicemenr oí rle iegularions rlar was oue ro rle paial-
ysis oí rle effoirs oí rlose wlo ouglr ro lave execureo
rlem.” (p. :¸8)
¸. !xplain: “Piice flucruarions aie ieouceo ly specularion,
nor aggiavareo, as rle populai legeno las ir.” (p. :¸¡)
¸. !xplain: “Tle flucruarions oí rle íoieign-exclange iare
aie nor oereimineo solely ly leais selling lur jusr as mucl
ly lulls luying.” (p. :¸¡)
..
vav: iii
M0Nl\ kN0 8kNK|N6
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv 1¸
Ikl 80!|Nl!! 0| 8kNK|N6
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
A banker is one wlo lenos our orlei people’s money, a capitalist
lenos our lis oi lei own money. Tle lusiness oí lanking íalls
inro rwo oisrincr caregoiies: (1) rle negoriarion oí cieoir rliougl
rle loan oí orlei people’s money ano (:) rle gianring oí cieoir
rliougl rle issue oí fiouciaiy meoia.
!n rleii iole as negoriaroi oí cieoir (oi credit intermediaries),
lanks loiiow íiom lenoeis ar a ceirain iare oí inreiesr ano rlen
leno ir ro loiioweis ar (wlar piomises ro le) a liglei iare oí
inreiesr.
Cieoir riansacrions involve rle exclange oí piesenr íoi íuruie
gooos. Cieoir riansacrions can le oivioeo inro rwo gioups:
(1) Tlose in wlicl one pairy las rle lenefir oí olraining a gooo
in rle piesenr wlile rle orlei pairy las rle oisaovanrage oí pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairy las
rle lenefir oí olraining a gooo in rle piesenr wlile rle orlei pairy
ooes net suffei any coiiesponoing oisaovanrage. !oans oí rle fiisr
rype (in wlicl rle lenoei acrually ienounces rle use oí lis money)
involve commodity credit wlile loans oí rle secono rype (in wlicl
rle lank issues fiouciaiy meoia) involve circulation credit.
Tle ciucial íearuie in loans oí fiouciaiy meoia is rlar rle oiigi-
nal oeposiroi is net engageo in a cieoir riansacrion. !e ierains rle
íull use oí lis money, even as rle lank lenos ir ro someone else.
1¡¸
1¡ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Tlis piocess incieases rle roral amounr oí money in rle lioaoei
sense.
Ònly ly iecognizing rle íunoamenral oisrincrion lerween
nores ano current accounts rlar aie eirlei (e) lackeo veisus (/) un-
lackeo ly money, can rle economisr lope ro unoeisrano rle
lioaoei iole rlar fiouciaiy meoia play in economic cycles.
Cheptcr 1¡: Thc Busincss ej Benling 1¡¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. I¡pes ef 8aak|aq kct|º|t¡
A banker is one wlo lenos our orlei people’s money, a capitalist
lenos our lis oi lei own money. Tle lusiness oí lanking íalls
inro rwo oisrincr caregoiies: (1) rle negoriarion oí cieoir rliougl
rle loan oí orlei people’s money ano (:) rle gianring oí cieoir
rliougl rle issue oí fiouciaiy meoia. (Recall rlar fiouciaiy meoia
aie nores ano lank lalances—claims on money—rlar aie nor acru-
ally coveieo ly money in ieseive.)
z. Ihe 8aaks as Neqet|aters ef Cre6|t
!n rleii iole as negoriaroi oí cieoir (oi credit intermediaries), lanks
loiiow íiom lenoeis ar a ceirain iare oí inreiesr ano rlen leno ir
ro loiioweis ar (wlar piomises ro le) a liglei iare oí inreiesr.
!n rlis acriviry, piuoenr lanks will oley rle golden rule ly wlicl
rleii lialiliries will nor maruie eailiei rlan rleii assers. !n orlei
woios, rle lanks sloulo net “loiiow sloir ro leno long,” ií rley
wanr ro avoio rle iisk oí insolvency. !ollowing rle goloen iule, ly
marcling rle maruiiries oí assers ano lialiliries, will nor eliminare
all iisks oí couise, lecause any invesrmenr coulo go soui ano rle
loiiowei oeíaulr on rle loan íiom rle lank.
¡. Ihe 8aaks as |ssaers ef ||6ac|ar¡ Me6|a
Cieoir riansacrions involve rle exclange oí piesenr íoi íuruie
gooos. Cieoir riansacrions can le oivioeo inro rwo gioups:
(1) Tlose in wlicl one pairy las rle lenefir oí olraining a gooo
1¡8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
in rle piesenr wlile rle orlei pairy las rle oisaovanrage oí pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairy las
rle lenefir oí olraining a gooo in rle piesenr wlile rle orlei pairy
ooes net suffei any coiiesponoing oisaovanrage. Tlis secono class
oí cieoir riansacrions is possille wlen a cieoiroi issues fiouciaiy
meoia, rlis peison lenos wirlour ieally giving anyrling up. !oans
oí rle fiisr rype (in wlicl rle lenoei acrually ienounces rle use oí
lis money) involve commoditycredit wlile loans oí fiouciaiy meoia
involve circulation credit.
!oi all gooos, an alsolurely secuie ano immeoiarely ieoeem-
alle claim will inleiir rle maiker value oí rle gooo irselí. !ow-
evei, wlar makes fiouciaiy meoia special is rlar rley can inácfinitc/y
íuncrion as money sulsrirures, since (unlike all orlei gooos)
nolooy evei is rle final “consumei” oí money piopei. Tleieíoie,
claims ro ir can ciiculare in rle communiry wirlour evei leing
ieoeemeo, wlicl allows rle lanks ro issue fiouciaiy meoia in rle
fiisr place.
¢. 0epes|ts as the 0r|q|a ef C|rca|at|ea Cre6|t
Tle issue oí fiouciaiy meoia is inrimarely connecreo wirl rle oe-
posir sysrem. A cusromei will oeposir acrual money wirl rle lank,
wlicl rlen is rle lasis upon wlicl fiouciaiy meoia (i.e., unlackeo
claims ro money) aie issueo. Tle ciucial íearuie in rlese opeia-
rions is rlar economically speaking, rle oiiginal oeposiroi is net
engageo in a cieoir riansacrion. !e is nor lenoing rle lank lis
money, lur is meiely oeposiring ir, lecause le srill ierains rle íull
economic use oí lis money in rle piesenr. Tleieíoie ly gianr-
ing new loans en tep oí sucl oeposirs, rle lanks inciease rle
roral amounr oí money in rle lioaoei sense. Tley aie nor meie
cieoir inreimeoiaiies, lur insreao aie gianring rle economic use
oí money ro a new gioup, wirlour raking ir away íiom rle oiiginal
gioup.
Cheptcr 1¡: Thc Busincss ej Benling 1¡p
;. Ihe 6raat|aq ef C|rca|at|ea Cre6|t
Tle specific merloo oí issuance oí fiouciaiy meoia is iiielevanr
íoi irs effecrs on rle value oí money. Tle lank miglr (1) lireially
leno our rle oiiginal oeposiroi’s money (wlile rle oiiginal oepos-
iroi srill lelieves le las íull ano immeoiare claim ro ir), (:) issue
orlei lank clienrs lanknores wlicl may le ieoeemeo wirl rle
oeposiroi’s money, oi (¡) gianr newloans in rle íoimoí clecklook
accounrs, wirl rle oeposiroi’s money seiving as pair oí rle ieseives
lelino rle new loan. |xo:i: A íull oesciiprion oí rle accounr-
ing oí íiacrional-ieseive lanking is availalle in rle lecruie, “Tle
Tleoiy oí Cenrial Banking,” ar: http://www.youtube.com/watch?
v=6HAEPSt_12U
]
Some wiireis riear rle expansion oí lanks’ nore-issue as akin
ro an inciease in rle communiry’s oemano íoi cieoir. Bur ií rle
communiry riies ro loiiow moie, peilaps ly issuing moie bills of
exchange, rlen rle inreiesr iare renos ro go up. !n conriasr, rle
lank supp/ics cieoir: wlen ir issues moie nores, rle iare oí inreiesr
(ar leasr inirially) goes oown.
6. ||6ac|ar¡ Me6|a aa6 the Natare ef |a6|rect lxchaaqe
Ònly ly iecognizing rle íunoamenral oisrincrion lerween nores
ano current accounts rlar aie eirlei (e) lackeo veisus (/) unlackeo
ly money, can rle economisr lope ro unoeisrano rle lioaoei iole
rlar fiouciaiy meoia play in economic cycles. Òn rle orlei lano, ir
is also a misrake ro oeny fiouciaiy meoia’s aliliry ro íacilirare inoi-
iecr exclanges. \len someone sells a commooiry íoi a lanknore,
ano rlen uses rle lanknore ro puiclase anorlei commooiry, rlis is
an inoiiecr exclange jusr as suiely as ií rle peison lao useo money
piopei.
..
1¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• |n the beglnnlng of thls chapter, Mlses dlvldes banklng lnto two
categorles: the negotlatlonof credlt throughthe loanof other peo-
ple’s money, and the lssue of fiduclary medla. (Murray Pothbard,
ln hls work on banklng, classlfies the two actlvltles as loan bank-
ing versus deposit banking.) Although other wrlters are famlllar
wlth these concepts, Mlses shone a spotllght on the dlstlnctlon
and wlll go on to polnt out the problems wlth the lssue of fiduclary
medla (l.e., deposlt banklng) that some earller economlsts had dls-
covered.
• Contlnulng wlth the prevlous note, Mlses explalns hls settllng
on the terms commodlty credlt and clrculatlon credlt on pages
z6(–6¡. Preclsely because he belleves the lssuance of fiduclary
medla play such a cruclal role ln the boom-bust cycle ln market
economles, Mlses ls deslgnlng hls theoretlcal edlfice to hlghllght
the phenomenon.
..
Cheptcr 1¡: Thc Busincss ej Benling 1¸1
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New Terminology
Banker: A peison wlo lenos our orlei people’s money.
Capitalist: A peison wlo lenos our lis oi lei own money.
Credit intermediaries: !nsrirurions rlar acr as “mioolemen” lerween
lenoeis ano loiioweis.
Golden rule (of bank lending): Marcling rle maruiiries oí assers ano
lialiliries, so rlar rle lank is nor oepenoenr on rle aliliry
ro “ioll ovei” maruiing oelr. !í a lank ooes nor íollow rle
goloen iule, incieases in sloir-reim inreiesr iares can leao
ro oisasrei, wlen rle lank musr pay irs own cieoirois wlile
irs assers aie nor yer oue.
Commodity Credit: A loan gianreo rliougl rle ienunciarion oí rle
use oí piesenr gooos ly rle lenoei. Commooiry cieoir may
involve money ceirificares lur nor fiouciaiy meoia.
Circulation Credit: A loan gianreo even rlougl rle lenoei ooes net
saciifice rle use oí piesenr gooos. Ciicularion cieoir involves
rle use oí fiouciaiy meoia.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairy ro a pay a fixeo sum oí money ro anorlei pairy ar
a specifieo íuruie oare oi upon oemano. A lill oí exclange
is geneially riansíeialle rliougl enooisemenr.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle aliliry ro wiire oiaírs oi wirloiawmoney upon
1¸: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
oemano. (Tooay a sranoaio “clecking accounr” woulo le an
example.)
Loan banking: Banking rliougl rle use oí commooiry cieoir,
wleie rle lank ieceives loans íiom one gioup oí saveis in
oioei ro irselí make loans ro anorlei gioup oí loiioweis.
Tle saveis oo nor consioei rlis money as pair oí rleii casl
lalances ouiing rle reim oí rle loan ro rle lank.
Deposit banking: Banking rliougl rle use oí ciicularion cieoir,
wleie rle lank ieceives oeposirs inro cuiienr accounrs íiom
one gioup oí clienrs in oioei ro make loans ro anorlei gioup
oí loiioweis. Tle oeposirois consioei rlis money ro le pair
oí rleii casl lalances, even rlougl mucl oí ir las leen lenr
our ro orleis.
..
Cheptcr 1¡: Thc Busincss ej Benling 1¸¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. Ðoes Mises iealize rlar mooein lanks peiíoimorlei opei-
arions lesioes rle rwo rypes oí lanking le menrions?
(pp. :ó1–ó:)
:. !xplain: “A peison wlo las a rlousano loaves oí lieao ar
lis immeoiare oisposal will nor oaie ro issue moie rlan a
rlousano rickers eacl oí wlicl gives irs loloei rle iiglr
ro oemano ar any rime rle oeliveiy oí a loaí oí lieao. !r is
orleiwise wirl money.” (p. :ó¡)
¡. \ly ooes Mises say rlar fiouciaiy meoia “can rleieíoie le
cieareo only ly lanks ano lankeis”? (p. :óp)
¸. !ow ooes rle issue oí fiouciaiy meoia affecr rle oljecrive
exclange value oí money? (p. :ó8)
¸. !xplain: “|Cieoir ciicularion] loans aie gianreo our oí a
íuno thet áiá net cxist /cjerc thc /eens vcrc grentcá.” (p. :¡1)
tuav:iv 1ó
Ikl lV0|0I|0N 0| ||00C|kk\ Ml0|k
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Iwe Wa¡s ef |ssa|aq ||6ac|ar¡ Me6|a
!iouciaiy meoia may le issueo ly lanks oi ly non-lanks (pii-
maiily rle goveinmenr). Banks can issue fiouciaiy meoia eirlei
rliougl lanknores oi ly gianring oeposirs in a cuiienr accounr
(i.e., a mooein-oay clecking accounr). Banks riear rleii oursrano-
ing fiouciaiy meoia as lialiliries on rleii lalance sleers, ano musr
loan oi oiiecrly invesr rlem wisely.
Coveinmenrs may also issue fiouciaiy meoia sucl as convert-
ible Treasury notes ano roken coins. Coveinmenrs oíren oo nor ser
asioe a cieoir íuno our oí rleii capiral ro “covei” rle incieaseo
olligarions. !nsreao goveinmenrs will pocker rle seigniorage as
income jusr as suiely as rax ievenue.
z. ||6ac|ar¡ Me6|a aa6 the C|ear|aq !¡stem
Tle use oí fiouciaiy meoia can ieouce rle oemano íoi money in
rle naiiowei sense. !oi example, in rle mooein !nireo Srares,
rle oemano ro lolo acrual !eoeial Reseive nores (gieen pieces
oí papei wirl picruies oí oeao piesioenrs) is mucl lowei, lecause
people can open clecking accounrs wirl commeicial lanks ano
1¸¸
1¸ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
wiire clecks oi use oelir caios (wleie rlese oeposirs aie pairly
fiouciaiy meoia, lecause rley aie nor íully lackeo up ly casl in
rle vaulr).
!owevei, an enriiely oiffeienr plenomenon is rle ieoucrion
in rle oemano íoi money in rle lioaoei sense—incluoing money
piopei ano even money sulsrirures (incluoing fiouciaiy meoia)—
liouglr alour ly rle oevelopmenr oí credit ano rle cleaiing sys-
rem. !í one pairy ro a riansacrion is willing ro oeíei ieceiving pay-
menr, le las rlus gianreo cieoir. !í rle orlei pairy larei oeliveis
gooos oi peiíoims seivices sucl rlar rle oiiginal oelr is pairially
oi íully offser, only rle oiffeience neeos ro le serrleo ly acrual
money oi money sulsrirures. As moie sucl riansacrions aie incoi-
poiareo inro sucl aiiangemenrs, rle communiry’s oemano íoi
money in rle lioaoei sense íalls lelow wlar ir orleiwise woulo
lave leen.
¡. ||6ac|ar¡ Me6|a |a 0emest|c Ira6e
So long as a counriy las a sralle legal íiamewoik rlar peimirs rle
luiloing oí riusr in issueis, rle use oí cleaiing opeiarions ano fiou-
ciaiy meoia can giow ro oominare riansacrions ano almosr com-
plerely oisplace rle use oí money in rle naiiowei sense.
¢. ||6ac|ar¡ Me6|a |a |ateraat|eaa| Ira6e
Tle piacrice oí using claims ano counrei-claims in cleaiing opei-
arions ro ieouce rle neeo ro rianspoir money was oí pairiculai
lenefir in inreinarional riaoe, lecause oí rle longei oisrances ano
rime involveo. !owevei, fiouciaiy meoia rlemselves aie srill lim-
ireo ly narional lounoaiies. !oi example, a pairiculai suppliei in
rle !nireo Srares miglr gianr cieoir ro a meiclanr in !iance, lur
Cheptcr 16: Thc Lte/utien ej Fiáu.iery Mcáie 1¸¡
rle claim on rle !iencl meiclanr woulo nor ciiculare íiom lano
ro lano in rle same way rlar a lanknore in rle !nireo Srares (oi in
!iance) coulo. Ònly wirl rle oevelopmenr oí a woilo lank, wirl
clienrele oiawn íiom eveiy counriy, coulo fiouciaiy meoia rian-
sceno narional lounoaiies.
..
1¸8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn page :¡8 Mises wiires, “|Bank fiouciaiy meoia] aie
enreieo as lialiliries, ano rle issuing looy ooes nor iegaio
rle sum issueo as an inciease oí irs income oi capiral, lur
as an inciease on rle oelir sioe oí irs accounr, wlicl musr
le lalanceo ly a coiiesponoing inciease on rle cieoir sioe
ií rle wlole riansacrion is nor ro figuie as a loss. Tlis
way oí oealing wirl fiouciaiy meoia makes ir necessaiy
íoi rle issuing looy ro iegaio rlem as pair oí irs riao-
ing capiral ano nevei ro speno rlem on consumprion lur
always ro invesr rlem in lusiness.” Tlis is a ciucial poinr
rlar newcomeis ro íiacrional-ieseive lanking oíren miss.
!ven rlougl sucl lankeis in a sense “cieare money our
oí rlin aii,” rley can’r simply open up a new accounr íoi
s1oo,ooo ano rlen wiire clecks ro luy rlemselves spoirs
cais ano oesignei clorles. Tle ieason is rlar rle mei-
clanrs in rle communiry woulo rlen lave s1oo,ooo in
claims on rle acrual casl ieseives oí rle lank, ano ulri-
marely rle lank’s vaulr woulo iun our oí rle genuine
money. \lar íiacrional lankeis oo insreao is /een our rle
s1oo,ooo ro a piooucrive lusiness ar (say) ¸ peicenr inreiesr.
\len rle s1o¸,ooo is iepaio in a yeai, rle s1oo,ooo rlar
was inirially cieareo can le “oesrioyeo” (rliougl look-
keeping) ano rle s¸,ooo in inreiesr income can le saíely
spenr wirlour oiaining rle lank’s casl ieseives. Tlus
íiacrional-ieseive lankeis cieare money our oí rlin aii
net ro oiiecrly speno ir—wlicl woulo le incieoilly ieck-
less ano sloir-liveo—lur insreao ro cern intcrcst in.emc
íiom ir.
Cheptcr 16: Thc Lte/utien ej Fiáu.iery Mcáie 1¸p
• Òn page :p1 Mises iejecrs rle claim rlar !noia ano orlei
Asiaric counriies useo golo as a “measuie oí piices” wlile
ieraining silvei as a meoium oí exclange. !oi one rling,
rle mooein suljecrive value rleoiy explooes rle veiy
norion oí money as a measuie, since value is nor an oljec-
rive piopeiry like lengrl oi weiglr rlar can le measuieo.
Yer oí moie ielevance ro rlis passage, Mises is poinring
our rlar even in rle classical golo sranoaio counriies, peo-
ple iaiely useo acrual golo wlen luying gooos ano seivices.
!nsreao, rley employeo ./eims ro golo. Bur rlis is piecisely
wlar lappeneo in !noia, wlicl ieraineo silvei coins in cii-
cularion rlar coulo le ieoeemeo íoi rle official money,
golo, ar a ceirain exclange iare.
..
1¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Convertible Treasury notes: Papei nores issueo ly rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in money upon oemano.
Seigniorage: Tle oiffeience lerween rle maiker value oí money
ano rle cosr ro pioouce ir.
Credit: Tle aliliry ro ieceive piesenr gooos in exclange íoi rle
piomise oí oeliveiing (rypically a giearei numlei oí ) íuruie
gooos.
..
Cheptcr 16: Thc Lte/utien ej Fiáu.iery Mcáie 1¸1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “To complere |a] riansacrion . . . ly íull oi pairial
cancellarion oí counrei-claims offeis impoiranr aovanrages
in compaiison wirl oiiecr exclange: all rle íieeoom con-
necreo wirl rle use oí money is comlineo wirl rle recl-
nical simpliciry rlar claiacreiizes oiiecr exclange riansac-
rions.” (p. :8:)
:. \lar ooes Mises rlink is rle impoirance oí cieoir íoi rle
moneraiy sysrem? (p. :8:)
¡. !xplain: “Money in rlese cases |oí inreinarional cleaiing
opeiarions] is srill a meoium oí exclange, lur irs employ-
menr in rlis capaciry is inoepenoenr oí irs plysical exis-
rence. !se is maoe oí money, lur nor physi.e/ use oí acru-
ally exisring money oi money sulsrirures. Money wlicl
is nor piesenr peiíoims an economic íuncrion, ir las irs
effecr solely ly ieason oí rle possililiry oí irs leing e//c ro
le piesenr.” (p. :8¡)
¸. Ðoes Mises classiíy lills oí exclange as fiouciaiy meoia?
(pp. :8¸–8ó)
¸. !í a lyporlerical woilo lank lao oeposirs ano nores rlar
weie lackeo up 1oo peicenr ly money on ieseive, coulo ir
economize on money paymenrs? (p. :p¸)
tuav:iv 1¡
||00C|kk\ Ml0|k kN0
Ikl 0lMkN0 |0k M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
!í laloi ano orlei iesouices aie useo ro exriacr moie golo íiom
mines, ano rlis aooirional golo goes inro rle casl lalances oí peo-
ple in rle communiry, rlen íiom a social poinr oí view rle laloi
ano orlei iesouices lave leen wasreo. Tle quanriry oí “ieal our-
pur” (pounos oí sreak, laiiels oí ciuoe oil, erc.) pioouceo pei pei-
son ooesn’r iise, lur meiely rle pri.cs oí rlese irems quoreo in golo
oi silvei.
Tle oevelopmenr oí fiouciaiy meoia kepr rle oljecrive ex-
clange value oí money lowei rlan ir orleiwise woulo lave leen,
ano rleiely avoioeo a laige oiveision oí iesouices inro mining
moie oí rle piecious merals íoi casl loloings.
Some wiireis aigue rlar rle paymenr sysrem in an aovanceo
maiker economy is “elasric” ano iesponos ro rle “neeos oí com-
meice,” iarlei rlan rle acrual srock oí money in rle naiiowei
sense. Alrlougl rle exrension oí rle cleaiing sysrem áecs ieouce
rle oemano íoi money in rle lioaoei sense, rleie is no ieason rlar
irs oevelopmenr sloulo le ielareo ro rle oemano íoi money. !r is
an inoepenoenr plenomenon rlar may eirlei sriengrlen oi coun-
reilalance clanges in rle oemano íoi money oiiginaring íiom
orlei causes.
Many wiireis (sucl as rlose oí rle Banking School) aigue rlar
rle lanks oo nor lave rle powei ro inoepenoenrly inciease rle
1¸¡
1¸¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
quanriry oí fiouciaiy meoia. \lar rlese wiireis íail ro unoeisrano
is rlar rle oemano íoi loans oepenos on rle iare oí inreiesr. !r
makes no sense ro speak oí lowmucl money rle lanks’ cusromeis
wisl ro loiiow, wirlour speciíying a iare oí inreiesr. !í rle lanks
wanr ro issue fiouciaiy meoia, rley musr lowei rle maiker iare
lelow rle natural rate of interest.
Businesses seek loans íiom rle lanks lecause rley oesiie cap-
iral, rley simply wanr capiral in thc jerm ej mency, so rlar rley
can convenienrly acquiie rle plysical capiral gooos rlar rley ulri-
marely oesiie íoi rleii opeiarions. Òí couise, rle meie issuance oí
fiouciaiy meoia ooes nor inciease rle amounr oí riacrois, íeirilizei,
oi powei rools. Tle only way rle lanks can piovioe rlese gooos
ro rleii clienrs is rliougl ieoisriilurion oí puiclasing powei away
íiom memleis oí rle communiry wlo oo nor ieceive rle influx oí
rle newly cieareo money.
Cheptcr 1¡: Fiáu.iery Mcáie ená thc Dcmená jer Mency 1¸¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe |aflaeace ef ||6ac|ar¡ Me6|a ea the 0emaa6 fer Meae¡
|a the Narrewer !ease
!n one sense, rle employmenr oí rle piecious merals (oi any orlei
useíul commooiry) ro enlaige rle srock oí money is wasreíul. !í
laloi ano orlei iesouices aie useo ro exriacr moie golo íiommines,
ano rlis aooirional golo goes net inro inousriial oi commeicial uses
(sucl as íoi oenral fillings oi jeweliy), lur insreao incieases rle
casl lalances oí people in rle communiry, rlen íioma social poinr
oí view rle laloi ano orlei iesouices lave leen wasreo. !ncieas-
ing rle quanriry oí money may ieoisriilure exisring wealrl ro make
some inoiviouals iiclei, lur only ar rle expense oí making orleis
(wlo aie lasr ro ieceive rle newmoney) pooiei. Tle communiry as
a wlole ooesn’r aclieve a liglei sranoaio oí living, simply lecause
people lolo moie golo oi silvei in rleii casl lalances. Tle quan-
riry oí “ieal ourpur” (pounos oí sreak, laiiels oí ciuoe oil, erc.)
pioouceo pei peison ooesn’r iise, lur meiely rle pri.cs oí rlese
irems quoreo in golo oi silvei.
Tle oevelopmenr oí fiouciaiy meoia ieouces rle oemano ro
lolo money in rle naiiowei sense. !n a communiry using golo
as commooiry money, a peison wlo lolos (aiiriglr ano insranrly
ieoeemalle) claims ro golo, wlicl aie accepreo in commeice ly
eveiyone in rle communiry, ooesn’r neeo ro caiiy as mucl e.tue/
golo on a oay-ro-oay lasis. !n rlis sense rle wioespieao use oí fiou-
ciaiy meoia “economizes” onrle amounr oí meral rlar musr le allo-
careo inro rle íuncrion oí seiving as rle meoiumoí exclange, moie
golo is íieeo up ro le useo in jeweliy oi inousriial applicarions.
\eie ir nor íoi rle simulraneous oevelopmenr oí fiouciaiy
meoia, rle inrensificarion oí rle oivision oí laloi as rle woilo
1¸ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
lecame one gianr inregiareo maiker woulo lave leo ro a slaip
inciease in rle oljecrive exclange value oí money. !n orlei woios,
as moie people aiouno rle woilo lecame pair oí rle glolal maiker
wlicl useo golo as rle inreinarional money, moie people woulo
lave riieo ro olrain golo as pair oí rleii casl loloings. !í acrual
golo lao ro sarisíy rlis luge giowrl in oemano, piices (quoreo in
golo) woulo lave íallen ano rle owneis oí golo mines woulo lave
inrensifieo rleii exriacrion effoirs. Bur rle simulraneous oevelop-
menr oí fiouciaiy meoia counreilalanceo rlis renoency, so rlar
rle puiclasing powei oí a unir oí golo oio nor iise as mucl as ir
orleiwise woulo lave.
z. Ihe ||actaat|eas |a the 0emaa6 fer Meae¡
Some oí rle flucruarions in rle oemano íoi money aie quire pie-
oicralle. An inciease in popularion ano rle spieao oí rle money
economy inciease rle oemano íoi money. Tle oemano íoi money
clanges ouiing loom ano lusr peiioos. Ano even in a rypical yeai,
rleie aie cyclical parreins laseo on agiiculruie ano rle paymenr
oí woikeis.
¡. Ihe l|ast|c|t¡ ef the !¡stemef kec|preca| Caace||at|ea
Some wiireis aigue rlar rle paymenr sysrem in an aovanceo mai-
ker economy is “elasric” ano iesponos ro rle “neeos oí commeice,”
iarlei rlan rle acrual srock oí money in rle naiiowei sense. Tle
quanriry oí money is saio ro lave lirrle influence on rle oljecrive
exclange value oí money, lecause (say) an inciease in rle oemano
íoi money will auromarically le counreilalanceo ly orlei íoices.
Tlese claims aie oíren oifficulr ro evaluare lecause rley íail ro
make rle ciucial oisrincrion lerween rle exrension oí rle cleaiing
Cheptcr 1¡: Fiáu.iery Mcáie ená thc Dcmená jer Mency 1¸¡
sysrem, veisus rle incieaseo use oí fiouciaiy meoia. Alrlougl rle
exrension oí rle cleaiing sysremáecs ieouce rle oemano íoi money
in rle lioaoei sense, rleie is no ieason rlar irs oevelopmenr sloulo
le ielareo ro rle oemano íoi money. !r is an inoepenoenr ple-
nomenon rlar may eirlei sriengrlen oi counreilalance clanges
in rle oemano íoi money oiiginaring íiom orlei causes.
¢. Ihe l|ast|c|t¡ ef a Cre6|t C|rca|at|ea 8ase6 ea 8|||s,
lspec|a||¡ ea Cemme6|t¡ 8|||s
Many wiireis (sucl as rlose oí rle Banking School) aigue rlar rle
lanks oo nor lave rle powei ro inoepenoenrly inciease rle quan-
riry oí fiouciaiy meoia. !í lusiness neeos iequiie moie riansacrions,
rlen somelow oi orlei, lusiness will ger ir—eirlei íiom lanks
issuing moie fiouciaiy meoia, oi íiom lusinesses oeveloping recl-
niques ro economize on rle use oí money. Òn rle orlei lano (so
rle aigumenr conrinues), ií rle lanks riy ro issue moie fiouciaiy
meoia rlan rle lusiness communiry oesiies, rlese excess nores will
come flowing lack ro rle lanks.
\lar rlese wiireis íail ro unoeisrano is rlar rle oemano íoi
loans oepenos on rle iare oí inreiesr. !r makes no sense ro speak oí
low mucl money rle lanks’ cusromeis wisl ro loiiow, wirlour
speciíying a iare oí inreiesr. !í rle lanks wanr ro issue fiouciaiy
meoia, rley musr lowei rle maiker iare lelow rle natural rate of
interest.
;. Ihe !|qa|ficaace ef the lxc|as|ºe lmp|e¡meat ef 8|||s as
Ceºer fer ||6ac|ar¡ Me6|a
Tle Ceiman Bank Acr oí 18¡¸ íolloweo rle íamous Peel’s Act in
imposing iequiiemenrs on rle cover rlar lanks coulo accepr wlen
1¸8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
issuing newloans in excess oí rleii golo oeposirs. Tle iequiiemenr
was significanr net lecause ir somelowrieo rle expansion oí cieoir
ro rle oesiie oí rle communiry íoi moie money. Rarlei, ir was
significanr lecause ir placeo an olsracle in rle issuance oí fiouciaiy
meoia, keeping rle quanriry oí money in rle lioaoei sense lowei
rlan ir orleiwise woulo lave leen.
6. Ihe |er|e6|ca| k|se aa6 |a|| |a the lxteat te Wh|ch 8aak
Cre6|t |s keça|s|t|eae6
Businesses seek loans íiom rle lanks lecause rley oesiie capiral,
rley simply wanr capiral in thc jerm ej mency, so rlar rley can con-
venienrly acquiie rle plysical capiral gooos rlar rley ulrimarely
oesiie íoi rleii opeiarions. Òí couise, rle meie issuance oí fiou-
ciaiy meoia ooes nor inciease rle amounr oí riacrois, íeirilizei, oi
powei rools. Tle only way rle lanks can piovioe rlese gooos ro
rleii clienrs is rliougl ieoisriilurion oí puiclasing powei away
íiom memleis oí rle communiry wlo oo nor ieceive rle influx oí
rle newly cieareo money.
). Ihe |aflaeace ef ||6ac|ar¡ Me6|a ea ||actaat|eas |a the
0|[ect|ºe lxchaaqe Va|ae ef Meae¡
As wirl rle exrension oí cleaiing opeiarions, rleie is no ieason
rlar rle expansion oi conriacrion oí fiouciaiy meoia sloulo mii-
ioi clanges in rle oemano ro lolo money, rleie is no “auromaric”
meclanism ly wlicl rle oljecrive exclange value oí money is sra-
lilizeo. Tlus rle insiglrs oí rle quanriry rleoiy aie uplelo.
..
Cheptcr 1¡: Fiáu.iery Mcáie ená thc Dcmená jer Mency 1¸p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• An example will claiiíy rle reiminology ano aigumenrs
iunning rliouglour rlis ano eailiei clapreis. Suppose a
man asks lis lairenoei ií le can “iun a ral,” meaning rlar
le will olrain oiinks in rle piesenr lur will pay money
íoi rlem larei (peilaps ar rle eno oí rle monrl). Tle
lairenoei agiees, saying rle man can lave up ro s1oo in
oiinks wirlour laving ro pay íoi rlem upíionr. By ooing
so, rle lairenoei las exrenoeo .rcáit ro rle man. !ow-
evei, rle quanriry oí mency in rle man’s possession lasn’r
incieaseo, lecause rle man ooesn’r lave any riansíeiialle
claim (issueo ly rle lairenoei) rlar orleis in rle commu-
niry woulo accepr. !n conriasr, ií rle man goes ro lis local
lank ano applies íoi a s1oo loan (ro le paio lack ar rle
eno oí rle monrl), rlen in rlis case roo rle man ieceives
an exrension oí cieoir, lur le e/se ieceives an aooirion ro
lis casl lalances. \lerlei rle lank loan consisrs oí a new
clecking accounr (wirl s1oo as rle inirial lalance), acrual
money, oi nores issueo ly rle lank, rlese woulo all le
classifieo as money in rle lioaoei sense. Tle man coulo
use rlem ro luy anyrling le wanreo, incluoing oiinks ar
rle lai. !inally, ro see rle limireo iole oí cleaiing sysrems,
ieveir ro rle oiiginal assumprion, wleie rle man’s cieoir
consisrs oí a “ral” issueo ly rle lairenoei wirl a limir oí
s1oo. !í rle man wanreo ro use rlis cieoir net ro luy alco-
lolic oiinks, lur iarlei ro luy (say) a paii oí sloes, le
woulo lave ro fino a sloe sellei wlo also wanreo ro luy
oiinks íiom rle pairiculai lai in quesrion. Tlen ir miglr
le possille ro aiiange a oeal wleiely rle man acquiies
1óo Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rle sloes, in exclange íoi relling rle lairenoei ro pur rle
sloe sellei’s oiinks on lis own ral (iarlei rlan claiging
rle sloe sellei íoi rlem).
• Mises concluoes lis oiscussion oí secrion ¸ on page ¡1:
ly saying, “
|
A
]
ll oí rlis is riue only unoei rle assump-
rion rlar all lanks issue fiouciaiy meoia accoioing ro uni-
íoim piinciples, oi rlar rleie is only one lank rlar issues
fiouciaiy meoia.” !n rle secrion, Mises lao ciiricizeo rle
wiireis oí rle Banking Sclool wlo aigueo rlar rle lanks
coulon’r ger rle communiry ro accepr exria issues oí fiou-
ciaiy meoia, ií rle communiry oion’r wanr ro lolo rlem.
Mises oljecreo rlar rle oemano íoi rle aooirional loans
coulo le influenceo ly rle iare oí inreiesr rle lanks
claigeo, ano lence rle Banking Sclool’s views weie mis-
raken. So long as rley aie willing ro sufficienrly lowei rle
iare oí inreiesr lelow rle naruial iare, rle lanks can con-
vince rle communiry ro accepr any amounr oí new fiou-
ciaiy meoia. !owevei, Mises ooes net mean rlar an inoi-
vioual lank las no clecks on irs issue. !í any single lank
unilareially loweis irs inreiesr iare ano issues moie fiou-
ciaiy meoia (compaieo ro rle policies oí irs comperirois),
rlen evenrually rlose nores will íall inro rle lanos oí peo-
ple wlo aie nor clienrs oí rle expanoing lank. \len rlese
people oeposir rle lank’s newly issueo nores wirl rleii
own lanks (wlicl aie comperirois), rlese nores will le
piesenreo íoi ieoemprion in money in rle naiiowei sense.
Tlus rle lone lank engageo in an expansionaiy policy will
soon see irs ieseives oí money piopei owinole, ano will
lave ro alanoon irs expeiimenr. Yer rlis meclanism is nor
wlar rle Banking Sclool rleoiisrs lao in mino wlen rley
saio lanks coulon’r issue moie nores rlan rle neeos oí rle
communiry waiianreo.
..
Cheptcr 1¡: Fiáu.iery Mcáie ená thc Dcmená jer Mency 1ó1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Banking School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks weie incapalle oí inoepenoenrly alreiing rle iare
oí inreiesr oi rle puiclasing powei oí money, lecause rle
maiker woulo use cleaiing opeiarions, lills oí exclange, ano
orlei reclniques ro ieceive rle cieoir ir oemanoeo íoi lusi-
ness puiposes.
Currency School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks causeo economic ciises rliougl rle expansion
ano conriacrion oí cieoir. !owevei, rle Cuiiency Sclool
rlouglr rle suppiession oí rle issue oí fiouciaiy meoia in
rle íoim oí lanknores (wlicl was cooifieo in Peel’s Acr)
woulo solve rle piollem, lecause irs memleis eiioneously
excluoeo oemano (oi cuiienr accounr) oeposirs íiom rleii
analysis.
(Wicksellian) natural rate of interest: Ðevelopeo ly economisr Knur
\icksell, rle lyporlerical iare oí inreiesr rlar woulo occui
ií gooos weie riaoeo oiiecrly againsr eacl orlei wirlour rle
use oí money.
Peel’s Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei oí issuing new nores away íiom piivare
lanks ano vesreo ir complerely wirl rle Bank oí !nglano,
wlicl irselí was iequiieo ro mainrain 1oo peicenr merallic
lacking íoi any new nores rlar ir issueo. !owevei, rle Acr
ciucially oio net impose sucl a iesriicrion on rle exrension
oí oeposirs, meaning rlar piivare lanks coulo cieare moie
1ó: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
fiouciaiy meoia ly gianring loans (nor lackeo ly golo) ro
rleii cusromeis.
Cover (of note issue): Assers lacking rle issue oí new lanknores.
Ðepenoing on rle iegularions, a lank miglr issue fiouciaiy
meoia nor lackeo ly money irselí, lur lackeo ly anorlei
asser sucl as a commooiry lill.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneially, a measuie oí a fiim’s aliliry ro quickly ruin some
oí irs assers inro casl in oioei ro finance an expansion.
Fixed capital: Assers emlooieo in ouialle invesrmenrs sucl as íac-
roiies ano specializeo equipmenr rlar will le useo ovei a long
peiioo.
..
Cheptcr 1¡: Fiáu.iery Mcáie ená thc Dcmená jer Mency 1ó¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was Aoam Smirl’s analogy ro explain rle oiawlack
oí using rle piecious merals as money? (p. :p8)
:. !í fiar oi cieoir money is employeo, ooes ir srill make sense
ro use fiouciaiy meoia ro economize on rle use oí money
in rle naiiowei sense? (pp. :pp–¡oo)
¡. \ly woulo popularion giowrl influence rle oemano ro
lolo money? (pp. ¡oo–o1)
¸. !xplain: “Tle oemano íoi money ano money sulsrirures
rlar is expiesseo on rle loan maiker is in rle lasr iesoir a
oemano íoi capiral gooos oi, wlen consumprion cieoir is
involveo, íoi consumprion gooos.” (p. ¡o¡)
¸. \lo leais rle “cosr oí ciearing capiral íoi loiioweis oí
loans gianreo in fiouciaiy meoia”? (p. ¡1¸)
tuav:iv 18
Ikl kl0lM|I|0N 0| ||00C|kk\ Ml0|k
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle confioence in a lank’s aliliry ro ieoeem irs fiouciaiy meoia is
an all-oi-norling pioposirion: ií a poirion oí rle communiry pan-
ics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. By rleii
veiy naruie, fiouciaiy meoia cannor all le lonoieo ly rle lank
ar once. Consequenrly, some wiireis suggesr an ouriiglr piolili-
rion on rle piacrice. !owevei, lisroiically rlis iequiiemenr woulo
lave leo ro a mucl laigei oiveision oí iesouices inro rle pioouc-
rion oí rle piecious merals as rle oemano íoi money incieaseo.
A lank opeiaring in a comperirive enviionmenr can only issue
as mucl fiouciaiy meoia as irs own cusromeis wisl ro lolo, íoi
riansacrions among rlemselves. \lenevei a lank’s cusromei seeks
ro oo lusiness wirl someone oursioe rle clienrele oí rle lank,
rle cusromei musr conveir lis claims inro money in rle naiiowei
sense, lecause rle orlei peison will nor wisl ro accepr rle lank’s
piomises ro pay.
Solvency means rlar an insrirurion (sucl as a lank) coulo slur
oown, sell offall oí irs assers, ano iaise ar leasr enougl money ro pay
off all oí irs cieoirois. Liquidity is a sriongei conoirion, meaning
rlar rle insrirurion’s assers oelivei a cash flow allowing ir ro pay
irs lialiliries en timc. !í a fiim is liquio, ir is solvenr, lur ir miglr
le solvenr wlile illiquio. Banks issuing fiouciaiy meoia aie always
illiquio.
1ó¸
1óó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Somerimes legislarion, lur always pullic opinion, compels rle
lanks ro give pieíeience ro sloir-reimiarlei rlan long-reimloans.
Tlis is a quire valio pieíeience, lackeo up ly cenruiies oí expe-
iience, simply lecause ir limirs a lank’s aliliry ro issue fiouciaiy
meoia.
Cheptcr 1S: Thc Rcácmptien ej Fiáu.iery Mcáie 1ó¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Necess|t¡ fer Cemp|ete lça|ºa|eace 8etweea Meae¡
aa6 Meae¡ !a|st|tates
So long as some people lelieve rlar a claim ro money issueo ly
a pairiculai insrirurion is alsolurely ielialle ano can le ieoeemeo
upon oemano, rlese people may pass sucl claims among rlem-
selves as ií rley weie money. Tlis is wlar makes rlem money
sulsrirures. !owevei, rle issuing insrirurion musr always keep a
ieseive íuno oí money in rle naiiowei sense ro ieoeem rle claims
wlenevei rley aie piesenreo, in oioei ro mainrain rlis riusr. Sucl
ieoemprions will le iequesreo wlenevei rle lank’s own clienrele
wisl ro use rleii claims ro oo lusiness wirl someone oursioe rle
clienrele, i.e., a peison wlo ooes net consioei rle claim ro le a
sulsrirure íoi money in rle naiiowei sense.
z. Ihe ketara ef ||6ac|ar¡ Me6|a te the |ssaer ea kcceaat ef
|ack ef Ceafi6eace ea the |art ef the ke|6ers
Tle confioence in a lank’s aliliry ro ieoeem irs fiouciaiy meoia
is an all-oi-norling pioposirion: ií a poirion oí rle communiry
panics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. By
rleii veiy naruie, fiouciaiy meoia cannor all le lonoieo ly rle
lank ar once. `o marrei low wisely a lank manages irs assers, ir
will nor le alle ro pay our money in rle naiiowei sense íoi all
oí irs oursranoing claims, ií cusromeis slow up en masse ano oe-
mano ieoemprion—assuming rle lank las leen issuing fiouciaiy
meoia.
1ó8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
¡. Ihe Case kqa|ast the |ssae ef ||6ac|ar¡ Me6|a
Because oí rle inreinal conriaoicrion oí rle naruie oí fiouciaiy
meoia—wlicl ienoeis eveiy issuing insrirurion lialle ro iuin—
some wiireis suggesr an ouriiglr piolilirion on rle piacrice. !ow-
evei, lisroiically rlis iequiiemenr woulo lave leo ro a mucl laigei
oiveision oí iesouices inro rle piooucrion oí rle piecious merals
as rle oemano íoi money incieaseo. Tle lanks coulo suivive even
ií rley weie legally iequiieo ro mainrain 1oo peicenr ieseives cov-
eiing all nore issues ano oeposirs, ir is nor consioeiarion íoi rle
piacrice oí lanking rlar leo legislarois ro roleiare fiouciaiy meoia.
Rarlei, ir was rle oesiie ro avoio a laige inciease in rle oljecrive
exclange value oí money (i.e., a geneial íall in piices oí gooos ano
seivices).
¢. Ihe ke6empt|ea |aa6
A lank opeiaring in a comperirive enviionmenr—wleie irs iivals
may puisue oiffeienr policies ano wleie irs own clienrele is only a
íiacrion oí rle wlole communiry using rle same money—can only
issue as mucl fiouciaiy meoia as irs own cusromeis wisl ro lolo,
íoi riansacrions among rlemselves. \lenevei a lank’s cusromei
seeks ro oo lusiness wirl someone oursioe rle clienrele oí rle lank,
rle cusromei musr conveir lis claims (wlerlei in rle íoimoí nores
oi a clecklook oeposir) inro money in rle naiiowei sense, lecause
rle orlei peison will nor wisl ro accepr rle lank’s piomises ro pay.
;. Ihe !e
·
ca||e6 “8aak|aq” I¡pe ef Ceºer fer ||6ac|ar¡ Me6|a
Solvency means rlar an insrirurion (sucl as a lank) coulo slur oown,
sell off all oí irs assers, ano iaise ar leasr enougl money ro pay off
all oí irs cieoirois. Liquidity is a sriongei conoirion, meaning rlar
Cheptcr 1S: Thc Rcácmptien ej Fiáu.iery Mcáie 1óp
rle insrirurion’s assers oelivei a cashflowallowing ir ro pay irs lialil-
iries en timc. !í a fiim is liquio, ir is solvenr, lur ir miglr le solvenr
wlile illiquio.
Some wiireis suggesr rlar “piuoenr” lanks will invesr in sloir-
reim assers, in oioei ro iemain liquio. Yer ly rleii veiy naruie,
lanks issuing fiouciaiy meoia aie illiquio: rleii lialiliries aie imme-
oiarely oue ií piesenreo, wlile rleii assers aie necessaiily oí longei
ouiarion. Tle lesr sucl lanks can sriive íoi is solvency.
6. Ihe !|qa|ficaace ef !hert·IermCeºer
Somerimes legislarion, lur always pullic opinion, compels rle
lanks ro give pieíeience ro sloir-reim iarlei rlan long-reim
loans. Tlis is a quire valio pieíeience, lackeo up ly cenruiies
oí expeiience. !owevei, rle explanarion íoi irs wisoom is net
rlar ir allows rle lanks ro ieoeem fiouciaiy meoia in rle evenr
oí a panic—rle lank’s asser maruiiries aie iiielevanr ií eveiyone
slows up, oemanoing ieoemprion. Tle acrual lenefir íiom íocus-
ing lank loans on sloir-reim invesrmenrs is simply rlar rle con-
sriainr clecks rle lank’s aliliry ro issue fiouciaiy meoia.
). Ihe !ecar|t¡ ef the |aºestmeats ef the Cre6|t
·
|ssa|aq 8aaks
Tleie is similai coníusion wlen ir comes ro pioposals seeking
ro guaianree rle (evenrual) ieoemprion oí all fiouciaiy meoia ly
means oí ieseive íunos consisring oí illiquio assers (sucl as moir-
gages). !ven ií rle pullic is ceirain rlar rley will le ctcntue//y paio
in money (in rle naiiowei sense) íoi rle claims ro money rlar rley
cuiienrly lolo, even so, ií rleie is any ooulr alour rle immcáie.y
oí rle paymenr, rlen rle claims will no longei le money sulsri-
rures. !nsreao, rle pullic will rake inro accounr rle oelay leíoie
1¡o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
ieceiving paymenr, ano sucl claims will riaoe ar a oiscounr ro rle
money irselí. (`ore rlar ií rle claims conrinue ro ciiculare as gen-
eially accepreo meoia oí exclange, even rlougl eveiyone knows
rlar ieoemprion ar lesr will occui aírei some oelay, rlen rle claims
will lave lecome cieoir money.)
ë. |ere|qa 8|||s ef lxchaaqe as a Cempeaeat ef the
ke6empt|ea |aa6
Alank cannor inciease irs issue oí money sulsrirures (consisring oí
lorl money ceirificares ano fiouciaiy meoia) leyono rle oemano
oí irs own clienrele, íoi use in rleii oealings wirl eacl orlei. !ow-
evei, ro rle exrenr rlar somerimes irs clienrs neeo ro exclange rleii
money sulsrirures wlen oealing wirl jercign cirizens, rle lank las
rle oprion oí keeping some oí irs ieseive íuno in rle íoim oí jer-
cign money sulsrirures, as opposeo ro money in rle naiiowei sense.
(Tlis is lecause rle íoieigneis wirl wlom rle lank’s clienrs wisl
ro oo lusiness, will accepr money sulsrirures issueo ly insrirurions
íiom rleii iespecrive counriies.) Yer rlis piacrice means rlar rle
oiiginal lank’s ieseive íuno las a smallei piopoirion oí money
in rle naiiowei sense, ano lence rlar irs own money sulsrirures
consisr oí a liglei íiacrion oí fiouciaiy meoia (veisus money cei-
rificares).
..
Cheptcr 1S: Thc Rcácmptien ej Fiáu.iery Mcáie 1¡1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !n mooein rimes, one oí rle majoi conrioveisies wirlin
rle Ausriian Sclool conceins rle legirimacy oí íiacrional
ieseive lanking. Some Ausriians íollow Muiiay Rorl-
laio wlo aigueo rlar lank issuance oí fiouciaiy meoia
leaos ro rle loom-lusr cycle ano is inleienrly íiauou-
lenr—akin ro a waielouse managei ienring our rle gooos
rlar weie supposeoly placeo wirl lim íoi saíekeeping.
Òrlei Ausriians sucl as Ceoige Selgin ano Sreve !oi-
wirz call rleii posirion “free banking” ano lelieve rlar
rleie is no ieason íoi lanks ro necessaiily keep 1oo pei-
cenr ieseives oí money in rle naiiowei sense, in oioei
ro íully covei all oursranoing cusromei oeposirs. Tle íiee
lankeis aigue rlar maiker íoices will oereimine rle piopei
iario oí money ceirificares ro fiouciaiy meoia in a com-
peririve lanking sysrem. (Viirually all mooein Ausriians
agiee rlar goveinmenr-sponsoieo .cntre/ /enling ano fiet
.urrcn.y aie lorl economically oesriucrive ano moially ille-
girimare. Tle oispure conceins rle piopei piacrice oí pii-
vare lanks opeiaring in a laissez-íaiie enviionmenr.)
• Conrinuing wirl rle alove nore, lorl gioups poinr ro pas-
sages in Mises’s wiirings ro leno cieoence ro rleii posirion.
!ven wirlin rlis veiy claprei, Mises offeis sraremenrs
rlar—vieweo in isolarion—woulo seem ro oefinirively sioe
wirl one camp veisus rle orlei. (Two oí rlese quorarions
aie rle opening selecrions íoi rle sruoy quesrions lelow.)
Alrlougl Mises agiees wirl rle Rorllaioian, 1oo-peicenr-
ieseive camp rlar rleie is a paiaoox in rle veiy naruie oí
wlar fiouciaiy meoia claim ro le, on rle orlei lano le
1¡: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
also agiees wirl rle íiee lankeis rlar rle lisroiical oevel-
opmenr oí fiouciaiy meoia economizeo on iesouices (rlar
woulo lave orleiwise gone inro rle socially wasreíul pio-
oucrion oí moie golo ano silvei íoi moneraiy puiposes).
Tlus Mises ooes nor cleaily íall inro one camp oi rle orlei.
(Òí couise Mises’s own view woulon’r serrle rle mooein
oispure: le coulo lave leen simply misraken, iegaioless oí
lis posirion.)
..
Cheptcr 1S: Thc Rcácmptien ej Fiáu.iery Mcáie 1¡¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Free banking (among modern Austrians): Tle oocriine loloing rlar
a íiee maiker in lanking will pick rle oprimal íiacrion oí
ieseives, wlicl may le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue oí fiouciaiy meoia
pei se causes rle lusiness cycle, only rlar excess quanriries
oí fiouciaiy meoia oo, ano rlar sucl an ourcome is almosr
always associareo wirl goveinmenr-suppoireo issues oí fiou-
ciaiy meoia.
Solvency: Tle siruarion in wlicl rle maiker value oí an insriru-
rion’s assers exceeos irs lialiliries.
Liquidity: Tle siruarion in wlicl an insrirurion’s assers will oelivei
a casl flowallowing ir ro pay irs lialiliries on rime. (All liquio
enreipiises aie also solvenr, lur nor necessaiily vice veisa.)
Cash flow: Tle srieam oí money paymenrs ovei rime oue ro an
asser oi collecrion oí assers.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial.
..
1¡¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Tlus rleie lies an iiiesolvalle conriaoicrion in
rle naruie oí fiouciaiy meoia. Tleii equivalence ro money
oepenos on rle piomise rlar rley will ar any rime le
conveireo inro money ar rle oemano oí rle peison enri-
rleo ro rlem ano on rle íacr rlar piopei piecaurions aie
raken ro make rlis piomise effecrive. Bur—ano rlis is like-
wise involveo in rle naruie oí fiouciaiy meoia—wlar is
piomiseo is an impossililiry in so íai as rle lank is nevei
alle ro keep irs loans peiíecrly liquio.” (p. ¡::)
:. !xplain: “Tle issue oí fiouciaiy meoia las maoe ir pos-
sille ro avoio rle convulsions rlar woulo le involveo in
an inciease in rle oljecrive exclange value oí money, ano
ieouceo rle cosr oí rle moneraiy appaiarus.” (p. ¡:¡)
¡. \len Mises says oí coins rlar rleii “smoorl íaces rell no
rales oí rle merloos ly wlicl rley lave leen acquiieo,”
is le making an aigumenr íoi oi againsr rle possililiry
oí cusromeis paying lanks íoi piovioing rlem wirl (íully-
lackeo) oeposir ano clecklook seivices? (p. ¡:¸)
¸. \ly ooes Mises say rlar a single lank wirl no comperi-
rois, oi an inousriy oí lanks opeiaring wirl uniíoim poli-
cies, woulo suffei no limirarions on rleii aliliry ro issue
fiouciaiy meoia? (pp. ¡:¸–:ó)
¸. !xplain: “\lerlei rle assers oí a cieoir-issuing lank con-
sisr oí sloir-reim lills oi oí hypothecary loans iemains a
marrei oí inoiffeience in rle case oí a geneial iun.” (p. ¡¡¡)
tuav:iv 1p
M0Nl\, Ckl0|I, kN0 |NIlkl!I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. 0a the Natare ef the |re||em
Interest acciues as rle oiffeience lerween wlar a piooucei pays
upíionr íoi inpurs veisus rle roral ievenue le ieceives íoi rle pioo-
ucr (oown rle ioao). !p rill now in rle look, we lave sruoieo rle
íoices rlar can clange rle exclange iario lerween money ano con-
sumei gooos, oi wlar aie calleo goods of the first order. `ow we
will invesrigare wlerlei clanges in rle supply oí ano oemano íoi
money can affecr rle money-piices oí goods of higher orders (i.e.,
piooucei gooos) ro a oiffeienr exrenr.
Tooke, !ullairon, ano orlei memleis oí rle Banking Sclool
rlouglr rlar rle lanks lao no powei ro influence piices, lecause
any excess issue oí fiouciaiy meoia woulo le immeoiarely ieruineo
ro rlem. Yer !oio Òveisrone, Toiiens, ano orlei memleis oí rle
Cuiiency Sclool rlouglr orleiwise. Tley coiiecrly iecognizeo
rlar ly loweiing rle iare oí inreiesr, rle lanks coulo inouce rle
pullic ro accepr moie fiouciaiy meoia. Tlis is rle meclanism
rliougl wlicl lank cieoir policy can influence rle puiclasing
powei oí money ano rle iare oí inreiesr.
1¡¸
1¡ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
z. Ihe Ceaaex|ea 8etweea Var|at|eas |a the kat|e 8etweea
the !teck ef Meae¡ aa6 the 0emaa6 fer Meae¡ aa6
||actaat|eas |a the kate ef |aterest
Tleie aie rliee senses in wlicl vaiiarions in rle srock oí ano
oemano íoi money can influence rle iare oí inreiesr. !iisr, in rle
case oí merallic cuiiency, sucl vaiiarions can áirc.t/y affecr rle iare
oí inreiesr ly oiiecrly affecring rle subsistence fund. !oi example,
a íall in rle oemano ro lolo golo as money, will ielease golo inro
inousriial puiposes ano rleiely make rle communiry wealrliei,
in rle same sense as ií rle amounr oí wlear sroieo in silos lao
incieaseo.
Vaiiarions in rle srock oí ano oemano íoi money can influence
rle iare oí inreiesr ináirc.t/y ano in rle long iun, ly peimanenrly
clanging rle oisriilurion oí piopeiry ano income. !oi example,
a ieoucrion in rle srock oí money coulo ieoisriilure wealrl inro
rle lanos oí cieoirois, wlo reno ro save moie. Tlus rle iare oí
inreiesr woulo le peimanenrly lowei lecause rle oveiall iare oí
saving woulo lave incieaseo.
!inally, vaiiarions can influence rle iare oí inreiesr in rle sloir
iun as piices aojusr ro rle new iealiries oí rle srock oí ano oemano
íoi money. \len piices aie geneially iising, rle iare oí inrei-
esr renos ro le liglei, as enriepieneuis aie willing ano alle ro
offei moie ro loiiow money. (`owaoays rlis is calleo a purchas-
ing power oi inflation premium in rle conriacrual iare oí inreiesr.)
\len piices aie íalling, rle iare oí inreiesr renos ro le lowei.
¡. Ihe Ceaaex|ea 8etweea the lça||||r|amkate aa6 the
Meae¡ kate ef |aterest
\len rle lanks issue moie fiouciaiy meoia, rle immeoiare iesulr
is a ieoucrion in rle iare oí inreiesr. Because rle lanks rypically
Cheptcr 1µ: Mency, Crcáit, ená ¡ntcrcst 1¡¡
invesr rle newissue rlemselves, oi leno ir ro lusinesses íoi pioouc-
rive invesrmenr, rle sulsisrence íuno renos ro inciease ano rle iare
oí inreiesr will iemain pcrmencnt/y lowei rlan rle oiiginal level
(rlougl nor as lowas ir was aírei irs inirial oiop). !owevei, rleie is
no quanrirarive ielarionslip lerween rle amounr oí new fiouciaiy
meoia issueo, ano rle íall in rle inreiesr iare. !noeeo, no marrei
low mucl new money rle lanks cieare ano leno our, rley will
nevei íoice rle conriacrual iare oí inreiesr lelow zeio peicenr.
Tle giaruirous naruie oí cieoir ieíeis ro rle íacr rlar rle lanks
can pusl oown rle iare oí inreiesr appaienrly ar will. Aie rleie any
íoices renoing ro ieesrallisl rle naruial piemiumoí piesenr veisus
íuruie gooos? \icksell aigueo rlar ií rle lanks pusl rle Money
Rare oí !nreiesr lelowrle `aruial Rare oí !nreiesr, rlar íoices will
evenrually iesroie rle Money Rare lack ro rle `aruial Rare. Bur
lis aigumenr íoi wly rlis sloulo occui is unsarisíacroiy.
¢. Ihe |aflaeace ef the |aterest |e||c¡ ef the Cre6|t
·
|ssa|aq
8aaks ea |re6act|ea
As Bolm-Baweik explaineo |see Teclnical `ores], rle iare oí
inreiesr goveins rle rime íoi wlicl iesouices aie “rieo up” in pio-
oucrion piocesses. Tle lowei rle iare oí inreiesr, rle longei rle
piocesses rlar enriepieneuis will selecr. !n equililiium, rle money
iare oí inreiesr equals rle naruial iare, ano enriepieneuis invesr
iesouices in piocesses sucl rlar rleii íiuirs (consumprion gooos)
aie complereo jusr as rle availalle savings (sulsisrence íuno) is
exlausreo. !r is reclnically possille ro lengrlen rle sriucruie oí
piooucrion, lur wirlour aooirional savings, rle sulsisrence íuno
will nor le alle ro íeeo rle woikeis wlile rley laloi in rle longei
piocesses.
\len rle lanks lowei rle money iare oí inreiesr ly issu-
ing fiouciaiy meoia, rley inouce enriepieneuis ro acr as ií rle
1¡8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
sulsisrence íuno lao ieally giown (wlen in íacr ir las nor).
!nriepieneuis loiiow money ar rle lowei iares, liie woikeis,
ano riy ro lio away iesouices íiom orleis ro legin longei-reim
piocesses. A geneial loom peiioo ensues, wleie mosr people íeel
piospeious.
Yer lecause rle issue oí fiouciaiy meoia ooesn’r acrually make
sociery iiclei, rle loom musr necessaiily come ro an eno. Tleie
aie plysically nor enougl savings ro caiiy sociery íoiwaio, unril
rle rime wlen rle new (longei) piocesses yielo rleii final con-
sumprion gooos. A lusr (wlar we now call a iecession) sers in. As
rle ourpur oí consumprion gooos oeclines, rleii piices iise. Realiz-
ing rleii eiiois, rle enriepieneuis oisconrinue rlose piojecrs rlar
weie only appaienrly piofiralle, lecause oí rle íalse inreiesr iare.
Tle piices oí piooucei gooos íall, ano rle money iare oí inreiesr
ieruins ro rle naruial iare.
;. Cre6|t aa6 lceaem|c Cr|ses
!n piacrice, rle lusr occuis wlen rle lanks slow oown rleii issue
oí íuirlei fiouciaiy meoia, rleiely allowing rle money iare ro iise
rowaio irs piopei level. Yer even ií rle lanks srulloinly riieo ro
lolo rle money iare oown, evenrually rley woulo íail. Tle giow-
ing expansion oí rle quanriry oí money in rle lioaoei sense oiives
piices liglei ano liglei, ano lenoeis insisr on giearei ano giearei
piemiums in rle conriacrual iare oí inreiesr. Tle longei rle lanks
lolo rle money iare lelow rle naruial iare, rle woise is rle even-
rual ciisis.
..
Cheptcr 1µ: Mency, Crcáit, ená ¡ntcrcst 1¡p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !ugen von Bolm-Baweik was a successoi oí Mengei ano a
pieoecessoi oí Mises in rle oevelopmenr oí Ausriian eco-
nomics. Òne oí Bolm-Baweik’s giear conriilurions was
ro explain rle capiralisrs’ inreiesr income as a piemium
given ro piesenr veisus íuruie gooos. !oi example, sup-
pose consumeis woulo pay s¸o íoi a maruie Cliisrmas
riee, lur woulo only pay s¸o íoi an aiiriglr claim guai-
anreeing rlem a maruie Cliisrmas riee ro le oeliveieo
in rwelve monrls. !í rlese weie rle final piices as oerei-
mineo ly consumeis’ suljecrive pieíeiences, rlen rle mai-
ker piice íoi an immeturc riee—one rlar neeoeo anorlei
yeai ro íully oevelop—woulo le s¸o as well. Assuming
norling else clangeo, a capiralisr wlo invesreo s¸o in
sucl a riee coulo wair one yeai, rlen sell rle maruie
veision íoi s¸o, nerring a :¸ peicenr annual ieruin on
lis capiral. Tlus Bolm-Baweik explaineo rle aliliry ro
eain inreiesr ovei rime as oue ro rle unoeilying suljec-
rive pieíeience íoi piesenr veisus íuruie gooos. A capi-
ralisr wlo luys íacrois oí piooucrion invesrs in “íuruie
gooos” wlicl rlen giow in maiker value as rley iipen inro
“piesenr gooos.” Also nore rlar rle reim “iipen” is nor
ieseiveo íoi agiiculruial piooucrs: Bolm-Baweik woulo
say rlar a capiralisr can invesr (say) s1oo,ooo in lumlei,
slingles, laloi, ano orlei inpurs wlicl iepiesenr a íuruie
louse. Òvei rle monrls, as rle louse is luilr, rle gooos-
in-piocess giaoually lecome a piesenr louse, ano lence
commano a liglei maiker value rlan rle inirial s1oo,ooo
invesrmenr.
18o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
• !n explaining rle loom ano lusr cycle, Mises ielies on
Bolm-Baweik’s capiral rleoiy. Bolm-Baweik vieweo rle
use oí capiral gooos as a “iounoalour” way oí sarisíying
goals. !oi example, ií someone wanrs ro ger coconurs íiom
riee liancles, a oiiecr appioacl is ro climl rle riee ano
gial rlem wirl lis laie lanos. Yer a moie iounoalour
(ano plysically piooucrive) appioacl is ro speno some rime
garleiing sricks ano vines, in oioei ro consriucr a long pole.
Tlen wirl rlis capiral gooo, rle peison can knock oown
íai moie coconurs pei loui oí lis laloi. Tle riaoeoff rlen
is lerween gerring moie plysical ourpur pei unir oí laloi,
veisus gerring rle coconurs soonei iarlei rlan larei. (!í
rle peison is iavenous ano wanrs ro ear a íew coconurs as
quickly as possille, le will jusr climl rle riee iarlei rlan
seaicl íoi sricks.) Bolm-Baweik aigueo rlar rle iare oí
inreiesr ieflecreo rle communiry’s pieíeiences íoi rle rim-
ing oí consumprion as well as rle reclnical oppoiruniries
íoi incieaseo ourpur iesulring íiom íuirlei lengrlening
(oi making moie iounoalour) rle merloos oí piooucrion.
!í some people in rle communiry saveo moie (ly srock-
piling coconurs, say), rlen rle woikeis woulo le alle ro
ear wlile piooucrion sliíreo our oí riee-climling ano inro
pole-piooucrion. Tle savings woulo lave augmenreo rle
sulsisrence íuno ro rioe eveiyone ovei unril rle liglei our-
pur oí rle moie iounoalour piocesses came online. Tle
iare oí inreiesr in rlis scenaiio woulo peimanenrly oecline,
ano sociery woulo aovance ro a peimanenrly liglei sran-
oaio oí living, as woikeis coulo garlei moie coconurs pei
loui wirl rle use oí rleii new rools.
..
Cheptcr 1µ: Mency, Crcáit, ená ¡ntcrcst 181
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Interest: !ncome acciuing ro rle ownei oí íuruie gooos as rley
maruie inro piesenr gooos, oue ro rle liglei valuarion
placeo on piesenr veisus íuruie gooos.
Goods of the first order: Consumei gooos.
Goods of higher orders: Cooos useo ro pioouce consumei gooos.
(Acapiral gooo useo ro pioouce a consumei gooo is a secono-
oioei gooo. A capiral gooo useo ro pioouce a secono-oioei
gooo is a rliio-oioei gooo, erc.)
Subsistence fund: A concepr useo ly Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave fiisr accumulareo, in oioei
ro íeeo ano orleiwise suppoir rle woikeis as rley engage in
rime-consuming piooucrion piocesses.
Purchasing power/inflation premium: An inciease in rle conriac-
rual iare oí inreiesr oue ro rle expecreo iise in piices.
..
18: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is “rle piollem,” rle naruie oí wlicl is ourlineo in
secrion 1? (pp. ¡¡p–¸ó)
:. \ly miglr rle oisriilurion oí income ano piopeiry alrei
rle long-iun iare oí inreiesr? (p. ¡¸¡)
¡. !í rle Money Rare oí !nreiesr is pusleo lelow rle `aruial
Rare oí !nreiesr (oi moie accuiarely, rle noimal iare oí
inreiesr), wlar lappens ro commooiry piices, accoioing ro
\icksell? (p. ¡¸¸)
¸. \lar aie rle rwo main meclanisms ly wlicl rle money
iare oí inreiesr iises lack ro rle naruial iare, aírei laving
leen pusleo oown ly rle lanks? (pp. ¡ó:–ó¡)
¸. !xplain: “Ceirainly, rle lanks woulo le alle ro pestpenc rle
collapse, lur neveirleless . . . rle momenr musr evenrually
come wlen no íuirlei exrension oí rle ciicularion oí fiou-
ciaiy meoia is possille. Tlen rle carasriople occuis. . . .”
(p. ¡ó¸)
tuav:iv :o
|k08|lM! 0| Ckl0|I |0||C\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle goveinmenrs oí !uiope ano Ameiica lave leen guioeo ly rle
ioea rlar rle naruial oesiie oí rle lanks ro issue fiouciaiy meoia
musr le cleckeo, in oioei ro avoio economic ciises. !owevei, rlis
goal conflicrs wirl rle orlei oesiies íoi low inreiesr iares ano ligl
selling piices.
Peel’s Bank Acr
|
Bank Clairei Acr 18¸¸
]
rook rle powei oí
issuing new nores away íiom piivare lanks ano vesreo ir com-
plerely wirl rle Bank oí !nglano, wlicl irselí was iequiieo ro
mainrain 1oo peicenr merallic lacking íoi any new nores rlar ir
issueo. !owevei, rle Acr ciucially oio net impose sucl a iesriicrion
on rle exrension oí oeposirs. Peel’s Acr rlus conraineo a “saíery
valve” rlar pievenreo a slaip iise in rle oljecrive exclange value
oí money, lur ar rle same rime ir íaileo ro eliminare economic
ciises lecause ir eiioneously rlouglr rley weie oue exclusively ro
unlackeo netcs.
Tle oegiaoarion oí rle classical golo sranoaio was alieaoy well
unoeiway /cjerc rle ourlieak oí \oilo \ai !. !iisr, cirizens ceaseo
using golo in eveiyoay riansacrions, ano rle acrual golo was srock-
pileo in rle vaulrs oí eacl counriy’s cenrial lank, wlicl issueo
papei nores insreao. Tlen rle golo was even íuirlei concenriareo
inro rle cenrial lanks oí jusr a íew majoi counriies, so rlar nor
even rle cenrial lanks (oí mosr counriies) lao golo in rleii vaulrs.
Alrlougl ir woulo lave unoesiialle oeflarionaiy consequences, a
18¡
18¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
riansirion lack ro an acrual golo cuiiency—in wlicl people useo
genuine golo coins in oaily puiclases—is rle only iealisric cleck
on goveinmenr-sponsoieo inflarion.
Tle oiiginal érarisr aigumenrs íoi iegularing rle issue oí com-
pering nores ly piivare lanks oo nor look neaily as compelling
aírei rle expeiience oí Ceiman lypeiinflarion. Tle allegeo evils
oí a íiee maiker in lanking aie norling compaieo ro rle acrual
evils unoei a goveinmenr monopoly oí rle cuiiency.
People musr cloose lerween a fiar sysrem iegulareo ly inoex
numleis oí piices, oi a ieruin ro an acrual golo cuiiency. !n oioei
ro pievenr iecuiiing economic ciises, rle alsolure piolilirion oí
rle íuirlei issuance oí fiouciaiy meoia is necessaiy. !í lanks con-
rinue wirl rle aliliry ro issue fiouciaiy meoia, ir leaves open rle
oesriucrion oí rle enriie moneraiy sysrem, as a cooioinareo pol-
icy oí expansion—peilaps unoei a \oilo Bank—woulo lave no
clecks on irs inflarionaiy porenrial.
Cheptcr :o: Pre//cms ej Crcáit Pe/i.y 18¸
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. |kl|kI0k\ klMkkK
¡. Ihe Ceafl|ct ef Cre6|t |e||c|es
Since rle rime oí rle Cuiiency Sclool, rle goveinmenrs oí !uiope
ano Ameiica lave leen guioeo ly rle ioea rlar rle naruial oesiie
oí rle lanks ro issue fiouciaiy meoia musr le cleckeo, in oioei ro
avoio economic ciises. !owevei, rlis goal conflicrs wirl rle orlei
oesiies ro íosrei “cleap money” ano “ieasonalle piices,” i.e., low
inreiesr iares ano ligl piices íoi ceirain pioouceis.
||. |k08|lM! 0| Ckl0|I |0||C\ 8l|0kl Ikl Wkk
z. |ee|’s kct
Peel’s Bank Acr
|
Bank Clairei Acr 18¸¸] rook rle powei oí issuing
new nores away íiom piivare lanks ano vesreo ir complerely wirl
rle Bank oí !nglano, wlicl irselí was iequiieo ro mainrain 1oo pei-
cenr merallic lacking íoi any new nores rlar ir issueo. !owevei,
rle Acr ciucially oio net impose sucl a iesriicrion on rle exren-
sion oí oeposirs. !n orlei woios, piivare lanks coulo cieare moie
fiouciaiy meoia ly gianring loans (nor lackeo ly golo) ro rleii
cusromeis, rlus loweiing rle iare oí inreiesr ano expanoing rle
srock oí money in rle lioaoei sense. !n rlis way, Peel’s Acr con-
raineo a “saíery valve” rlar pievenreo a slaip iise in rle oljecrive
exclange value oí money (i.e., íalling piices oí gooos ano seivices),
18ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
lur ar rle same rime ir íaileo ro eliminare economic ciises lecause
ir eiioneously rlouglr rley weie oue exclusively ro unlackeo netcs.
¡. Ihe Natare ef 0|sceaat |e||c¡
Many wiireis, as well as rle geneial pullic, oo nor unoeisrano rle
“ieal” economic íoices lelino movemenrs in inreiesr iares, insreao
rley view incieases in inreiesr iares as ailiriaiy ano unnecessaiy
consriainrs on rle communiry’s piospeiiry. !oi example, ir is in rle
naruie oí lanking rlar an inoivioual lank musr iaise rle inreiesr
iare ir claiges on new loans, ií irs ieseives oí money in rle nai-
iowei sense aie leing oiaineo lecause ir las issueo moie fiouciaiy
meoia rlan irs comperirois. Tlis lelavioi woulo occui wlerlei
oi nor goveinmenr oi cenrial lank iules iequiieo ir.
\len ir comes ro inreinarional movemenrs oí capiral, people
also íail ro unoeisrano rlar oomesric inreiesr iares musr ieflecr con-
oirions in rle woilo maiker. Tleie is norling moie mysreiious in
íoieign evenrs alreiing oomesric inreiesr iares, rlan (say) a íoieign
ciop íailuie iaising oomesric íiuir piices.
¢. Ihe 6e|6·|rem|am|e||c¡
Tle Bank oí !iance implemenreo a well-known golo-piemium
policy, in wlicl ir claigeo a piemium (somewleie in rle iange oí
o.¸ ro o.8 peicenr) on iequesrs ro exclange íiancs íoi golo, ií rle
golo weie going ro le invesreo alioao seeking a liglei ieruin.
Tle puipose oí rle policy was ro wioen rle gap ly wlicl rle
Bank oí !iance coulo mainrain a lowei oiscounr iare rlan pie-
vaileo in orlei counriies. Tle policy linoeieo capiral ourflows ená
inflows, ano linoeieo rle íull incoipoiarion oí !iance inro rle
woilo maiker. Tle only way ro riuly insulare Bank policy íiom
rle iesr oí rle woilo maiker woulo le ro leave rle golo sranoaio
Cheptcr :o: Pre//cms ej Crcáit Pe/i.y 18¡
enriiely, aoopring cieoir money oi fiar money ano rleiely suffei-
ing inflarion.
;. !¡stems !|m||ar te the 6e|6·|rem|am|e||c¡
Cenrial lanks lave aoopreo orlei reclniques ro linoei rle expoir
oí golo. !oi example, rley miglr nor suiienoei golo ro expoireis
in rle mosr convenienr íoim, oi rley miglr give woin-our coins
rlar lao sliglrly less meral conrenr rlan rle coins inrenoeo íoi
oomesric use.
6. Ihe Nea
·
!at|sfact|ea ef the !e
·
ca||e6 “|||eq|t|mate”
0emaa6 fer Meae¡
Arremprs ro only piovioe golo íoi expoir wlen rle puipose is
“legirimare” woulo íail ro aclieve rleii oljecrive in rle long-
reim, as specularois woulo fino orlei means ro aclieve rle same
eno. Moieovei, rleie is a wlole specrium oí inreimeoiare cases
lerween “legirimare” oemanos íoi commooiry impoirarion ano
“illegirimare” specularion on íoieign invesrmenrs. !oi example,
wlar ií a íoieign company wanreo ro wirloiaw oeposirs rlar ir lao
pieviously invesreo in a counriy? \oulo rle aurloiiries peimir a
“loss” oí golo in rlis ciicumsrance?
). 0ther Measares fer !treaqthea|aq the !teck ef Meta| ke|6
|¡ the Ceatra| 8aaks
·
ef
·
|ssae
\lile cenrial lanks-oí-issue aoopreo policies ro iaise rle upper
gold point ano rlus oiscouiage rle expoir oí golo, ar rle same
rime many aoopreo policies ro ieouce rle lower goldpoint ano rlus
encouiage impoirs oí golo. Tle rwo sers oí policies laigely offser
188 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
eacl orlei, so rlar rle acrual gap lerween rle golo poinrs oio nor
clange as mucl as miglr lave leen supposeo.
ë. Ihe |remet|ea ef Cheçae aa6 C|ear|aq Iraasact|eas as a
Meaas ef ke6ac|aq the kate ef 0|sceaat
!n Ceimany leíoie rle fiisr \oilo \ai, rleie was an effoir ro
ieouce rle Ceiman people’s eveiyoay use oí golo, ano ieplace
ir wirl rle use oí cleck ano cleaiing riansacrions. Tlis woulo
allegeoly allow rle Reiclslank ro lolo a laigei ieseive oí meral,
ano keep a lowei oiscounr iare. !owevei, rleie is no necessaiy
connecrion lerween rle long-iun iare oí inreiesr ano rle quanriry
oí fiouciaiy meoia.
|||. |k08|lM! 0| Ckl0|I |0||C\ |N Ikl |lk|00
|MMl0|kIl|\ k|Ilk Ikl Wkk
§. Ihe 6e|6·lxchaaqe !taa6ar6
Ðuiing rle \oilo \ai !, rle majoi poweis (excepr rle !nireo
Srares) explicirly suspenoeo rle golo sranoaio. !owevei, rle oegia-
oarion oí rle classical golo sranoaio was alieaoy well unoeiway
/cjerc rle ourlieak oí wai. !iisr, cirizens ceaseo using golo in eveiy-
oay riansacrions, ano rle acrual golo was srockpileo in rle vaulrs
oí eacl counriy’s cenrial lank, wlicl issueo papei nores insreao.
Tlen rle golo was even íuirlei concenriareo inro rle cenrial lanks
oí jusr a íew majoi counriies, so rlar nor even rle cenrial lanks
(oí mosr counriies) lao golo in rleii vaulrs. !nsreao, rley roo lao
papei claims enrirling rlem ro rle golo rlar was sroieo elsewleie.
!n rlis way, viirually rle enriie woilo lecame accusromeo ro
using papei as rleii money, wlicl lao a moie ano moie renuous
Cheptcr :o: Pre//cms ej Crcáit Pe/i.y 18p
link ro golo. As oí 1p:¸, rle woilo piice oí golo was oominareo ly
rle acrions oí rle !nireo Srares goveinmenr. Yer sucl an ourcome
is rle anrirlesis oí rle wlole iarionale íoi rle golo sranoaio: ro
keep polirical inreiíeience our oí money.
¡e. k ketara te a 6e|6 Carreac¡
Alrlougl ir woulo lave unoesiialle oeflarionaiy consequences, a
riansirion lack ro an acrual golo cuiiency—in wlicl people useo
genuine golo coins in oaily puiclases—is rle only iealisric cleck
on goveinmenr-sponsoieo inflarion. !ao rle cirizens oí rle giear
poweis leen using golo on rle eve oí \oilo \ai !, ir woulo lave
leen mucl moie oifficulr íoi rleii goveinmenrs ro iun rle piinr-
ing piesses ro pay íoi aimamenrs.
¡¡. Ihe |re||emef the |ree6emef the 8aaks
Tle oiiginal érarisr aigumenrs íoi iegularing rle issue oí comper-
ing nores ly piivare lanks oo nor look neaily as compelling aírei
rle expeiience oí Ceiman lypeiinflarion. Tle allegeo evils oí a
íiee maiker in lanking aie norling compaieo ro rle acrual evils
unoei a goveinmenr monopoly oí rle cuiiency.
¡z. ||sher’s |repesa| fer a Cemme6|t¡ !taa6ar6
Tle íamous Ameiican economisr !iving !islei pioposeo rlar
inoex numleis woulo riack an aveiage oí commooiry piices, so
rlar rle oollai irselí coulo le oefineo as a vaiialle weiglr oí golo
rlar possesseo consranr puiclasing powei in reims oí rle com-
mooiries in rle inoex.
Tleie aie seveial piollems wirl !islei’s pioposal. !iisr, rle
vaiious inoex numleis aie ailiriaiy, rleie is no scienrific way ro
1po Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
measuie rle “riue” clange in rle puiclasing powei oí golo íiom
monrl ro monrl. Anorlei piollem is rlar rle maiker alieaoy
las reclniques íoi lanoling clanges in rle puiclasing powei oí
money, !islei’s pioposal woulo simply leao ro an aojusrmenr oí
rle reclniques. !inally, even ignoiing rle orlei piollems, !islei’s
pioposal woulo nor counreiacr rle áiffcrcntie/ impacr rlar inflarion
las as ir unevenly spieaos rliougl rle economy. !í rle piice inoex
incieases ly 1 peicenr in a ceirain monrl, rlis is lecause some
piices incieaseo ly moie rlan 1 peicenr, wlile orleis incieaseo
ly less.
¡¡. Ihe 8as|c 0aest|eas ef |atare Carreac¡ |e||c¡
People musr cloose lerween a fiar sysremiegulareo ly inoex num-
leis oí piices, oi a ieruin ro an acrual golo cuiiency. !n oioei ro
pievenr iecuiiing economic ciises, rle alsolure piolilirion oí rle
íuirlei issuance oí fiouciaiy meoia is necessaiy. (Sucl a piolili-
rion musr go leyono Peel’s Acr, ano incluoe lank oeposirs as well
as nores, íoi economically rle rwo aie equivalenr.) !í lanks con-
rinue wirl rle aliliry ro issue fiouciaiy meoia, ir leaves open rle
oesriucrion oí rle enriie moneraiy sysrem, as a cooioinareo pol-
icy oí expansion—peilaps unoei a \oilo Bank—woulo lave no
clecks on irs inflarionaiy porenrial.
Ònly ly íieeing money ano lanking íiom polirical influence
can people avoio economic ciises wlile mainraining rle liglesr
possille sraliliry oí rle puiclasing powei oí money.
..
Cheptcr :o: Pre//cms ej Crcáit Pe/i.y 1p1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages ¡¡¡–8:, Mises oesciiles rle “golo-piemium pol-
icy” implemenreo ly rle Bank oí !iance. !n rle alsence oí
sucl a piemium, invesrois woulon’r oisringuisl lerween
oomesric ano íoieign invesrmenrs (excepr peilaps íoi a
sliglr psyclological pieíeience íoi rle íoimei), ano woulo
pur rleii capiral wleie ir woulo eain rle liglesr ieruin. !í
rle Bank oí !nglano’s oiscounr iare weie liglei rlan rle
Bank oí !iance’s, rlen !iencl invesrois woulo ruin rleii
íiancs in íoi golo, use rle golo ro luy lonos in !nglano,
rlen conveir rle golo lack inro íiancs aírei eaining rleii
inreiesr. Tle iesulr woulo le a liglei iare oí ieruin (mea-
suieo in íiancs) rlan ií rle invesrois lao lenr rle money
in !iance. !owevei, ií ruining íiancs inro golo involves
paymenr oí a (small) piemium ro rle Bank oí !iance, rlen
invesrois woulo only aoopr rle alove sriaregy ií rle oiffei-
ence in inreiesr iares weie sufficienrly laige. Tleieíoie, rle
golo-piemiumpolicy gave rle Bank oí !iance a wioei mai-
gin ro keep inreiesr iares ielarively low, leíoie suffeiing
íiom an ourflow oí golo.
• Òn page ¡p8, Mises poinrs our rlar mosr aigumenrs ciiri-
cizing rle opeiarion oí a piivare, comperirive lanking sys-
rem weie “rloiouglly unsouno.” Tle one legirimare aigu-
menr came íiom rle Cuiiency Sclool, wlicl (coiiecrly)
poinreo our rlar ií piivare lanks issueo nores in excess
oí rleii golo ieseives (i.e., fiouciaiy meoia), rlis coulo
cause economic ciises. !ionically, rlis oangei only exisrs
wlen rle lanks all opeiare unoei a uniíoim oiscounr pol-
icy—rley musr all inflare in unison, oi else rle lank rlar is
1p: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
rle mosr aggiessive will lave irs fiouciaiy meoia ieruineo
ro ir (rliougl cleaiing opeiarions), ano ir will quickly lose
irs golo ieseive ro irs comperirois. Yer somelow, rlese
olseivarions leo ro rle call ro alolisl comperirive lan-
knore issue ano ieplace ir wirl a goveinmenr monopoly.
As Mises says, “`ow rle monopolizarion oí rle lanks-
oí-issue in eacl sepaiare counriy ooes nor meiely íail ro
oppose any linoiance oí rlis uniíoimiry oí pioceouie, ir
mareiially íacilirares ir.”
..
Cheptcr :o: Pre//cms ej Crcáit Pe/i.y 1p¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice oí golo (quoreo in a counriy’s cuiiency) alove wlicl
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi íoieigneis ro exclange rle oomesric cuiiency íoi
golo (ar rle official ieoemprion iare, wlicl is lelow rle cui-
ienr maiker piice), ano lave rle golo slippeo our oí rle oiig-
inal counriy.
Lower gold point: !noei rle golo sranoaio, rle minimum maiker
piice oí golo (quoreo in a counriy’s cuiiency) lenearl wlicl
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi cirizens ro impoir golo ano exclange ir wirl rle
aurloiiries ar rle official ieoemprion iare íoi rle oomesric
cuiiency.
..
1p¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was rle rleoierical eiioi oí rle Cuiiency Sclool,
ano wly was rlis misrake an “aovanrage” wirl iespecr ro
rle implemenrarion oí Peel’s Acr? (pp. ¡óp–¡o)
:. * \len Mises claims rlar a sole lank, engaging in a moie
inflarionaiy policy rlan irs comperirois, woulo enoangei
irs “solvency” (p. ¡¡¸), is rlar consisrenr wirl lis oefinirion
oí rle reim (veisus “liquioiry”) on page ¡¡1?
¡. !xplain: “Tle lanks woulo srill lave ro lave a oiscounr
policy even ií rleie weie no legislarive iegularion oí rle
nore covei.” (p. ¡¡¸)
¸. !ow oio !iance’s golo-piemium policy linoei lorl rle
ourflow ená inflow oí capiral? (p. ¡8:)
¸. !xplain: “Tleie is only one oangei rlar is peculiai ro rle
issue oí nores, rlar oí irs leing ieleaseo íiom rle common-
law olligarion unoei wlicl eveiylooy wlo enreis inro a
commirmenr is sriicrly iequiieo ro íulfill ir ar all rimes ano
in all places. Tlis oangei is infinirely giearei ano moie
rliearening unoei a sysrem oí monopoly.” (p. ¡pp)
..
vav: iv
M0NlIkk\ klC0N!Ik0CI|0N
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv :1
Ikl |k|NC|||l 0| !00N0 M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe C|ass|ca| |6ea ef !eaa6 Meae¡
Tle piinciple oí souno money musr le placeo in rle conrexr oí
rle lioaoei, classical lileial piogiam oí conraining goveinmenr
ryianny. Jusr as a consrirurion oi a lill oí iiglrs woulo le aoopreo,
in liglr oí lisroiical aluses oí civil lileiries, in rle same way rle
classical lileials oí rle ninereenrl cenruiy wanreo ro pievenr gov-
einmenrs íiom wiecking cuiiencies as lao occuiieo rliouglour
lisroiy.
Souno money involves a merallic sranoaio, wirl all rokens ano
papei nores leing ieoeemalle in rle merallic money upon oemano.
!n piacrice, rlis las meanr golo since rle lare ninereenrl cenruiy.
Alrlougl rleii ioeas weie coiiecr, rle classical lileials oio nor
aoequarely oeíeno rle golo sranoaio íiomirs ciirics, ano rle pullic
íell sway ro eiioneous inflarionaiy oocriines.
z. Ihe V|rtaes aa6 k||eqe6 !hertcem|aqs ef the 6e|6 !taa6ar6
!r is riue rlar rle pullic geneially welcomes inflarionism as op-
poseo ro rle oirloooxy oí rle golo sranoaio, lur only lecause
rley misunoeisrano rle riue siruarion. Pioouceis welcome “ligl
1p¡
1p8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
piices” wlen ir is rleii own piices in quesrion, lur rley oon’r wel-
come incieasing piices in rle irems rley rlemselves musr puiclase.
!nflarion can only give even rle appeaiance oí piospeiiry, in siru-
arions wleie rle majoiiry oon’r iecognize wlar is lappening. !oi
rlis ieason, inflarionism cannor le a lasring economic policy.
Conriaiy ro irs ciirics, rle golo sranoaio oio nor “collapse.”
Rarlei, ir was sysremarically ano inrenrionally oesrioyeo ly gov-
einmenrs lenr on inflarion. Tlose wiireis wlo llame rle “iules
oí rle golo sranoaio game” íoi keeping inreiesr iares ligl, oo nor
unoeisrano rle íuncrion oí inreiesr iares ano lowcieoir expansion
causes economic looms ano lusrs.
¡. Ihe |a||·lmp|e¡meat 0ectr|ae
An employei will only liie a man ií le is piooucrive enougl ro
jusriíy rle wage le expecrs ro le paio. !í rle employei woulo lose
money ly liiing rle man, le will iemain unemployeo. \len gov-
einmenr policies ano unions use coeicion ro lolo wage iares alove
rle maiker-cleaiing level, institutional unemployment iesulrs.
!n rlis serring, ir is riue rlar moneraiy inflarion may cause com-
mooiry piices ro iise íasrei rlan wage iares. Tlis will oeciease
rle unemploymenr iare, lur only lecause ir effecrively loweis rle
woikeis’ real wages. Ònce rle laloi unions iealize wlar is lappen-
ing, rley will legin oemanoing auromaric wage incieases rieo ro
rle “cosr oí living.” Tlen rle appaienr lenefirs oí inflarion (in
ieoucing unemploymenr) will oisappeai.
¢. Ihe lmerqeac¡ krqameat |a |aºer ef |aflat|ea
Some wiireis conceoe rle negarive effecrs oí inflarion, lur aigue
rlar in ceirain emeigency siruarions, ir is rle only merloo ly wlicl
Cheptcr :1: Thc Prin.ip/c ej Seuná Mency 1pp
goveinmenrs can caiiy our viral rasks. Yer inflarion pei se ooes nor
inciease rle plysical ano luman iesouices ar a counriy’s oisposal.
!í an apologisr íoi inflarion claims rlar ir is rle only way ro finance
a wai, le is aomirring rlar rle pullic woulo nor agiee wirl rle
goveinmenr’s wai expenoiruies ií ir íully unoeisrooo rle saciifice
rley woulo enrail.
..
:oo Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• On pages (zo–z: Mlses responds to a crltlque of the gold stan-
dard that lts opponents contlnue to use. Modern-day crltlcs stlll
say (as they dld ln Mlses’s tlme) that the gold standard “collapsed”
and that governments are no longer wllllng to play the “rules of
the gold standard game.” what they mean ls that governments
were no longer wllllng to renounce the (short-term) benefits to
themselves of lnflatlon, and so they refused to redeem thelr cur-
rencles ln specle. ¥et Mlses polnts out that the governments dld
much more than thls. |n order to wean the publlc off gold, they
employed “pollcemen, customs guards, penal courts, prlsons, ln
some countrles even executloners.” |n Mlses’s vlew, governments
actlvely combat the publlc’s preference for a sound commodlty
money. Contrary to the clalms of the lnflatlonlsts, malntenance of
a commodlty money doesn’t requlre a speclal commltment from
the government, but rather requlres only that the government
obey lts contractual obllgatlons llke everybody else ln a market
economy.
• On pages (z¡–z6, Mlses places Keyneslan analysls ln a tradltlon
of faulty theorles golng back to the “spurlous grocer phllosophy
. . . exploded by Adam Smlth and 1ean-8aptlst Say.” These classlcal
economlsts argued that a general buslness depresslon was not
caused by a “dearness of money,” and consequently could not be
solvedby monetary lnflatlon. Say’s dlscusslon(whlch later came to
be summarlzed as “Say’s Law”) explalned that ultlmately, the gro-
cer’s customers earned the purchaslng power to demand hls prod-
ucts by first supplylng thelr own goods and servlces. As an econ-
omy grew over tlme, the varlous sectors lncreased thelr output
..
Cheptcr :1: Thc Prin.ip/c ej Seuná Mency :o1
across the board. Say argued that relatlve prlces would ad[ust
to malntaln the proper balance among the sectors, but there was
not a danger that the economy as a whole could produce a “gen-
eral glut” that could only be remedled by an expanslon of the
stock of money.
..
:o: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Institutional unemployment: Tle siruarion wleie woikeis aie qual-
ifieo ano willing ro accepr jols ar pievailing wage iares, yer
cannor fino employeis ro liie rlem.
Real wages: \age iares ielarive ro rle piices oí gooos ano seivices.
..
Cheptcr :1: Thc Prin.ip/c ej Seuná Mency :o¡
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Study Questions
1. \lar was rle “seiious llunoei” oí rle ninereenrl-cenruiy
aovocares oí rle golo sranoaio? (p. ¸1¸)
:. \lar connecrion ooes Mises make lerween rle golo sran-
oaio ano iepiesenrarive goveinmenr? (p. ¸1ó)
¡. !ow oio goveinmenrs manage ro alanoon rle golo sran-
oaio? (p. ¸:o)
¸. \lar is rle only efficacious way ro iaise ieal wage iares?
(p. ¸:¸)
¸. \lar’s wiong wirl rle emeigency aigumenr in íavoi oí
inflarion? (pp. ¸:ó–:8)
tuav:iv ::
C0NIlM|0kkk\ C0kklNC\ !\!IlM!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe |aflex|||e 6e|6 !taa6ar6
!noei lorl rle classical gold standard ano rle gold-exchange stan-
dard—as rley lao exisreo leíoie \oilo \ai !—eacl narion’s cui-
iency unir was legally rieo ro an inflexille (i.e., consranr) exclange
iare againsr golo. Tle oiffeience lerween rle rwo sysrems was one
oí oegiee. !noei rle classical golo sranoaio, cirizens wirlin eacl
counriy caiiieo acrual golo coins ano useo rlem in eveiyoay rians-
acrions. Anylooy coulo exclange golo íoi narional nores ano vice
veisa wirlour oelay. !arei, unoei rle golo-exclange sranoaio, cir-
izens only useo rle goveinmenr’s papei nores ano roken coins in
oomesric commeice. !owevei, rle cenrial lanks oí rle woilo srill
exclangeo rleii iespecrive cuiiencies againsr golo ar rle official
(ano inflexille) iares.
z. Ihe ||ex|||e !taa6ar6
Tle flexible standard aiose lerween rle woilo wais our oí rle pie-
wai golo exclange sranoaio. !eie rleie was no legal ieoemprion
iequiiemenr, locking in a fixeo exclange iare oí golo againsr rle
narional cuiiency. !nsreao, an agency (sucl as rle cenrial lank)
:o¸
:oó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
woulo le given rle aurloiiry ro peg rle cuiiency ro golo ar a iare
rlar coulo le suljecr ro a suooen clange. !í rle oiop in rle cui-
iency againsr golo was seveie enougl, rle evenr woulo le calleo a
devaluation.
¡. Ihe |ree|¡
·
Vac|||at|aq Carreac¡
A freely-vacillating currency is one wirl no official peg ro golo ar
all. Tle cuiiency is a cieoir oi fiar money, lelo on accounr oí
irs expecreo íuruie puiclasing powei. !í rle goveinmenr exeicises
iesriainr, sucl a money—even rlougl ir is a “lao cuiiency”—can
peisisr.
¢. Ihe |||as|ºe !taa6ar6
Somerimes a goveinmenr will announce a (vaiialle) peg ro irs cui-
iency, yer rlis isn’r a flexille sranoaio. Tle goveinmenr eníoices
rle peg rliougl penalries ano confiscarion, nor rliougl ieoemp-
rion ar rle official iare. Tle illusive standard is rlus a íoim oí piice
conriol, ano leaos ro a sloirage in rle íoieign exclange maiker.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :o¡
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Technical Notes
• As Mises explaineo eailiei in rle look (pp. 18o–8ó), ex-
clange iares aojusr on an unlampeieo maiker unril rleie
is no aovanrage ro luying a commooiry in one cuiiency
ano immeoiarely selling ir in anorlei cuiiency. Yer unoei
an illusive sranoaio, rle goveinmenr oí a counriy acrively
inreiíeies wirl rlis piocess, oíren ro keep rle piice oí
irs own cuiiency alove rle maiker-cleaiing piice rlar
woulo aclieve puiclasing powei paiiry. !n Mises’s exam-
ple (p. ¸¡¸), rle maiker cleais wlen one oollai riaoes íoi
1oo Ruiiranian iuis. !í a laiiel oí oil (say) sells íoi s1oo in
rle !nireo Srares, ano íoi 1o,ooo iuis in Ruiirania, rleie
is no ailiriage oppoiruniry ar rle coiiecr exclange iare.
!owevei, ií rle Ruiiranian goveinmenr announces rlar ir
will pur people in piison wlo pay moie rlan ¸o iuis íoi
one oollai, rlen rle exclange iare will iise ro rle airifi-
cial piice (ar leasr wirlin rle loioeis oí Ruiirania). Ar rle
newexclange iare, oil puiclaseo alioao will nowonly cosr
¸,ooo iuis pei laiiel, compaieo ro rle oomesric piice oí
1o,ooo iuis. Ruiiranian iefineis will rlus riy ro sell rleii
iuis againsr oollais, in oioei ro luy oil ano impoir ir. !ow-
evei, íoieigneis will nor wanr ro sell many oollais íoi iuis
ar rle iario oí 1-ro-¸o, lecause rle acrual maiker iario is
1-ro-1oo. Consequenrly rle Ruiiranian iefineis will com-
plain rlar rley “can’r fino oollais” ro finance rleii oesiieo
impoirs. Tleie is an appaienr “sloirage oí oollais.”
• Aírei explaining rle meclanics oí foreign-exchange con-
trols, Mises on page ¸¡¸ classifies rlem as “a oevice íoi
rle viirual expiopiiarion oí íoieign invesrmenrs.” !e las
:o8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
in mino a scenaiio sucl as rle íollowing: Suppose a !.S.
capiralisr invesrs s1 million luiloing a íacroiy in Ruiira-
nia. Ar rle oiiginal, maiker-oereimineo exclange iare, rle
capiralisr sells lis s1 million íoi 1oo million iuis, ano uses
rle cuiiency ro luy mareiials, liie woikeis, erc. in Ruii-
rania ro ser up rle íacroiy. !veiy yeai rle íacroiy eains a
ner income oí ¸ million iuis. Tle íoieign ownei woulo
lave lis local agenrs sell rle ¸ million iuis in rle íoieign
exclange maiker, conveiring rlem ro s¸o,ooo, ano wiiing
rle money lack ro lis lank accounr in rle !nireo Srares.
Tlus íiom eirlei rle viewpoinr oí rle íacroiy managei
(ieckoning in iuis) oi íiom rle íoieign invesroi (ieckon-
ing in oollais), rle iare oí ieruin on rle invesreo capiral is
five peicenr pei yeai. !owevei, wlen rle Ruiiranian gov-
einmenr imposes íoieign-exclange conriols ano sers a new
piice oí s1 íoi ¸o iuis (insreao oí 1oo), rle maiker íoi ool-
lais oiies up. `ow wlen rle íacroiy eains irs usual ¸ mil-
lion iuis, rle Ameiican invesroi can’r ger rle money our oí
rle counriy. !r’s riue rlar officially speaking, lis ¸ million
iuis is now woirl s1oo,ooo, ooulle rle pievious amounr.
Bur rlis is lirrle consolarion, since no one wirl oollais will
acrually riaoe s1oo,ooo íoi ¸ million iuis. People aiouno
rle woilo woulo le willing ro riaoe lalí rlar (s¸o,ooo) íoi
¸ million iuis, lur rle Ruiiranian goveinmenr will punisl
any oí irs cirizens cauglr accepring sucl an offei. Tlus rle
Ameiican’s s1 million íacroiy in Ruiirania las effecrively
leen raken ovei ly rle Ruiiranian goveinmenr, since ir
conriols rle íoieign-exclange maiker, ano conveiring iuis
inro oollais is rle only way rle Ameiican ownei can oeiive
any lenefir íiom lis invesrmenr.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :op
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New Terminology
Classical gold standard: Tle sysrem ly wlicl a counriy’s cuiiency
is ieoeemalle on oemano íoi a fixeo weiglr oí golo. !n
Mises’s usage, unoei a classical golo sranoaio, a poirion oí
rle cirizens’ casl lalances consisrs oí acrual golo coins ano
lullion ro le useo íoi making puiclases.
Gold-exchange standard: Tle sysrem ly wlicl a counriy’s cui-
iency is ieoeemalle on oemano íoi a fixeo weiglr oí golo,
rlougl somerimes only ly orlei goveinmenrs ano cenrial
lanks. !n Mises’s usage, unoei a golo-exclange sranoaio
rle cirizens useo only papei nores in eveiyoay riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Flexible standard: Tle sysrem ly wlicl a counriy’s cuiiency is
ieoeemalle íoi a vaiialle weiglr oí golo, ro le announceo
ly rle goveinmenr ar irs oiscierion.
Currency peg: Tle vaiialle ano nonlegally-linoing iare ar wlicl a
goveinmenr is cuiienrly mainraining irs cuiiency’s exclange
iare againsr golo.
Devaluation: Tle siruarion in wlicl a counriy on rle flexille sran-
oaio announces a laige oiop in rle value oí irs cuiiency
againsr golo.
Freely-vacillating currency: A cieoir oi fiar cuiiency rlar las no
official peg ro golo ar all. !rs maiker piice flucruares jusr as
any commooiry.
:1o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Illusive standard: Tle sysrem ly wlicl a counriy’s cuiiency is
peggeo ro golo ar nonmaiker iares. Tle exclange iare is
mainraineo nor rliougl rle manipularion oí golo ieseives
lur iarlei rliougl rle eníoicemenr oí íoieign-exclange
conriols.
Foreign-exchange controls: Coveinmenr iesriicrions on rle mai-
ker íoi íoieign cuiiencies.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :11
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Study Questions
1. !noei rle classical ano golo exclange sranoaios, oio ir
marrei ií lanknores weie enooweo wirl legal renoei sra-
rus? (p. ¸:p)
:. \ly oio rle unoirlooox sraresman pieíei rle reim “peg”
ro “ieoemprion”? (p. ¸¡o)
¡. * Mises says (p. ¸¡1) rlar cieoir ano fiar moneys “aie nor
money sulsrirures lur money piopei in rlemselves.” Ðoes
rlis mean rlar commooiry money is nor money piopei?
¸. \lar is rle oursranoing insrance oí a íieely-vacillaring cui-
iency? (p. ¸¡1)
¸. \ly ooes Mises oislike rle reim “scaiciry oí íoieign ex-
clange”? (pp. ¸¡¡–¡¸)
tuav:iv :¡
Ikl klI0kN I0 !00N0 M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle oisinregiarion oí rle woilowioe classical golo sranoaio las
gone lano-in-lano wirl rle maicl rowaio all-iouno cenrial plan-
ning. Tle ieruin ro souno money involves a ienunciarion oí infla-
rion. Tlis is only possille ií rle pullic iecognizes rle íuriliry oí
inreivenrionisr goveinmenr.
Tle ieruin ro souno money srill means a ieruin ro rle golo
sranoaio. Ònly unoei rlis sysrem will rle oereiminarion oí rle
moneraiy unir’s puiclasing powei iemain oursioe rle spleie oí
goveinmenr conriol. Tle only way ro riuly saíeguaio a narion’s
money is ro iemove all avenues íoi inflarion. Tlis incluoes nor
only rle goveinmenr’s iesoiring ro rle piinring piess ro finance
irs oeficirs, lur also commeicial lanks’ aliliry ro issue oeposirs nor
íully lackeo up ly money piopei.
!oi a ielarively small counriy (“Ruiirania”) rle goveinmenr
oí wlicl las leen using inflarion ro finance irs oeficirs, rle gov-
einmenr musr fiisr (rempoiaiily) piolilir rle íuirlei issuance oí
fiouciaiy meoia oenominareo in “iuis.” Ònce rle iui’s exclange
iare (as well as rle piice oí golo quoreo in iuis) las cleaily peakeo,
rle goveinmenr oí Ruiirania locks in rle cuiienr maiker piice oí
eirlei a !.S. oollai oi golo (quoreo in iuis). An agency will le oeo-
icareo wirl rle sole rask oí mainraining rle iui’s ieoemprion iare
ro eirlei rle oollai oi golo ar rlis iare, íoievei. Ruiirania will le
lack on rle golo exclange sranoaio.
:1¡
:1¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Tle !nireo Srares goveinmenr musr ieruin ro rle classical
golo sranoaio. An agency will le esrallisleo rlar will luy oi sell
golo againsr oollais upon oemano, ar rlis iare. !n oioei ro piovioe
moie iesisrance ro íuruie inflarion, rle goveinmenr sloulo sup-
piess small-oenominarion papei nores, wlicl woulo íoice Amei-
icans ro once again caiiy íull-weiglr golo coins in rleii casl
lalances.
Ònly an alanoonmenr oí rle inreivenrionisr minoser, coupleo
wirl a ieruin ro rle classical golo sranoaio, can saíeguaio rle
cuiiency.
Cheptcr :¸: Thc Rcturn te Seuná Mency :1¸
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Chapter Outline
¡. Meaetar¡ |e||c¡ aa6 the |reseat Irea6 Iewar6
k||·keaa6 ||aaa|aq
Tle oisinregiarion oí rle woilowioe classical golo sranoaio las
gone lano-in-lano wirl rle maicl rowaio all-iouno cenrial plan-
ning. Tle rienos aie ielareo. !nflarion allows goveinmenr officials
ro seize conriol oí moie iesouices rlan rle pullic woulo orleiwise
appiove. Rising piices pusles people inro liglei rax liackers ano
allows rle goveinmenr ro rax “excess piofirs” íiomlusinesses. Tle
social uniesr causeo ly inflarion can le llameo upon capiralism,
giving rle goveinmenr yer anorlei pierexr ro expano irs powei.
Tle ieruin ro souno money involves a ienunciarion oí infla-
rion. Tlis is only possille ií rle pullic iecognizes rle íuriliry oí
inreivenrionisr goveinmenr.
z. Ihe |ateqra| 6e|6 !taa6ar6
Tle ieruin ro souno money srill means a ieruin ro rle golo
sranoaio. Ònly unoei rlis sysrem will rle oereiminarion oí rle
moneraiy unir’s puiclasing powei iemain oursioe rle spleie oí
goveinmenr conriol.
Tle only way ro riuly saíeguaio a narion’s money is ro iemove
all avenues íoi inflarion. Tlis incluoes nor only rle goveinmenr’s
iesoiring ro rle piinring piess ro finance irs oeficirs, lur also com-
meicial lanks’ aliliry ro issue oeposirs nor íully lackeo up ly
money piopei. !n orlei woios, goveinmenrs musr speno only wlar
rley rax oi loiiow, ano lanks musr le piolilireo íiomissuing new
fiouciaiy meoia.
:1ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
¡. Carreac¡ keferm|a kar|taa|a
!oi a ielarively small counriy rle goveinmenr oí wlicl las leen
using inflarion ro finance irs oeficirs, rle ciucial rling is ro quickly
assuie woilo invesrois rlar rle cuiiency is sralilizeo. Tleie is
a rwo-srep piocess involveo. !iisr, rle goveinmenr oí Ruiirania
musr (rempoiaiily) piolilir rle íuirlei issuance oí fiouciaiy meoia
oenominareo in “iuis,” rle cuiiency oí rle counriy. Tlis will
cause rle exclange iare oí rle iui ro srop íalling againsr orlei,
majoi cuiiencies as well as golo.
Ònce rle iui’s exclange iare (as well as rle piice oí golo quoreo
in iuis) las cleaily peakeo, ano legun a oefinire oownwaio rieno,
ir is rime íoi srep rwo. !n rlis srage, rle goveinmenr oí Ruiirania
locks in rle cuiienr maiker piice oí eirlei a !.S. oollai oi golo
(quoreo in iuis). An agency will le oeoicareo wirl rle sole rask oí
mainraining rle iui’s ieoemprion iare ro eirlei rle oollai oi golo
ar rlis iare, íoievei. !í people ruin in oollais oi golo (oepenoing
on rle cloice oí rle link), rle agency is alloweo ro issue new iuis,
wlicl aie lackeo up 1oo peicenr ly rle new oeposir. Ar rlis poinr,
rle iui will le lack on eirlei a oollai- oi golo-exclange sranoaio,
ano no new fiouciaiy meoia can le issueo.
¢. Ihe 0a|te6 !tates’ ketara te a !eaa6 Carreac¡
Tle !nireo Srares goveinmenr musr ieruin ro rle classical golo
sranoaio, wlicl offeieo a sriongei cleck on inflarion rlan rle
golo-exclange sranoaio. !r musr fiisr piolilir rle issuance oí new
oollais, wlerlei in rle íoim oí Tieasuiy nores oi lank lalances
nor lackeo up 1oo peicenr ly casl oeposirs. Aírei rle oollai-piice
oí golo sralilizes, rle !.S. goveinmenr will announce rle cuiienr
maiker piice as rle new, peimanenr exclange iare lerween rle
!.S. oollai ano golo. (Tle new piice miglr veiy well le liglei
rlan rle official iare oí s¡¸ pei ounce, esrallisleo in rle Bierron
Cheptcr :¸: Thc Rcturn te Seuná Mency :1¡
\ooos agieemenr neai rle eno oí \oilo \ai !!, ano lasring unril
Riclaio `ixon alolisleo rle lasr iemnanrs oí rle golo sranoaio in
1p¡1.)
An agency will le esrallisleo rlar will luy oi sell golo againsr
oollais upon oemano, ar rlis iare. !n oioei ro piovioe moie iesis-
rance ro íuruie inflarion, rle goveinmenr sloulo suppiess small-
oenominarion papei nores, wlicl woulo íoice Ameiicans ro once
again caiiy íull-weiglr golo coins in rleii casl lalances.
;. Ihe Ceatreºers¡ Ceacera|aq the Che|ce ef the
New6e|6 |ar|t¡
\irlin rle ianks oí rlose aovocaring a ieruin oí rle !.S. ro rle
golo sranoaio, rleie is conrioveisy ovei rle appiopiiare exclange
iare. Tle restorers wanr ro go lack on golo ar rle iare oí s¡¸ pei
ounce, wlicl was esrallisleo in rle 1p¡¸ Colo Reseive Acr (ano
was rle golo piice useo in rle Bierron \ooos sysrem). Tle stabi-
lizers wanr ro íiee rle maiker ro lolo ano use golo, rlen ser rle
oollai ro rle new piice oí golo rlar will le esrallisleo in rle mai-
ker, even ií ir lappens ro le moie rlan s¡¸ pei ounce.
Tle aigumenrs oí rle iesroieis aie inconsisrenr. Tleie is norl-
ing “lonesr” alour going lack ro s¡¸ pei ounce. A mucl sriongei
case coulo le maoe rlar rle pie-1p¡¡ piice oí s:o.ó¡ pei ounce
oí golo was rle riue paiiry, wlicl Roosevelr rlen oislonoieo as
one oí lis fiisr acrs in office. !uirleimoie, rle people wlo weie
laimeo ly rle piioi inflarion woulo nor necessaiily le rle same
ones ro lenefir íiom a cuiienr lour oí oeflarion. !oi example, ir is
riue rlar a lono oiiginally issueo in (say) 1p:8, piomising ro pay
s1,ooo pei yeai íoi fiíry yeais, woulo lave lao irs “ieal” maiker
value salorageo wlen !ÐR oevalueo rle oollai. Yer ií rle oiiginal
puiclasei oí rle lono solo ir in (say) 1p¸o, rlen rle new ownei
las alieaoy raken inro accounr rle new inflarionaiy iegime. Tle
:18 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
íull capiral loss las alieaoy leen alsoileo ly rle oiiginal ownei.
Ar rlis poinr, ro iaise rle puiclasing powei oí rle oollai ly iesroi-
ing golo ro irs íoimei paiiry, woulo le ro piesenr a giír ro rle new
ownei oí rle lono.
Tle orlei majoi flawwirl rle iesroieis’ viewpoinr is rlar infla-
rion is laimíul nor meiely lecause ir affecrs oeíeiieo paymenrs.
Money is nor neurial, ano an inrenrional oeflarion will lave unoe-
siialle consequences rlar will occui in aooirion ro—iarlei rlan
unooing—rle eailiei consequences oí rle inflarion.
Ceac|a6|aq kemarks
Tle pullic ano mosr inrellecruals lamenr rle consequences oí infla-
rion, yer rley suppoir rlose policies (goveinmenr oeficir spenoing
ano low inreiesr iares) rlar iequiie inflarion. Ònly an alanoon-
menr oí rle inreivenrionisr minoser, coupleo wirl a ieruin ro rle
classical golo sranoaio, can saíeguaio rle cuiiency.
..
Cheptcr :¸: Thc Rcturn te Seuná Mency :1p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages ¸¡p–¸o, Mises lamenrs rlar even many sup-
poireis oí souno money oo nor iecognize rle oangei in
lank cieoir expansion wlen unoeiraken ro suppoir lusi-
ness (as opposeo ro financing goveinmenr oeficirs). Yer
rle ciicularion cieoir rleoiy oí rle riaoe cycle (oevelopeo
in pair i i i, claprei v) slows rle weakness in rlis rlink-
ing. Tlar is wly Mises leie aovocares a complere pioli-
lirion on rle issuance oí new fiouciaiy meoia, since le
lelieves ir is rle only suie way ro avoio íuruie ciises rlar
will inevirally oiscieoir capiralism. (`ore rlar Mises’s sug-
gesreo ieíoims woulo net riansíoim rle lanking sysrem
inro a 1oo-peicenr-ieseive aiiangemenr, lecause rle pie-
viously issueo fiouciaiy meoia woulo srill exisr.)
• Alrlougl rley aie similai, Mises’s pioposals (in secrions ¡
ano ¸) íoi cuiiency ieíoim in rle geneiic small counriy
“Ruiirania” veisus rle !nireo Srares aie oiffeienr. Mises
wanrs ro quickly srop rle iapioly oepieciaring cuiiency oí
Ruiirania, rle goveinmenr oí wlicl las leen monetizing
its deficits. Mises is conrenr ro srop rle oownwaio spiial ly
iesroiing Ruiirania ro eirlei a oollai- oi a golo-exclange
sranoaio. (Recall rlar rle oollai irselí was srill rieo ro golo
ar rle official iare oí s¡¸ pei ounce wlen Mises wiore
rlese pioposals.) !oi rle !nireo Srares, Mises wanrs ro
srop rle íuirlei issuance oí fiouciaiy meoia—in oioei ro
aiiesr rle loom-lusr cycle—ano ro iesroie rle classical
golo sranoaio. Tlis larrei oljecrive explains Mises’s pio-
posal íoi alolisling papei nores in oenominarions oí s¸,
::o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
s1o, ano peilaps s:o, so rlar rle pullic woulo caiiy íull-
weiglr golo coins (srampeo wirl s¸, s1o, erc.) íoi rlese
riansacrions.
..
Cheptcr :¸: Thc Rcturn te Seuná Mency ::1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Restorers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ar a lisroiic paiiry, a move rlar woulo iequiie oeflarion.
Stabilizers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ly locking in rle cuiienr maiker piice oí golo.
Monetizing government deficits: Coveiing rle oiffeience lerween
goveinmenr expenoiruies veisus rax ieceiprs ano loans íiom
piivare lenoeis, ly iesoir ro rle piinring piess.
..
::: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “\lile aovocaring ligl piices ano wage iares
as a panacea ano piaising rle Aominisriarion íoi laving
iaiseo ‘narional income’ . . . ro an unpieceoenreo leiglr,
rley llameo piivare enreipiise íoi claiging ouriageous
piices ano piofireeiing.” (p. ¸¡¡)
:. * Mises wiires (pp. ¸¡¡–¡8) rlar allegeoly piogiessive gov-
einmenrs will nor alanoon rleii “mosr íoimioalle weapon,
inflarion.” Yer isn’r rlis a veision oí rle ciirique oí rle golo
sranoaio (pp. ¸:o–:1) rlar saio mooein goveinmenrs weie
no longei willing ro íollow rle iules oí rle golo-sranoaio
game?
¡. !n wlar consisrs rle “eminence oí rle golo sranoaio”?
(p. ¸¡8)
¸. \ly ooes Mises (lumoiously) pick rle name “Joln Bao-
man” íoi rle Ruiiranian in one oí lis rlouglr expeiimenrs?
(p. ¸¸ó)
¸. \lar is rle “incuialle oeíecr” oí rle golo-exclange sran-
oaio (as opposeo ro rle classical golo sranoaio)? (p. ¸¸1)
..
k||lN0|Cl!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
avvixbix a
0N Ikl C|k!!|||CkI|0N 0|
M0NlIkk\ Ikl0k|l!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Cata||act|c aa6 kcata||act|c Meaetar¡ 0ectr|ae
Money is sucl an impoiranr pair oí economic liíe rlar wiireis ana-
lyzeo ir leíoie rle oevelopmenr oí orlei aieas oí economic rleoiy.
!ven aírei rle oevelopmenr oí catallactics ano rle mooein suljec-
rive rleoiy oí value, acarallacric rleoiies oí money peisisr. Yer a
necessaiy conoirion oí a sarisíacroiy rleoiy oí money is rlar ir is
emleooeo in a moie geneial rleoiy oí exclanges, wirlin wlicl
exclanges involving money aie meiely a componenr.
!conomic rleoiy is oifficulr, ano iequiies rlar rle economisr
fiisr consioei rle íoimarion oí piices in rle case oí oiiecr exclange.
Yer evenrually rle analysis musr le geneializeo ro incluoe inoiiecr
exclange ano rle iole oí money, oi else rle conclusions may go
asriay.
z. Ihe “!tate” Iheer¡ ef Meae¡
Tle “Srare” rleoiy oí money claims rlar rle value oí money iesrs
on rle aurloiiry oí rle liglesr civil powei, iarlei rlan leing rle
iesulr oí valuarions in rle maiker. Alrlougl irs pioponenrs may
nor iealize ir, rle Srare rleoiy oí money ooesn’r even arrempr ro
::¸
::ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
explain rle puiclasing powei oí money, wlicl is rle piimaiy pui-
pose oí a moneraiy rleoiy.
¡. !champeter’s kttempt te |erma|ate a Cata||act|c
C|a|mIheer¡
As an analogy, ir is accepralle ro call money a claim on rle geneial
srock oí gooos. Yer rle norion oí money as a claim cannor seive as
an acrual rleoiy oí money, seeking ro explain rle exclange iario
lerween money ano all orlei gooos ano seivices. Sclumperei las
maoe an arrempr ro oo so, lur le was íoiceo ar rle ourser ro excluoe
loaios ano orlei impoiranr ieal-woilo oereiminanrs oí rle value
oí money. !is íailuie illusriares rlar ir is a oeao eno ro analyze
money as a claim.
¢. “Meta|||sm”
Knapp oefines metallism as rle moneraiy oocriine claiming rlar
rle unir oí value is a ceirain quanriry oí meral. Knapp’s oefinirion
is uncleai, lur le uses rle reim ro incluoe all rlose rleoiies oí
money rlar aie net nominalistic.
;. Ihe Ceacept “Meta|||sm” |a W|eser aa6 |h|||ppeº|ch
Knapp’s cumleisome classificarion scleme las uníoirunarely leen
aoopreo ly orlei economisrs, allowing rle coníusion in lis woik
ro seep inro rleiis.
6. Nete: Ihe ke|at|ea ef the Ceatreºers¡ a|eat Nem|aa||smte
the |re||ems ef the Iwe laq||sh !chee|s ef 8aak|aq Iheer¡
Some wiireis, influenceo ly Knapp, inreipiereo rle clasl lerween
rle Cuiiency ano Banking Sclools as a clasl lerween merallism
Hppcnáix H: On thc C/essifi.etien ej Menctery Thcerics ::¡
ano nominalism. !owevei, rlis is nor ieally rle ciux oí rleii aigu-
menr. Because le oisoaineo rleoiy alrogerlei, Knapp was unalle
ro even expiess rle acrual conrioveisy lerween rle rwo !nglisl
sclools oí rlouglr on lanking.
..
::8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !n rlis claprei (e.g., pp. ¸ó¸ ano ¸¡¡), Mises iejecrs rle rle-
oiy rlar rle value oí money equals rle value oí rle piecious
merals. Tlis may suipiise some ieaoeis, since rliouglour
rle look Mises cleaily enooises rle classical golo sranoaio,
ano le also srares rlar people in commeice (iiglrly) evalu-
are coins on rleii meral conrenr, nor on rle sramp placeo
ly rle legislaruie. !owevei, rleie is no conriaoicrion leie.
Mises agiees rlar rle moneraiy unir sloulo ulrimarely le
a fixeo weiglr oí golo (oi anorlei commooiry). !owevei,
ro explain rle te/uc (oi rle puiclasing powei) oí rlar
moneraiy unir, one neeos a rleoiy oí inoiiecr exclange,
giounoeo in rle suljecrive rleoiy oí value.
• !n lis ciirique oí Sclumperei (in secrion i i i), Mises ex-
plains rlar a sarisíacroiy rleoiy oí money musr rake inro
accounr all oereiminanrs oí irs puiclasing powei, incluo-
ing “loaios.” !oi example, ií people in rle communiry
lecome íeaiíul ano riy ro accumulare an exria monrl’s
woirl oí expenses in rle íoim oí casl, rlen orlei rlings
equal rle puiclasing powei oí money will iise (i.e., piices
will íall). A rleoiy rlar oisiegaioeo rle iole oí loaios
woulo le unalle ro explain wly rle value oí money
clangeo.
..
Hppcnáix H: On thc C/essifi.etien ej Menctery Thcerics ::p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Catallactics: Tle sruoy oí exclanges oi (moie naiiowly) rle sruoy
oí moneraiy exclanges, wirl an emplasis on rle oereimina-
rion oí piice iarios.
Metallism: As oefineo ly Knapp, rle moneraiy oocriine claiming
rlar rle unir oí value is a ceirain quanriry oí meral.
Nominalism: Tle moneraiy oocriine claiming rlar rle unir oí
value oeiives íiomrle goveinmenr’s oesignarion oí rle legal-
renoei unir oí accounr.
..
:¡o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Tleie aie piollems oí rleoiy íull compielen-
sion oí wlicl can le arraineo only wirl rle aio oí rle
rleoiy oí inoiiecr exclange. To seek a solurion oí rlese
piollems, among wlicl, íoi example, is rle piollem oí
ciises, wirl no insriumenrs lur rlose oí rle rleoiy oí oiiecr
exclange, is inevirally ro go asriay.” (p. ¸ó:)
:. !xplain: “!acrs oo nor speak, rley neeo ro le spoken e/eut
ly a rleoiy.” (p. ¸ó¡)
¡. !xplain: “Tle Srare Tleoiy oí money—ano all acarallacric
rleoiies oí money in geneial—lieaks oown nor so mucl
lecause oí rle íacrs, lur lecause ir is nor alle so mucl as
ro arrempr ro explain rlem.” (p. ¸ó¡)
¸. !xplain: “!n a sriicr ano exacr sense . . . all money rlar is nor
clanging owneis ar rle veiy momenr unoei consioeiarion
is awairing employmenr. `eveirleless, ir woulo le incoi-
iecr ro call sucl money ‘unemployeo’, as pair oí a ieseive
ir sarisfies a oemano íoi money, ano consequenrly íulfils
rle claiacreiisric íuncrion oí money.” (p. ¸¡1)
¸. Ðoes Mises rlink rlar rle papei money expeiiences oí rle
wai yeais pose a ieíurarion oí carallacric rleoiies oí money?
(pp. ¸8o–81)
avvixbix n
IkkN!|kI0k’! N0Il 0N Ikl IkkN!|kI|0N
0| ClkIk|N IlCkN|Ck| IlkM!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money
in the Broader Sense
Money
in the Narrower
Sense
Money
Substitutes
Fiduciary
Media
Commodity
Money
Credit
Money
Fiat
Money
Token
Money
etc.
Uncovered
Bank
Deposits
and Notes
Money
Certificates
|
Tle rianslaroi’s nore in Appenoix B is selí-explanaroiy ano
neeos no summaiy leie. !owevei, we lave iepioouceo rle
rianslaroi’s excellenr oiagiam ro illusriare rle Misesian clas-
sificarion scleme iegaioing oiffeienr moneraiy conceprs.]
:¡1
6|0!!kk\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aleatory: Ðepenoenr on clance, luck, oi an unceirain ourcome.
Banker: A peison wlo lenos our orlei people’s money.
Banking School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks weie incapalle oí inoepenoenrly alreiing rle iare
oí inreiesr oi rle puiclasing powei oí money, lecause rle
maiker woulo use cleaiing opeiarions, lills oí exclange, ano
orlei reclniques ro ieceive rle cieoir ir oemanoeo íoi lusi-
ness puiposes.
Banknotes: Papei nores issueo ly lanks, rypically enrirling rle
leaiei ro a specifieo amounr oí rle money gooo.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairy ro a pay a fixeo sum oí money ro anorlei pairy ar
a specifieo íuruie oare oi upon oemano. A lill oí exclange
is geneially riansíeialle rliougl enooisemenr.
Bimetallist legislation: !ffoirs ly rle goveinmenr ro esrallisl a
fixeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr iequiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr paymenr in silvei ounces ar
a fixeo mulriple oí rle golo piice.
Cable rate: Slang useo ly íoieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
:¡¡
:¡¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Capital consumption: A meraploi oenoring rle ieoucrion in cap-
iral lecause oí a íailuie ro ieinvesr enougl our oí cuiienr
ourpur.
Capitalist: A peison wlo lenos our lis oi lei own money.
Cash (verb): To ieoeem a claim (sucl as a lanknore) ly paying rle
specifieo amounr oí rle money gooo.
Cash flow: Tle srieam oí money paymenrs ovei rime oue ro an
asser oi collecrion oí assers.
Catallactics: Tle sruoy oí exclanges oi (moie naiiowly) rle sruoy
oí moneraiy exclanges, wirl an emplasis on rle oereimina-
rion oí piice iarios.
Circulation Credit: A loan gianreo even rlougl rle lenoei ooes net
saciifice rle use oí piesenr gooos. Ciicularion cieoir involves
rle use oí fiouciaiy meoia.
Circulation credit theory of the trade cycle: Tle rleoiy oevelopeo
ly Mises (in rle piesenr look) explaining rle loom plase oí
rle lusiness cycle as oue ro rle airificial expansion oí lank
cieoir, maoe possille ly fiouciaiy meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Classical gold standard: Tle sysrem ly wlicl a counriy’s cuiiency
is ieoeemalle on oemano íoi a fixeo weiglr oí golo. !n
Mises’s usage, unoei a classical golo sranoaio, a poirion oí
rle cirizens’ casl lalances consisrs oí acrual golo coins ano
lullion ro le useo íoi making puiclases.
Clearing systems: Aiiangemenrs rlar cancel our oi “cleai” iecipio-
cal financial claims, so rlar only ner claims neeo le serrleo
rliougl rle acrual riansíei oí money.
C/essery :¡¸
Commodity Credit: A loan gianreo rliougl rle ienunciarion oí rle
use oí piesenr gooos ly rle lenoei. Commooiry cieoir may
involve money ceirificares lur nor fiouciaiy meoia.
Commodity money: A common meoiumoí exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo íoi nonmoneraiy iea-
sons.
Convertible Treasury notes: Papei nores issueo ly rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in money upon oemano.
Cover (of note issue): Assers lacking rle issue oí new lanknores.
Ðepenoing on rle iegularions, a lank miglr issue fiouciaiy
meoia nor lackeo ly money irselí, lur lackeo ly anorlei
asser sucl as a commooiry lill.
Credit: Tle aliliry ro ieceive piesenr gooos in exclange íoi rle
piomise oí oeliveiing (rypically a giearei numlei oí ) íuruie
gooos.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriy collecrively speno less on íoieign gooos ano
assers rlan vice veisa. !r is serrleo ly an inflow oí money ro
rle counriy.
Credit intermediaries: !nsrirurions rlar acr as “mioolemen” le-
rween lenoeis ano loiioweis.
Credit money: A common meoium oí exclange rlar is a claim on a
peison oi legal peison (sucl as a coipoiarion oi goveinmenr
agency), nor íalling oue unril a (possilly unceirain) íuruie
oare.
Currency peg: Tle vaiialle ano nonlegally-linoing iare ar wlicl a
goveinmenr is cuiienrly mainraining irs cuiiency’s exclange
iare againsr golo.
:¡ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Currency School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks causeo economic ciises rliougl rle expansion
ano conriacrion oí cieoir. !owevei, rle Cuiiency Sclool
rlouglr rle suppiession oí rle issue oí fiouciaiy meoia in
rle íoim oí lanknores (wlicl was cooifieo in Peel’s Acr)
woulo solve rle piollem, lecause irs memleis eiioneously
excluoeo oemano (oi cuiienr accounr) oeposirs íiom rleii
analysis.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle aliliry ro wiire oiaírs oi wirloiawmoney upon
oemano. (Tooay a sranoaio “clecking accounr” woulo le an
example.)
Debase: To oilure rle value oí rle money, íoi example wlen a
iulei inrioouces “lase” merals inro rle coinage, ieoucing
rleii piecious-meral conrenr.
Debit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriy collecrively speno moie on íoieign gooos
ano assers rlan vice veisa. !r is serrleo ly an ourflowoí money
íiom rle counriy.
Deflation: A ieoucrion in rle quanriry oí money rlar is nor offser
ly a íall in rle oemano íoi ir, sucl rlar piices reno ro íall.
(`ore rlar rlis is a reclnical economic oefinirion, nor neces-
saiily laving rle connorarions oí “oeflarion” in populai ois-
cussions.)
Deposit banking: Banking rliougl rle use oí ciicularion cieoir,
wleie rle lank ieceives oeposirs inro cuiienr accounrs íiom
one gioup oí clienrs in oioei ro make loans ro anorlei gioup
oí loiioweis. Tle oeposirois consioei rlis money ro le pair
oí rleii casl lalances, even rlougl mucl oí ir las leen lenr
our ro orleis.
C/essery :¡¡
Devaluation: Tle siruarion in wlicl a counriy on rle flexille sran-
oaio announces a laige oiop in rle value oí irs cuiiency
againsr golo.
Direct exchange: An exclange in wlicl lorl pairies inreno ro
oiiecrly use rle ieceiveo gooo, eirlei in consumprion oi pio-
oucrion.
Division of labor: Tle siruarion in wlicl people specialize in pai-
riculai occuparions, piooucing íai moie rlan rley peisonally
can consume, ano riaoe away rleii suiplus ro ieceive some
oí rle suiplus cieareo ly orleis.
Equilibriumrate of interest: Tle iare oí inreiesr coiiesponoing ro
rle riue supplies oí capiral gooos ano consumei pieíeiences
íoi piesenr veisus íuruie consumprion. Also known as rle
naruial iare oí inreiesr.
Étatism(as theory): Tle oocriine oí rle omniporence oí rle Srare.
Étatism(as policy): Tle arrempr ro iegulare all social ano economic
affaiis ly aurloiirarive commanomenr ano piolilirion.
Exchange rate: Tle iario ar wlicl one cuiiency riaoes againsr
anorlei in rle íoieign-exclange maiker.
Exchange value: Tle significance oí a gooo oue ro irs aliliry ro le
riaoeo íoi orlei gooos. (!xclange value can le qualifieo as
eirlei suljecrive oi oljecrive.)
Fiat money: Acommon meoiumoí exclange accepreo nor lecause
oí irs reclnological piopeiries, lur lecause oí a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !iar
money is nor “lackeo up” ly anyrling else.
:¡8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Fiduciary media: Money sulsrirures issueo ovei ano alove rle
money (in rle naiiowei sense) lelo in rle ieoemprion íuno.
!iouciaiy meoia aie “unlackeo.”
Fixed capital: Assers emlooieo in ouialle invesrmenrs sucl as íac-
roiies ano specializeo equipmenr rlar will le useo ovei a long
peiioo.
Flexible standard: Tle sysrem ly wlicl a counriy’s cuiiency is
ieoeemalle íoi a vaiialle weiglr oí golo, ro le announceo
ly rle goveinmenr ar irs oiscierion.
Foreign-exchange controls: Coveinmenr iesriicrions on rle mai-
ker íoi íoieign cuiiencies.
Foreign-exchange rate: Tle exclange iario lerween a oomesric
ano íoieign cuiiency.
Forward contract: Similai ro a íuruies conriacr, rlougl a íoiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oaily
maiking-ro-maiker. Òn rle oeliveiy oare, rle luyei pays rle
íoiwaio piice as oiiginally specifieo in rle conriacr. Tlus rle
íoiwaio conriacr can aclieve a posirive oi negarive maiker
value, as conoirions clange ano cause rle acrual spor piice
(on rle oeliveiy oare) ro move alove oi lelow rle oiiginally
specifieo íoiwaio piice.
Free banking (among modern Austrians): Tle oocriine loloing rlar
a íiee maiker in lanking will pick rle oprimal íiacrion oí
ieseives, wlicl may le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue oí fiouciaiy meoia
pei se causes rle lusiness cycle, only rlar excess quanriries
oí fiouciaiy meoia oo, ano rlar sucl an ourcome is almosr
always associareo wirl goveinmenr-suppoireo issues oí fiou-
ciaiy meoia.
C/essery :¡p
Free good: A gooo rlar las a piice oí zeio, lecause ir is nor scaice.
Tleie is enougl oí rle gooo ro sarisíy all luman wanrs rlar
ir can reclnically íulfill.
Freely-vacillating currency: A cieoir oi fiar cuiiency rlar las no
official peg ro golo ar all. !rs maiker piice flucruares jusr as
any commooiry.
Futures contract: A sranoaioizeo conriacr, riaoeo on an oiganizeo
exclange, wleie rwo pairies agiee ro exclange a gooo ar
a specifieo piice (rle íuruies piice) ar a specifieo íuruie
oare (rle oeliveiy oare). As conoirions clange ano alrei rle
íuruies piice peiraining ro rle oeliveiy oare, rle exclange
will cieoir oi oelir rle accounrs oí rle luyei ano sellei oí
rle oiiginal íuruies conriacr on a oaily lasis ro ieflecr rle
clange. (!í rle íuruies piice goes up, rle luyei gains ano rle
sellei loses, erc.) Tlese oaily episooes oí maiking-ro-maiker
iesroie rle maiker value oí rle íuruies conriacr irselí ro zeio.
!pon oeliveiy, rle sellei oí rle íuruies conriacr oeliveis rle
gooo, wlile rle luyei pays rle cuiienr spor piice íoi rlar
oare, net rle íuruies piice as oiiginally specifieo.
Gold-exchange standard: Tle sysrem ly wlicl a counriy’s cui-
iency is ieoeemalle on oemano íoi a fixeo weiglr oí golo,
rlougl somerimes only ly orlei goveinmenrs ano cenrial
lanks. !n Mises’s usage, unoei a golo-exclange sranoaio
rle cirizens useo only papei nores in eveiyoay riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Gold standard: Tle aiiangemenr ly wlicl a narion’s money (sucl
as rle !.S. oollai oi rle Biirisl pouno) can le ieoeemeo íoi
a oefinire weiglr oí golo.
:¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Golden rule (of bank lending): Marcling rle maruiiries oí assers
ano lialiliries, so rlar rle lank is nor oepenoenr on rle alil-
iry ro “ioll ovei” maruiing oelr. !í a lank ooes nor íollowrle
goloen iule, incieases in sloir-reiminreiesr iares can leao ro
oisasrei, wlen rle lank musr pay irs own cieoirois wlile irs
assers aie nor yer oue.
Goods of higher orders: Cooos useo ro pioouce consumei gooos.
(Acapiral gooo useo ro pioouce a consumei gooo is a secono-
oioei gooo. A capiral gooo useo ro pioouce a secono-oioei
gooo is a rliio-oioei gooo, erc.)
Goods of the first order: Consumei gooos.
Gresham’s Law: Populaily summaiizeo as “lao money oiives our
gooo,” rle plenomenon ly wlicl people will lolo money
rlar is unoeivalueo ly legislarion, ano will speno rle money
rlar is oveivalueo ly legislarion. !oi example, ií limerallisr
legislarion iequiies rlar meiclanrs accepr silvei ano golo ar
rle iario oí 1ó-ro-1, wlen in íacr rle acrual maiker exclange
iare is :o-ro-1, rlen eveiyone will riy ro luy wirl silvei, ano
no one will use golo íoi making puiclases. Colo will seem
ro oisappeai, ano only silvei will le useo in commeice. !oi a
oiffeienr example, ií rle goveinmenr passes legal renoei laws
on all goveinmenr-srampeo coins, rlen coins wirl low meral
value (sucl as !.S. quaireis minreo in rle yeai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. quaireis minreo in rle yeai 1p¸o) will le loaioeo ly
people wlo iecognize rle value oí rle silvei.
Hedging transaction: A financial riansacrion in wlicl an inoivio-
ual arremprs ro ieouce lis oi lei exposuie ro a maiker our-
come. !oi example, someone wlo lelieves rlar Srock XYZ
will ourpeiíoim mosr orlei srocks miglr “go long” ly pui-
clasing seveial rlousano slaies oí ir. Bur ro leoge limselí
C/essery :¸1
againsr a geneial íall in rle maiker, le miglr also “go sloir”
an inoex íuno loloing all rle srocks in rle S&P ¸oo. Tlus,
even ií XYZ íalls in piice, rle invesroi will srill make money,
so long as Srock XYZ oiops ly a smallei amounr rlan mosr
orlei srocks.
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeoly counreiacring rle pieoicrions
oí a naïve quanriry rleoiy oí money.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial.
Illusive standard: Tle sysrem ly wlicl a counriy’s cuiiency is
peggeo ro golo ar nonmaiker iares. Tle exclange iare is
mainraineo nor rliougl rle manipularion oí golo ieseives
lur iarlei rliougl rle eníoicemenr oí íoieign-exclange
conriols.
Indirect exchange: An exclange in wlicl ar leasr one pairy inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir away in rle
íuruie íoi somerling else.
Inflation: An inciease in rle quanriry oí money (in rle lioaoei
sense oí rle reim) rlar is nor offser ly a coiiesponoing
inciease in rle oemano íoi money (in rle lioaoei sense oí
rle reim), wirl rle necessaiy iesulr leing a íall in rle pui-
clasing powei oí money. (`ore rlar rlis is a reclnical eco-
nomic oefinirion, nor necessaiily laving rle connorarions oí
“inflarion” in populai oiscussions.)
Inflation tax: Tle ieoisriilurion oí wealrl íiom rle cirizeniy ro
rle goveinmenr (oi irs oesignareo leneficiaiies) rliougl
inflarion.
:¸: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Inflationism: Moneraiy policy rlar seeks ro inciease rle quanriry
oí money.
Institutional unemployment: Tle siruarion wleie woikeis aie qual-
ifieo ano willing ro accepr jols ar pievailing wage iares, yer
cannor fino employeis ro liie rlem.
Interest: !ncome acciuing ro rle ownei oí íuruie gooos as rley
maruie inro piesenr gooos, oue ro rle liglei valuarion
placeo on piesenr veisus íuruie gooos.
Lawof diminishing marginal utility: Tle iule, oeoucille íiom rle
naruie oí economizing acrion, rlar eacl aooirional unir oí
a gooo oi seivice will lave a lowei value, lecause a peison
will allocare successive unirs ro sarisíying enos rlar aie less
ano less impoiranr.
Legal tender: An irem rlar rle goveinmenr oeclaies ro le valio íoi
rle paymenr oí oelrs oenominareo in money, ar pai value.
Liquid (adjective): Tle aliliry oí leing solo íoi rle íull maiker
piice wirl a veiy sloir seaicl rime. (!oi example, a slaie
oí coipoiare srock is mucl moie liquio rlan a louse.)
Liquidity: Tle siruarion in wlicl an insrirurion’s assers will oelivei
a casl flowallowing ir ro pay irs lialiliries on rime. (All liquio
enreipiises aie also solvenr, lur nor necessaiily vice veisa.)
Loan banking: Banking rliougl rle use oí commooiry cieoir,
wleie rle lank ieceives loans íiom one gioup oí saveis in
oioei ro irselí make loans ro anorlei gioup oí loiioweis.
Tle saveis oo nor consioei rlis money as pair oí rleii casl
lalances ouiing rle reim oí rle loan ro rle lank.
Lower gold point: !noei rle golo sranoaio, rle minimum maiker
piice oí golo (quoreo in a counriy’s cuiiency) lenearl wlicl
C/essery :¸¡
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi cirizens ro impoir golo ano exclange ir wirl rle
aurloiiries ar rle official ieoemprion iare íoi rle oomesric
cuiiency.
Market value: Synonymous wirl rle oljecrive exclange value oí a
gooo, rypically quoreo in money reims.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion oí riaoing ir away ro acquiie somerling else in rle
íuruie.
Metallism: As oefineo ly Knapp, rle moneraiy oocriine claiming
rlar rle unir oí value is a ceirain quanriry oí meral.
Mixed economy: An economy possessing aspecrs oí lorl capiral-
ism ano socialism, in wlicl piivare inoiviouals ierain nom-
inal owneislip oí rle means oí piooucrion, lur rle gov-
einmenr exrensively iegulares rleii use oí rlis piopeiry,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Monetary policy: Coveinmenr oi cenrial lank effoirs ro alrei rle
puiclasing powei oí money.
Monetizing government deficits: Coveiing rle oiffeience lerween
goveinmenr expenoiruies veisus rax ieceiprs ano loans íiom
piivare lenoeis, ly iesoir ro rle piinring piess.
Money: A meoium oí exclange rlar is geneially accepreo in rle
communiry. Money rypically sranos on one sioe oí viirually
eveiy exclange.
Money certificates: Money sulsrirures rlar aie íully lackeo ly
money (in rle naiiowei sense).
:¸¸ Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Money cranks: Veiy naïve wiireis wlo lelieve rlar scaiciry is an
airificial insrirurional consriainr, ano rlar piospeiiry iequiies
only a sufficienr willingness ro cieare moie money ano/oi
issue moie lank cieoir.
Money in the broader sense: Tle acrual money gooo (wlerlei
commooiry, fiar, oi cieoir money), plus money sulsrirures.
Money in the narrower sense: Tle acrual money gooo (wlerlei
commooiry, fiar, oi cieoir money), nor incluoing money sul-
srirures.
Money substitute: A peiíecrly secuie ano insranrly ieoeemalle
claim on money, wlicl irselí ciiculares as money (in rle
lioaoei sense) lecause ir íulfills rle íuncrions oí money.
Money rate of interest: Tle iare oí inreiesr oereimineo in rle mai-
kerplace íoi loans oí money. (Tle money iare can oeviare
íiom rle equililiium |oi naruial] iare oí inreiesr, in a pio-
cess rlar is explaineo in pair i i i oí rle look.)
Naïve inflationism: !nflarionism suppoireo ly rle lelieí rlar
money consrirures wealrl.
Nominalism: Tle moneraiy oocriine claiming rlar rle unir oí
value oeiives íiomrle goveinmenr’s oesignarion oí rle legal-
renoei unir oí accounr.
Objective exchange value of money: Tle possililiry oí olraining a
ceirain quanriry oí orlei gooos in exclange íoi a unir oí
money.
Objective theory of value: An explanarion oí value rlar ielies on rle
oljecrive piopeiries oí a gooo, sucl as irs cosr oí piooucrion
oi rle amounr oí laloi rlar wenr inro irs consriucrion. (Tle
C/essery :¸¸
classical economisrs, sucl as AoamSmirl ano Ðavio Ricaioo,
lelo an oljecrive rleoiy oí value.)
Paper standard: Tle aiiangemenr ly wlicl rle goveinmenr ooes
nor ieoeem papei nores íoi a piecious meral. (A papei sran-
oaio sranos in conriasr ro a golo sranoaio.)
Parallel Standard: Amoneraiy sysremin wlicl rwo oiffeienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as money unoei a Paiallel Sranoaio.)
Peel’s Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei oí issuing newnores away íiompiivare lanks
ano vesreo ir complerely wirl rle Bank oí !nglano, wlicl
irselí was iequiieo ro mainrain 1oo peicenr merallic lack-
ing íoi any new nores rlar ir issueo. !owevei, rle Acr ciu-
cially oio net impose sucl a iesriicrion on rle exrension oí
oeposirs, meaning rlar piivare lanks coulo cieare moie fiou-
ciaiy meoia ly gianring loans (nor lackeo ly golo) ro rleii
cusromeis.
Price controls: Coveinmenr oeciees rliearening fines oi orlei
punislmenr íoi people riaoing ar piices rlar aie eirlei roo
ligl (in rle case oí a piice ceiling) oi roo low (in rle case oí
a piice flooi).
Price of money: Tle quanriry oí gooos (oi seivices) rlar musr le
given up in exclange ro acquiie a unir oí money.
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiy economy, piices aie rypically quoreo in
reims oí rle money gooo.
Private capital: Tle aggiegare oí rle piooucrs rlar seive as a
means ro rle acquisirion oí gooos.
:¸ó Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Purchasing power: Tle amounr oí gooos ano seivices rlar a unir
oí money can commano lecause oí rle vaiious piices in rle
maiker.
Purchasing power/inflation premium: An inciease in rle conriac-
rual iare oí inreiesr oue ro rle expecreo iise in piices.
Purchasing Power Parity: Tle rleoiy sraring rlar rle exclange
iario lerween rwo monies is oereimineo ly rle iespecrive
exclange iarios oí eacl money ano orlei gooos ano seivices.
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei oí money ly ieíeience ro rle quan-
riry oí money ano rle oemano ro lolo ir. (Tleie aie many
veisions oí rle quanriry rleoiy, wirl rle moie meclanical
ones—wlicl posir rlar a ooulling oí rle money srock will
leao ro a ooulling oí all piices—leing olviously wiong.)
Real wages: \age iares ielarive ro rle piices oí gooos ano seivices.
Regression Theorem: Mises’s aigumenr rlar rle cuiienr puiclas-
ing powei oí money is influenceo ly people’s memoiy oí
yesreioay’s puiclasing powei. Tle causaliry is riaceo lack
in rime, unril rle poinr ar wlicl rle money gooo was valueo
as a iegulai commooiry in oiiecr exclange.
Restorers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ar a lisroiic paiiry, a move rlar woulo iequiie oeflarion.
Restrictionism/Deflationism: Moneraiy policy rlar aims ar iaising
rle oljecrive exclange value oí money.
Scale of values: An analyrical rool ly wlicl rle economisr inrei-
piers rle acrions oí an inoivioual, wlo suljecrively ianks pai-
riculai unirs oí gooos ano seivices in oioei íiommosr ro leasr
impoiranr.
C/essery :¸¡
Seigniorage: Tle oiffeience lerween rle maiker value oí money
ano rle cosr ro pioouce ir.
Shortages: A sloiríall in rle quanriry oí gooos offeieo íoi sale,
compaieo ro rle amounr consumeis wisl ro puiclase. Sloir-
ages aie causeo wlen a piice ceiling lolos rle piice lelow
rle maiker-cleaiing level.
Social (productive) capital: Tle aggiegare oí rle piooucrs inrenoeo
íoi employmenr in íuirlei piooucrion.
Solvency: Tle siruarion in wlicl rle maiker value oí an insriru-
rion’s assers exceeos irs lialiliries.
Stabilizers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ly locking in rle cuiienr maiker piice oí golo.
Subjective theory of value: An explanarion oí value rlar ielies on
inoiviouals’ suljecrive iankings oí pairiculai unirs oí gooos
ano seivices. (Tle so-calleo Maiginal Revolurion oí rle
eaily 18¡os—speaileaoeo ly Cail Mengei, \illiam Sranley
Jevons, ano !éon \alias—oveiruineo rle oljecrive rleoiy
oí value ano usleieo in rle suljecrive rleoiy.)
Subsistence fund: A concepr useo ly Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave fiisr accumulareo, in oioei
ro íeeo ano orleiwise suppoir rle woikeis as rley engage in
rime-consuming piooucrion piocesses.
Token coins: Coins rlar seive as iepiesenrarives oí money (usually
in veiy small oenominarions), even rlougl rley oo nor con-
rain rle íull weiglr oí meral in rle case oí a commooiry
money.
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice oí golo (quoreo in a counriy’s cuiiency) alove wlicl
:¸8 Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi íoieigneis ro exclange rle oomesric cuiiency íoi
golo (ar rle official ieoemprion iare, wlicl is lelow rle cui-
ienr maiker piice), ano lave rle golo slippeo our oí rle oiig-
inal counriy.
Use-value: Tle significance oí a gooo oue ro irs aliliry ro le
oiiecrly useo ly rle ownei in consumprion oi piooucrion.
(!se-value can le qualifieo as eirlei suljecrive oi oljecrive.)
Value: Tle impoirance rlar an inoivioual places on a pairiculai
unir oí a gooo oi seivice.
(Wicksellian) natural rate of interest: Ðevelopeo ly economisr Knur
\icksell, rle lyporlerical iare oí inreiesr rlar woulo occui
ií gooos weie riaoeo oiiecrly againsr eacl orlei wirlour rle
use oí money.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneially, a measuie oí a fiim’s aliliry ro quickly ruin some
oí irs assers inro casl in oioei ro finance an expansion.
|N0lK
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B
Bankei, 1¡¸, 1¡¡
Banking
lusiness oí, 1¡¸
oeposir, 1¸o
íiacrional ieseive, 1¸o, 1¸8,
1¡1
íiee, 1¡1–¡:
loan, 1¸o
Sclool, 1¸¡, 1¸¡, 1óo, 1¡¸,
::8–:p
Banknore, :ó, 8¸, 1¡ó, 1¡p, 1¸¸
Bills oí exclange, 1¡p, 1¸1
Bimerallism, ¡8
Bolm-Baweik, !ugen von, 18,
ó:, 81, 1¡¡, 1¡p–8o
Business cycle, 1¡¡, 1¡¡–¡8, 18¸,
1po, ::o
C
Calle iare, 8ó
Capiral
consumprion, 1oó, 11o
piivare, ¸¸, ¸¸
social, ¸¸, ¸¸
Capiralisr, 1¡¸, 1¡¡
Ciicularion cieoir, 1¡¸, 1¡8,
1¡p, 1¸o, 1¸¡
Ciicularion cieoir rleoiy oí rle
riaoe cycle. Scc Business
cycle
Classical economisrs, 11, 1¡, 18,
:o
Cleaiing sysrems, 8¸, 1¸ó–¸¡
Commooiry cieoir, 1¡¸, 1¡8,
1¸o
Commooiry money, :¡, :ó–:¡,
¡p
Cosr oí living, 8ó, 8¡
Cieoir, 1¸ó, 1¸1, 1¸p
Cieoir money, :¡, :¡, :p–¡o, ¡ó,
¡8, ¡p, 1ó¡, 1óp–¡o, :oó
Cieoir policy, 18¡–p¸
Cieoir riansacrions, 1o¸–oó,
1¡¸, 1¡¡–¡8
Cuiiency Sclool, 1¡¸, 18¸,
1p1–p:, 1p¸, ::8–:p
Cuiiency specularion, 1:8–:p,
1¡:
D
Ðeflarion, 11¸–1ó, 11p, 1:o,
18p, :1¡–18
Ðeflarionism, 11¸–1ó, 11p
:¸p
:¸o Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
Ðiminisling maiginal uriliry,
law oí, 11, 1¸
Ðiiecr exclange
oefinirion, ¡, ¸
piice oereiminarion in, 81
iole in rleoiy oí money, ó¡,
óp, ::¡, :¡:
Ðivision oí laloi, ¸
E
!rarism, 1:¸, 1:¡, 1¡:
F
!iar money, :¡, :¡, ¡ó, ¡8, 8¸,
1ó¡, 1¡1, :oó
!iouciaiy meoia, ó8, ¡¡, 1¡¸,
1¡ó, 1¡8, 1¡p, 1¸o, 1¸¡,
1¸¸–¸1, 1¸¡–ó¡, 1ó¸–¡¸,
18¸, :1¸–1ó, ::o
!islei, !iving, 1¸, 18, 18p–po
!oieign exclange iare, 8ó, p:,
1:1, 1¡o, 1¡:, :o¡–o8, :11
!oiwaio conriacr, 1op
!uruies conriacr, 1op
G
Colo sranoaio, :ó, p¡, 11¡, 1:o,
1:1, 18¡–8¸, 188–8p,
1p¡–p8, :oo, :o¡, :o¸–11,
:1¡–:¡
Coloen iule (oí maruiiry marcl-
ing), 1¡¡
Cooos
consumprion, ¸¡, ¸1, 8¸, 8p,
1¡¸
íiee, 1¸
oljecrive exclange value oí,
óo–ó1
piesenr veisus íuruie, 1o¸,
1¡¸, 1¡¡–¡8, 1¡p
piooucrion, ¸¡, ¸1, 8¸, 8p,
1¡¸
suljecrive exclange value oí,
óo–ó1
Cieslam’s !aw, ¡8
H
!oaios, ¡¸–¡ó
!oiwirz, Sreve, 1¡1–¡:
I
!noex numleis, pp–1o¡, 18p–po
!noiiecr exclange
oefinirion, ¡, ó
emeigence oí, ¡–¸, ¸–¡
ineviraliliry, ¸¸
ielarion ro fiouciaiy meoia,
1¡p
ielarion ro rleoiy oí money,
:¡o, :¡:
!nflarion, 11¸–1ó, 118–1p, 1:o,
1:¸, 18¸, 18p, 1p8, :o¡,
:1¸, :1¡–18
!nflarionism, 11¸–1ó, 118–1p,
1:o, 1:¸, 1:¸–:ó, 1:¡–:p
!nreiesr
money iare oí, 1¡¸, 1¡ó–¡8,
18:
naruial iare oí, 1¸¸, 1¸¡, 1óo,
1¡ó–¡8, 18:
souice oí, 1¡¸, 1¡p
¡nácx :¸1
J
Jevons, \illiam Sranley, :o
L
!egal renoei legislarion, :ó, :p
!iquioiry, :¡, ¡o, 1ó¸, 1ó8–óp,
1p¸
M
Maiginal ievolurion, :o
Meoium oí exclange, ¸–ó, ¸¡,
8o
Mengei, Cail, 8, 1:, :o, ¡p, ¸p,
ó:, ó8, ¡o, ¡1, 81, 1¡p
Moneraiy policy, 11¸–::
Money
lioaoei sense, in rle, 1¡8,
1¸ó, 1¸¡, 1¸¸–¸¡, 1¸8
ceirificares, ó8, ¡¡
commooiry. Scc Commooiry
money
cianks, ¸o, ¸:
cieoir. Scc Cieoir money
oefinirion, ¡, ¸
fiar. Scc !iar money
íuncrion oí, ¡–¸, ¸
inoex oí piices, 1¡, 1¸p
measuie oí maiker exclange
value, 1ó
naiiowei sense, in rle, :ó,
1¸¸, 1¸¡, 1¸¸–¸¡, 1ó¸,
1ó¡–ó8, 1óp–¡o, 18ó
oljecrive exclange value oí.
Scc Money, puiclasing
powei oí
oiigin oí, ¡–¸, ¸–¡, ó¡, ¡1
puiclasing powei oí, :¡, :¸,
:8, ¡¡, ¸¡, ¸p–óo, ó¡–ó8,
óp, ¡ó–¡¡, ¡p–8o, 8ó,
pp–1o1, 1op–1o, 11¸–1ó,
1¸¸–¸ó, 1ó8, 1po
quanriry rleoiy oí. Scc Çuan-
riry rleoiy oí money
seconoaiy íuncrions oí, ¸, ¡,
¡¸, ¡¡
socialism ano, ¸p, ¸1
souno, 1p¡–:o¡, :1¡–:¡
srare’s influence on, ¡8
srare rleoiy oí, ¡¡, ¡8, ¡p,
::¡–:8, :¡:
sulsrirure, :¡, :¸–:ó, :p–¡o,
¡ó, ¡p, 1¸1, 1ó¡, 1óp–¡o
supply ano oemano, ¡:,
¡¡–¡8, 8¸, 1¸¸–¸¡, 1¡ó
P
Papei sranoaio, :ó
Paiallel sranoaio, p1
Peel’s Acr, 1¸¡, 18¡, 18¸–8ó,
1p¸
Piices
causeo ly suljecrive pieíei-
ences, 1¸, ¸¡–¸8, ¸p
conriols on, :8, 1:¸, 1:¡–:8,
1¡o, 1¡:, :o¡–o8
Puiclasing powei paiiry, p:, p¡,
:o¡
Q
Çuanriry rleoiy oí money, ó8,
¡o, ¡:, ¡¡–¡¡
:¸: Stuáy Cuiác te Thc Thcery ej Mency ená Crcáit
R
Regiession rleoiem, 81–8:
Ricaioo, Ðavio, :o
Rorllaio, Muiiay, 1¸o, 1¡1–¡:
S
Saving, ielarion ro sulsisrence
íuno, 18o
Scale oí values, 11, 1¸, :1, 8:
Sclumperei, Josepl, ::8, :¡o
Seignioiage, 1¸¸
Selgin, Ceoige, 1¡1–¡:
Smirl, Aoam, :o, 1ó¡
Solvency, 1ó¸, 1ó8–óp, 1p¸
T
Token coins, :ó, :p, 8o, 1¸¸
Tiaoe lalance p:–p¡, p¸–p¸,
11p, 1:1, 1:¸–:ó, 1:8
Tiaoe cycle. Scc Business cycle
U
!nemploymenr, connecrion
wirl inflarion, 1p8
!riliry, 11, 1¸, 18–1p
V
Value
cosr rleoiy oí, 18
oefinirion, 11, 1¡
laloi rleoiy oí, 18
measuiemenr oí, :1
oljecrive rleoiy oí, 11, 1¡,
18, :o
oljecrive use, ó:, ó¸
suljecrive rleoiy oí, 11,
1¡–1¸, 18, :o, ¸¡–¸8,
¸p–óo, ó1, ó:, ó¸, ó¡–ó8
suljecrive use, óo–ó1, ó:, ó¸,
8¸, 8¸
roral, 1¸
W
\alias, !éon, :o
\icksell, Knur, 1ó1, 1¡¡, 18:
\iesei, !iieoiicl von, 18, :1,
ó:, ¡8, 8p, 1oo

     

  

Study Guide


THE THEORY OF MONEY AND CREDIT
  

Robert P. Murphy

LvMI
MISES INSTITUTE

org : ---- .The Theory of Money and Credit was translated from the German by H.0/ Ludwig von Mises Institute  West Magnolia Avenue Auburn.. Copyright ©  by the Ludwig von Mises Institute Published under the Creative Commons Attribution License . http://creativecommons.E. Batson and published by Jonathan Cape (London) in .org/licenses/by/3. Alabama  Mises.

..... The Determinants of the Objective Exchange Value. . . THE VALUE OF MONEY . . ... . .. . The Enemies of Money . Money and the State  .... .. . . .. . . .... . .... The Various Kinds of Money . ..  v .. On the Measurement of Value . THE NATURE OF MONEY . . ... .. .... or Purchasing Power. .... ........ . .. . . . . .  .  II.  .. . .. .  . ... .. . . .. . . . . CONTENTS Preface ... . .. .. . . . . ... ..... . ... .. .. . . ... . .. . . ...  . . . .. The Concept of the Value of Money . ... ... .. . . .. .. ... .. .. . ... . .. .. The Function of Money . of Money ... . . ix I.. . . .. . .. .  ... . .. . . . .. Money as an Economic Good .. . . .. ... . . .. . .... .

. . . . . . . . MONETARY RECONSTRUCTION . The Evolution of Fiduciary Media . . . . . . . . . . . . . . Credit. . . . . The Problem of Measuring the Objective Exchange Value of Money and Variations in It . . . . . . .  . . . . . . . .  . . . . . . . . . The Redemption of Fiduciary Media .  .vi Study Guide to The Theory of Money and Credit . . . . . . . . .  . . . Money. . . . Problems of Credit Policy . . . . The Return to Sound Money . The Social Consequences of Variations in the Objective Exchange Value of Money .  . The Problem of the Existence of Local Differences in the Objective Exchange Value of Money . Contemporary Currency Systems . . . . . . . . . . . . . . . . . . .  . . . . . .  . and Interest . . . . . . . .  IV.  . . MONEY AND BANKING . Fiduciary Media and the Demand for Money . . . . . . . .  . The Business of Banking .  . . . . . . . Monetary Policy .  . . . . . . . .  . . . . . . The Exchange Ratio Between Money of Different Kinds . . . . The Principle of Sound Money . . . The Monetary Policy of Étatism III. . . . . . .  . .  . . .

. . . . . . . . .  . Translator’s Note on the Translation of Certain Technical Terms . . . . . . . . . . . . . . . . . . On the Classification of Monetary Theories . .  Glossary . .  . . . . . . . . . . . . . . . . . . .Contents vii APPENDICES . . .  Index . . . . . . . . . . . . . . . .

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...... The present study guide seeks to change that common impression.. The Theory of Money and Credit is a hard book to read.. He successfully applied subjectivist... even at a relatively young age.. many were understandably skeptical....... Mises integrated (what we now call) microeconomics with macroeconomics.... With the help of this study guide..... I have found that Mises’s work can be difficult at times.. saying it was “important reading for these troubled times.. As if that weren’t enough. In preparing it. he or she will see that Mises systematically builds his argument from one chapter to the next.. One of the most enjoyable surprises for me was to discover just how impressive an economist Ludwig von Mises really was.............. PREFACE When “Joe the Plumber”—a small business owner who became a hero among conservatives when he challenged candidate Barack Obama’s proposed tax hikes in the  presidential campaign— compiled a list of Christmas book recommendations for The American Spectator... first published a century ago.......... if the reader will put in the effort to work through the book methodically..... Mises gave a systematic explanation of the boom-bust cycle..... In other words................ marginal utility theory to the case of money—a task that had eluded earlier theorists in the Austrian tradition...” Although Austrians were glad that someone was bringing attention to Mises’s classic work. blaming it on the artificial ix .. but there is a definite method behind it. After all...... he included The Theory of Money and Credit..... even the layperson will be able to unlock the amazing insights contained in this tome.. In this single work..........

For one thing. In the final section of the book (written after the original release). which often behave differently from the depiction in academic writings.” There is also a list of new terms for each chapter (with a full list included in the back as a glossary) and finally a list of five study questions to ensure that the reader is grasping the essential points of each chapter. He also shows a practical understanding of actual financial markets. Robert P. I hope that this study guide eases the understandable “intimidation factor” and allows a new generation of readers to experience the wealth of wisdom contained in Mises’s first major work. down to the individual section headings. Each chapter contains an overall summary (except for very short chapters). Yet upon my most recent reading. The format of the study guide follows the  edition of The Theory of Money and Credit published by the Mises Institute. These accomplishments alone would have earned Mises an important seat in the history of economic thought. spelling has been updated. Mises offers very wise policy recommendations for returning to sound money. I realized that Mises showcases much more of his talent. followed by a detailed outline. and in a few instances. However.  . Tennessee July.x Study Guide to The Theory of Money and Credit expansion of bank credit and the corresponding reduction of the money rate of interest below the “natural” rate. As an insightful plumber (and layperson) has remarked. hyphens have been dropped. I follow Mises’s work very closely. In order to modernize the style. it is important reading for these troubled times. he displays a thorough command of the relevant literature. no content has been altered from the English translation as published by the Mises Institute. not only in pure economic theory but also in applied topics such as money and banking. Then I include a section on either “Notable Contributions” or “Technical Notes. Murphy Nashville.

..............................   ............................................... THE NATURE OF MONEY .....................

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.... Because every trader would act in this fashion............. those goods that were initially more marketable.. at least one person in the transaction accepts a good that he intends to trade away in the future for something else. Some goods would have had a far broader market than others..... A trader who came to market with an unmarketable good would place himself in a more advantageous bargaining position if he engaged in an indirect exchange... In a direct exchange...... Even before the use of money......... people accept goods in trade that they intend to personally use......  THE FUNCTION OF MONEY Summary Money is necessary in a society based on private property and the division of labor................. There is no medium of exchange involved in the transaction. ....... a community would gravitate to one or a few commodities that would be acceptable to everyone in trade. whether for consumption or production................ by trading his good for something that was more marketable.. In an indirect exchange.... traders would have quickly discovered the benefits of indirect exchanges... This is how money emerged from an initial state of  . The function of money is to facilitate these trades: Money is a commonly used medium of exchange..... Over time.... The item that is accepted in the first trade is a medium of exchange. would see their marketability enhanced even further.... and the use of media of exchange to facilitate them..

Historically the market has often chosen gold and silver as money. Although other writers outline other “functions” of money— such as a standard of deferred payments or a store of value—these all flow from its definition: money is a commonly accepted medium of exchange. . Study Guide to The Theory of Money and Credit barter.

.. radios. Bill... in a society based on the division of labor. but he thinks Alan’s muffin looks ...... suppose Alan has a muffin but he is really hungry for fish... .... The General Economic Conditions for the Use of Money A person living by himself on a tropical island would not need money...... there is no one person or group who decides how scarce resources will be deployed.... For example..Chapter : The Function of Money  .... Each individual must make his or her own plans......... and decided which portion of the total output each person would get to consume..... The function of money is to facilitate these trades: Money is a commonly used medium of exchange... The Origin of Money In a direct exchange.. copper mines)........... each of which specialized in producing different goods and services—could get by without the use of money... Even an entire community—consisting of thousands or millions of households.. people accept goods in trade that they intend to personally use. factories.. money is essential...... and where private individuals own both consumption goods (TVs..... so long as they produced everything they needed within the household. Several people living in the same household would not need money either........ has a net (which can be used to catch fish) that he doesn’t really want.. which usually require exchanging property for other people’s property. on the other hand........ Big Macs) and producer goods (tractors. However.. In such a society... Chapter Outline .. whether for consumption or production.. assuming there were a central group or person who acted as a “planner” and told everyone what to make............

the person accepts a good because he plans on trading it away again in the future. . this is a direct exchange. but is very cold at night. For example. philosophy books. hates birds. Even before the use of money. and she wants to exchange it for a certain parakeet. These two successive trades would make all three people happier. In this scenario. however. The woman with the quilt. the trader could improve his bargaining position by trading away his telescope for something more marketable. If Alan trades his muffin for Bill’s net. but is instead interested in obtaining a new radio. The owner of the radio. there must have been a time when people had goods and traded with each other. In this example. no direct exchange is possible. such as eggs. However. In this case. is very hard of hearing and has no use for a radio. at least one person in the transaction accepts a good that he doesn’t intend to consume or use himself in production. milk. suppose there is a woman who has knitted a quilt. Study Guide to The Theory of Money and Credit delicious. machinery). In an indirect exchange. the woman could trade away her quilt for the radio—even though she personally has no use for it—and then trade the radio in turn for the parakeet. There is no medium of exchange involved in the transaction. leather) would have had a far broader market than others (telescopes. Unfortunately. the radio would be a medium of exchange. Rather. but before money had arisen. Logically. A trader who came to market with an unmarketable good such as a telescope probably wouldn’t be able to quickly find someone who (a) had the items that the first trader hoped to acquire and (b) wanted a telescope. Some goods (eggs. the man who owns the parakeet doesn’t want a quilt. even if the trader had no desire to eat the eggs. unfortunately. traders would have quickly discovered the benefits of indirect exchanges—and the use of media of exchange to facilitate them.

In any particular indirect exchange. a trader would naturally prefer to sell his own wares in exchange for the most marketable medium of exchange. or a store of value through time—these all flow from its use as a common medium of exchange. Although other writers outline other “functions” of money—such as a standard of deferred payments. A commonly accepted medium of exchange is money. . or a facilitator of credit transactions. which therefore serves to facilitate the exchange of goods and services. Over time. . because this would place him in the most advantageous position as he continued looking for the goods he ultimately desired. those goods that were initially more marketable. Historically. a community would gravitate to one or a few commodities that would be acceptable to everyone in trade. The “Secondary” Functions of Money Money is.Chapter : The Function of Money  Because every trader would act in this fashion. but also by people intending to use them as media of exchange. this is a crucial “function” and we see money’s importance by focusing on it. gold and silver have been the two commodities most frequently employed as money. a common medium of exchange. In a market economy. would see their marketability enhanced even further: They would be demanded not only by people intending to use them directly. They have very similar properties and are both excellent media of exchange. by definition.

.. • ........................... whose  Grundsätze (translated as Principles of Economics) is the founding work of what is called “Austrian” economics.. where each person only seeks to improve his own position at each step in the process.... Study Guide to The Theory of Money and Credit ...... This can be confusing.. Menger is credited in the annals of the history of economic thought with giving the first satisfactory explanation of the origin of money. Among his other contributions......... Even in modern textbooks. Rather than assuming that money must have been created by an edict issued by a powerful king or wise tribal leader....... Menger showed that step-by-step evolution from an initial state of barter to a monetary economy.. Menger’s approach —followed by Mises—is refreshingly clear: Money is defined as a commonly accepted medium of exchange.......... Important Contributions • Mises references Carl Menger... ................. because it makes it hard to pin down exactly what money is and why it so important......... writers will list several “functions” of money...... and this characteristic enables all of the other “functions” attributed to it...

. Indirect exchange: An exchange in which at least one party intends to hold the received good.... Medium of exchange: A good that is accepted in exchange..... either in consumption or production... with the intention of trading it away to acquire something else in the future...Chapter : The Function of Money  .............................. and trade away their surplus to receive some of the surplus created by others.. New Terminology Direct exchange: An exchange in which both parties intend to di- rectly use the received good. Money: A medium of exchange that is generally accepted in the community............ producing far more than they personally can consume... Division of labor: The situation in which people specialize in par- ticular occupations............................ ... ........... in order to trade it away in the future for something else.. Money typically stands on one side of virtually every exchange.

...... ... explain how each is related to money’s role as a commonly accepted medium of exchange.......... Study Questions ........... ) .................. Did media of exchange exist before the existence of money? (pp.......... ) .......... Can you think of reasons that traders eventually gravitated toward gold and silver as money..... For the various secondary functions of money listed by Mises... –) . (pp.. as opposed to other items such as cattle or aluminum? ...... –) . Would a society based on total central planning in both production and consumption need money? Why or why not? (p.......... Study Guide to The Theory of Money and Credit .......... Why doesn’t a direct exchange involve the use of a medium of exchange? (p....

......... which traces the source of value to the mind of the individual actor...................” what he means is that if forced to give up one diamond or one gallon of water........... Value is the significance given to a particular good by a person....  ... If someone says. nd. Individuals’ subjective valuations give rise to objective exchange ratios or prices...... etc. Exchanges will occur until there are no more mutually beneficial trades.  ON THE MEASUREMENT OF VALUE Summary The classical economists relied on an objective theory of value.... It is impossible to perform arithmetical operations on the marginal utilities of various units in order to compute the “total utility” or total value of the entire stock of the good. and naturally thought that money was a measuring rod of this objective value..... The law of diminishing marginal utility states that the value of the last unit of a commodity decreases as the person acquires a greater quantity of the commodity.) and not a measurement of the intensity of value.... rd.... he would choose to give up the latter....... Modern economics is based on a subjective theory of value... The various schemes to define an objective measurement of satisfaction—a “util”—cannot get around the fact that value scales involve a ranking (st......... Each party to a voluntary trade gives up an item that is lower on his value ranking (or scale of values). . Subjective value is bound up with the idea of exchange... “Diamonds are more valuable than water............... in exchange for an item that is higher on his ranking....

money prices themselves are constantly changing. since it is less liable to confusion. However. That is why Mises and Menger prefer to say that money is an index (not a measurement) of prices. Study Guide to The Theory of Money and Credit Knowledge of objective money prices causes people to revise their subjective value scales. . Objective money prices provide a “common denominator” for the market exchange values of all the various goods and services available.

Value is the significance given to a particular good by a person...... and that is why he “exchanges” his leisure time for coconuts (by climbing trees). The Immeasurability of Subjective UseValues The classical economists (such as Adam Smith) relied on an objective theory of value....... but instead is an attribute ascribed to physical things by subjective preferences........ However... it was natural to view money as a measuring rod of this objective value. Each party to a voluntary trade gives up an .. alone on his desert island......... he may value satisfying his hunger more than he values satisfying his desire to lounge on the beach.... it means that he would choose the former if faced with a choice between the two..... If a man values a piece of iron more than a piece of bread.............. value doesn’t reside in physical things per se. Just as a thermometer shows a higher reading on a hot day than on a cold day—reflecting the objectively warmer temperature—so too did the classical economists think that a higher price tag indicated that a more expensive good had a higher objective value than a cheaper good.. In modern economics... modern economics is based on a subjective theory of value.. Subjective value is bound up with the idea of exchange.... who can imagine ways to use the good to become more satisfied.. In this mindset. valuation guides exchanges made in the marketplace.... Even Robinson Crusoe......... which traces the source of value to the mind of the individual actor. Chapter Outline .. which held that the value of a commodity was based on an objective criterion (such as the amount of labor required for its production).. reveals his valuations by his “exchanges” with nature.. With more than one person...Chapter : On the Measurement of Value  ..................... For example...

Thus Alice and Bob’s subjective rankings of apples and pears. and decide which he prefers. For example. and that the price of a pear is two-thirds of an apple. These subjective valuations—which do not involve any measurement of the amount of value or utility residing in each combination of fruit—mean that the two people can gain from trading the three pears for the two apples. “Jim is a  percent better friend than Sally. value is subjective. Even though market exchanges are driven by subjective valuations that are themselves nonquantifiable. i.”) All that is necessary is that a person be able to look at any two possibilities. pears. nonetheless these exchanges in turn give rise to objective exchange ratios or prices.” whereas Bob has the opposite ranking. But it would be nonsensical to describe this scenario as one in which “an apple gives  percent more value to people than a pear.” .. and that on her value scale Alice ranks “two apples” more highly than “three pears. exchanges will occur until there are no more mutually beneficial trades. allowed for the formation of an objective market price reflected in their exchange. The underlying subjective valuations driving acts of exchange do not involve a “measurement” of value. without implying that there is an objective unit of friendship that the person measures in each person before constructing the ranking. Someone can report. In the market. someone can rank his friends in order of importance. This apparent contradiction—where each person gives up something “less valuable” in exchange for something “more valuable”—is perfectly sensible because value is in the eye of the beholder. suppose Alice has three pears while Bob has two apples.e. in exchange for an item that is higher on his ranking. (For an analogy. “Jim is my best friend and Sally is my second-best friend” without being able to say. This mutually beneficial trade then establishes that the objective price of an apple is . Study Guide to The Theory of Money and Credit item that is lower on his value ranking (or scale of values).

th gallon might be used to wash the car. The various schemes to define an objective measurement of satisfaction—a “util”—cannot get around the fact that value scales involve a ranking (st. This follows from the observation that a person will necessarily assign subsequent units of a commodity to those purposes that he deems less and less significant. Fisher concludes that the th loaf of bread must have only one-half the utility of the th loaf. nd. As a person’s access to water becomes greater. The renowned Chicago School economist Irving Fisher.Chapter : On the Measurement of Value  The law of diminishing marginal utility states that the value of the last unit of a commodity (in someone’s possession) decreases as the person acquires a greater quantity of the commodity. One problem with this approach is that a free good (such as air) would end up . For example. At the same time. devised a clever argument by which he equated the utility of the th loaf of bread with the utility derived from the last and second-last units of fuel oil. . if a person has only one gallon of water. however. it is obviously impossible to perform arithmetical operations on the marginal utilities of various units in order to compute the “total utility” or total value of the entire stock of the good. which were devoted to drinking. for example. the utility of the th loaf of bread was equal to the utility of only the last unit of fuel oil. But this assumes away diminishing marginal utility in the fuel oil. etc. he will attach a great significance to it. because it is necessary to stave off thirst. The th gallon. rd. Total Value If it is impossible to measure the value in a single unit of a good. and is not nearly as important as the st through th gallons. And the . a relatively unimportant goal. perhaps. the last (or marginal) gallon of water becomes less significant.) and not a measurement of the intensity of value. will be devoted to cooking.

Money as a Price Index At this point. For example. Study Guide to The Theory of Money and Credit with a total value of zero. because in this situation the “total value” and the “marginal value” are the same. since the marginal utility of one cubic meter of air is zero in most circumstances. . Someone who despises smoking and loves vegetables may nonetheless place a higher value on an unopened carton of cigarettes than on a tomato. In this way. Knowledge of objective money prices causes people to revise their subjective value scales. however. Only in this contrived case can we meaningfully speak of the “total value” of the entire stock of water. it should be clear that money cannot serve as a measuring rod of subjective value. “Diamonds are more valuable than water. he would choose to give up the latter. then the car has twice as much exchange value. because she can sell the carton for money.” what he means is that if forced to give up one diamond or one gallon of water. then he would choose to retain the water (at least if he wanted to live longer than a few days). If someone says. . where the amount is measured in money prices. There is a sense in which money is a measure of objective market exchange value. if a car trades for . the unit under consideration is all the water in the world. It must be repeated that utility or value is a concept related to the acts of choice that a particular individual contemplates. while a motorcycle trades for .. and then use the money to buy a tomato as well as many other items. objective money prices provide a “common denominator” for the market exchange values of all the various goods and services available. Someone bringing a car to market can obtain “twice as many goods and services” for it. But if an individual had to choose between all the water in the world. or all the diamonds.

not only because the price (quoted in money) of the motorcycle can change.Chapter : On the Measurement of Value  However. because money prices themselves are determined by the underlying subjective valuations of the traders. That is why Mises and Menger prefer to say that money is an index (not a measurement) of prices. they are constantly changing. The various combinations of goods that one motorcycle can “buy” today. . since it is less liable to confusion. but also because the prices (quoted in money) of all others goods can change. may be different tomorrow.

.. Although such an approach explained the fact that prices and production costs tended to be similar........ Modern Austrian economists also chide their • .... mainstream economics.... Although other economists participated in the Subjectivist /Marginal Revolution..... ..... Irving Fisher was an incredibly influential economist from the Chicago School... Important Contributions • The replacement of the classical economists’ labor (or cost) theory of value.. with subjective value theory. not the determinants of actual market prices.... as Mises’s frequent references to Menger... Study Guide to The Theory of Money and Credit ....... and Wieser testify........... only pushes the problem back one step... and so to explain the price of a good by the costs of producing it...... Böhm-Bawerk..... By explaining the prices of consumer goods through the interaction of subjective valuations in the market—and then using these consumer prices to explain the prices of the producer goods needed to make them—the subjective value theorists resolved these problems..... Although economists paid lip service to the subjectivist revolution in value theory. and arguably one of the founders of modern.. nonetheless they often fell back into the old habit of viewing utility as a cardinal........ For example... “costs” are themselves prices. it was the Austrian economists who worked out the logical foundations of the new approach......... Mises’s critique of Fisher is a good illustration of this tendency. was a true revolution in economic theory.. Worse still.. measurable substance........... it was clear that the actual day-to-day prices of goods were not determined by production costs.. there were many problems.. so at best the cost theory explained long-run tendencies. The classical theory explained the price of a good by the amount of labor or (more generally) the cost of producing the good..

There is no need to assume that a consumer has an intensity of preference for various goods that could be measured by units of utility.Chapter : On the Measurement of Value  . mainstream peers for relying on mathematical models of “utility functions” that can easily lead the economist into forgetting that modern price theory only assumes that individuals can rank various combinations of goods from best to worst. .

...) Value: The importance that an individual places on a particular unit of a good or service. .......... because a person will allocate successive units to satisfying ends that are less and less important... Subjective theory of value: An explanation of value that relies on individuals’ subjective rankings of particular units of goods and services....... that each additional unit of a good or service will have a lower value.... There is enough of the good to satisfy all human wants that it can technically fulfill.. because it is not scarce..... Law of diminishing marginal utility: The rule... such as Adam Smith and David Ricardo....... .... (The classical economists... Objective theory of value: An explanation of value that relies on the objective properties of a good....................... Scale of values: An analytical tool by which the economist inter- prets the actions of an individual...... New Terminology Free good: A good that has a price of zero.. such as its cost of production or the amount of labor that went into its construction. In a monetary economy.... deducible from the nature of economizing action.... William Stanley Jevons.. (The so-called Marginal Revolution of the early s—spearheaded by Carl Menger.) Prices: The market exchange ratios between various goods and ser- vices...... prices are typically quoted in terms of the money good.. who subjectively ranks particular units of goods and services in order from most to least important............ held an objective theory of value.. Study Guide to The Theory of Money and Credit .. and Léon Walras—overturned the objective theory of value and ushered in the subjective theory.

.... ) ............. Why would an isolated individual still need to engage in a “comparison of values” before taking action with respect to scarce goods? (p... ) ........ –) ....” (p..................... ) ............. the search for a principle governing the measurement of value was to a certain extent justifiable.. .. How does money aid the entrepreneur? (pp. Why does an exchange of two items require that the people making the exchange place the items in reverse order on their value scales? (p. ) ........... Explain: “The untenability of [Wieser’s] argument is shown by the fact that it would prove that the total stock of a free good must always be worth nothing.............. Study Questions .. Explain: “In the older political economy....Chapter : On the Measurement of Value  ......” (p..

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... silver.......... For economics..... ............ in the current United States “green rectangular pieces of paper” become money when certain ink patterns are placed on them......... is itself used as a medium of exchange....... and yet people also valued and traded these commodities for other reasons......  THE VARIOUS KINDS OF MONEY Summary A money substitute is a perfectly secure and immediate claim on money.... For example. the most important being the explanation of the purchasing power of money........ Fiat money is accepted as a common medium of exchange not because of its technological properties.... rather than legal formalities.... For example... what matters is the actual practices and expectations of individuals in the market.. but because of a special legal designation provided by the appropriate authority..  ......... Commodity money is a common medium of exchange that is also an economic good in its own right..... gold.. Because the claims themselves can facilitate indirect exchange... falling due in the future.... they become a “substitute” for the original commodity money.... Credit money occurs when a claim on a physical or legal person....... The definition of money should serve the purposes of economic theory.. and even tobacco have historically been used as money..

but economically something is money because of its usage by people in the market. But the government cannot force people to adopt a particular item as the commonly accepted medium of exchange. The government can use its tremendous power to make it more likely that people will adopt a particular item (such as green pieces of paper with certain ink patterns) as money. A government edict per se cannot transform it into money. Study Guide to The Theory of Money and Credit Some theorists explain the value of money as due to State commands. . let alone to accept it with a particular purchasing power.

and a reputable bank issues a paper ticket entitling the bearer to one ounce of gold.. In other words....... For example.. people might trade paper claims guaranteeing the owner to a loaf of bread.. So long as people in the community are certain that they will be paid in physical gold whenever they present the ticket to a branch of the bank. gold coins would (so long as everyone is assured of immediate redemption)........ then such tickets are money substitutes and may change hands during purchases the same way physical gold would. . But the crucial feature of such claims on money is that the claims themselves can facilitate indirect exchange... but they would eventually redeem them. i....... suppose the commonly accepted medium of exchange is gold..... For economists—as opposed to legal theorists or the businessperson—the definition of money should serve the purposes of economic theory..... to receive the physical gold....... people can issue perfectly secure and immediate claims (i......... Money and Money Substitutes A money substitute is a perfectly secure and immediate claim on money. Chapter Outline ....... not just money... In the market economy...e. to explain the purchasing power of money........ redemption tickets) to all sorts of goods.... In contrast..e...... pieces of paper entitling the owner to an ounce of gold can circulate in the market the same way actual  oz. Such tickets could never become “breadsubstitutes” because the paper couldn’t serve the same function as actual bread........ and so become a “substitute” for the original commodity money...... The central task of the economic analysis of money is to explain the exchange ratios between money and all other goods...Chapter : The Various Kinds of Money  .. In principle merchants might never actually turn the tickets in...........

the Austro-Hungarian Bank would voluntarily cash its paper notes for gold upon request. because legally the Austro-Hungarian Bank had no obligation to redeem its paper notes for commodity money.. money substitutes. The Peculiarities of Money Substitutes In the economic analysis of money. between money and money substitutes) will make it easier to explain other phenomena (such as the purchasing power of money. For example. and . . i. Credit Money. but believes his preferred distinction (i. conventional accounts say that Austria-Hungary from  to  possessed a paper standard. (See the Appendix B on page  for a diagram outlining Mises’s classification scheme for various items that are often included in the concept of money.e. The same principle applies to banknotes. He concedes that it would be logically consistent to include money substitutes in the definition of money itself. For example. then economically speaking the token is a money substitute. and Fiat Money Commodity money is a common medium of exchange that is also an economic good in its own right. For example. Yet in practice during this period. Study Guide to The Theory of Money and Credit In Mises’s judgment. what matters is the actual practices and expectations of individuals in the market. if in practice the holder of a token can easily exchange it for the “equivalent” amount of actual money.e.. and in fact the notes were declared legal tender. as well as the boombust cycle) more clearly in later chapters. gold. and so economically speaking Austria-Hungary was on a gold standard. Commodity Money.) . silver. whether or not legislation declares that token coins are legally binding claims on money. the most fruitful classification scheme distinguishes between the underlying “money in the narrower sense” versus perfectly secure and immediate claims to such money.

redeemability will be restored. then the notes would circulate as credit money (not fiat money) because they would be claims to gold falling due in the future (at an uncertain date). However. if the public expects that at some point in the future.Chapter : The Various Kinds of Money  even tobacco have historically been used as money. is itself used as a medium of exchange. it is necessary that people are generally willing to accept the claim in trade not because they want to wait and receive the underlying payment (to which the claim entitles them). suppose a government originally promised to redeem its paper notes immediately upon demand for commodity money (such as gold). in the current United States “green rectangular pieces of paper” are not money per se. economically speaking.g. but because of a special legal designation provided by the appropriate authority. the government suspends convertibility. the mere legal declaration isn’t what makes them money. command) of the U. government. They only become money when they are cut to exact size and printed with the correct designs by the U. Credit money occurs when a claim on a physical or legal person (e. falling due in the future. but because they expect to be able to easily trade away the claim itself for other goods. To distinguish credit money from mere credit. and yet people also valued and traded these commodities for other reasons.e. For example. green pieces of paper with the appropriate ink patterns—as a common medium of exchange. So long as the paper notes are considered so liquid that virtually everyone is willing to accept . in economics the definition of money is a commonly accepted medium of exchange. However.. But during a war.S.S. Treasury. For example. Thus the green pieces of paper appear to become money by “fiat” (i. The government can only use its powers to encourage people to use a particular class of items—for example. a corporation or government agency). so that the paper notes are now not legally binding claims on anything.. Fiat money is accepted as a common medium of exchange not because of its technological properties.

For example. because governments cannot simply force a particular good to command a particular purchasing power in the market.S. But the market will react by raising prices (quoted in terms of the coins). they are a common medium of exchange and hence money. For example. government has passed a law. .” But this is a very inadequate reading of history. The Commodity Money of the Past and of the Present Some theorists explain the value of money as due to State commands. . and then debase them by melting them down and minting a greater number of coins with less silver content per coin. and even if the king resorts to price controls with draconian penalties. a king can collect taxes in the form of silver coins. he will cause shortages in accordance with economic law. “The monetary unit of the United States is the dollar. because the U. Study Guide to The Theory of Money and Credit them in trade.

..........) • In the Misesian scheme......... The important point is not whether such redemption were a legal requirement... such coins are valued because they actually consist of a recognized weight in gold or silver.. credit money is not the same as a money substitute because the claims constituting credit money are not due immediately. it would be awkward to purchase an item with a price of ¹⁄₁₀₀th of an ounce of gold.... Mises argues that token coinage is not an independent economic concept.............. they would nonetheless trade at their face value so long as everyone believed that the government would faithfully exchange one ounce of physical gold for  tokens..... but rather a special type of money substitute. in a country using gold as its commodity money. For example..... but merely whether in practice people expected the option to be available upon demand....... “Legal Tender. if customers had to use the physical gold itself.. The government might therefore produce a limited number of small discs (perhaps made of copper or nickel) that were stamped with..... of gold.. but coins consisting of the commodity money...Chapter : The Various Kinds of Money  ..” Even though the actual metal content of the tokens would be less.. (Also note that the “coins” Mises discusses on pages – are not token coins.... Token coinage was developed to facilitate small transactions. ¹⁄₁₀₀th oz...... Money substitutes are valued the same as the underlying money to which they are claims... In other words... not because the holders expect to be able to redeem them for gold or silver.......... whereas they must be for a true money substitute........ a ... Technical Notes • On pages –.... ..

upon request. will be subject to an independent valuation. (See p. Study Guide to The Theory of Money and Credit banknote entitling the bearer to one ounce of gold. but also on the liquidity of the bond. will have the same purchasing power as one ounce of gold. a corporate bond promising the bearer one ounce of gold in  years. However. depending not merely on the reliability of the claim and the wait involved. if it is to become a credit money and circulate as a common medium of exchange.) . .

....... typically entitling the bearer to a specified amount of the money good........ valued for nonmonetary reasons. dollar or the British pound) can be redeemed for a definite weight of gold.... Commodity money: A common medium of exchange that is an eco- nomic good in its own right.....S... but because of a special legal designation provided by the appropriate authority........ New Terminology Banknotes: Paper notes issued by banks. Gold standard: The arrangement by which a nation’s money (such as the U. Credit money: A common medium of exchange that is a claim on a person or legal person (such as a corporation or government agency)..... Cash (verb): To redeem a claim (such as a banknote) by paying the specified amount of the money good....Chapter : The Various Kinds of Money  . at par value........ Debase: To dilute the value of the money................ ............ Legal tender: An item that the government declares to be valid for the payment of debts denominated in money.. for example when a ruler introduces “base” metals into the coinage.. reducing their precious-metal content....... Fiat money: A common medium of exchange accepted not because of its technological properties..... not falling due until a (possibly uncertain) future date. ............. Fiat money is not “backed up” by anything else..

(A paper standard stands in contrast to a gold standard. a share of corporate stock is much more liquid than a house.) Price controls: Government decrees threatening fines or other pun- ishment for people trading at prices that are either too high (in the case of a price ceiling) or too low (in the case of a price floor). even though they do not contain the full weight of metal in the case of a commodity money. fiat.) Money in the narrower sense: The actual money good (whether commodity. or credit money). . or credit money). not including money substitutes. which itself circulates as money (in the broader sense) because it fulfills the functions of money. Money substitute: A perfectly secure and instantly redeemable claim on money. Token coins: Coins that serve as representatives of money (usually in very small denominations). Study Guide to The Theory of Money and Credit Liquid (adjective): The ability of being sold for the full market price with a very short search time. Purchasing power: The amount of goods and services that a unit of money can command because of the various prices in the market. (For example. Money in the broader sense: The actual money good (whether commodity. plus money substitutes. Paper standard: The arrangement by which the government does not redeem paper notes for a precious metal. fiat.

.. ) ... .. What does Mises think of the treatment economists had given to money.. ) ... .......” (p....... ....... Study Questions .... it is perfectly possible to satisfy an increased demand for money by just such a process as this. rather than money itself? How is this peculiarity “explained by reference to the special characteristics of money”? (p.... ) ........... ) . Would Mises be surprised at the world’s current monetary system? (p...Chapter : The Various Kinds of Money  ........ say....... ) .... What is the task of economic theory......... before his own contribution? (p.. What is “peculiar” about the fact that people may use claims on money............... regarding money? (p....... Explain: “[W]hereas it is impossible to satisfy an increase in the demand. for bread by issuing more bread-tickets .......

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This is clear when we consider cases where a contract cannot be fulfilled as written. But from the legal point of view...... money is a common medium of exchange.......... In economics... the State has more influence than any other entity. money is a common medium of payment or debt settlement. and so the court specifies a monetary payment instead.. because merchants wouldn’t need chemical tests and scales to evaluate the gold or silver their customers presented in payment...... In this respect..  .. weight. By producing suitable coins........ . Money can only serve this function (as a medium of debt settlement) because it is a medium of exchange......... the State must conform to the market..................... Originally the State’s only role in the monetary sphere was to supply recognizable coins that were hard to counterfeit and that were very similar in appearance.. Its actions in the market are governed by the Laws of Price.... The legal system can certainly allow debtors to “satisfy” their contractual liabilities by paying with items at a face value higher than what the creditors actually believe they are worth..... but this merely means a partial repudiation of the debt......  MONEY AND THE STATE Summary Unless it resorts to outright socialism......... and fineness. Government cannot force people to attribute a certain exchange value to a good........... the State was merely facilitating commerce. but this is due to the State’s enormous budget......

. converting them into credit money or even fiat money. Study Guide to The Theory of Money and Credit The State’s influence in the monetary sphere has grown because its size has grown. The State also influences the monetary sphere through its ability to suspend the immediate redemption of money substitutes. but also because of its control of the mint: The State can withdraw coins of one metal and replace them with coins of a different metal.

. The same is true of money: mere government edicts cannot explain the purchasing power of a common medium of exchange.. (For example........ If a contract calls for one party to pay back a loan of “ ounces of gold.. money is a common medium of payment or debt settlement......... Government cannot force people to attribute a certain exchange value to a good... or can a banknote or a check written on a bank account—denominated in gold—satisfy the debt? What about token coins that can be exchanged for gold?) However... The Position of the State in the Market Although it commands a large influence because of its power to tax.......... But from the legal point of view....... The Legal Concept of Money In economics.Chapter : Money and the State  ...... and so the court specifies a monetary payment instead... Chapter Outline .... the government can only successfully change market prices through its own decisions to buy and sell................... plus  ounces in interest” in one year.. The legal system can certainly allow debtors to “satisfy” their contractual liabilities by paying with items at a face value higher than what the creditors actually believe . This is clear when we consider cases where a contract cannot be fulfilled as written..... Unless it completely abolishes private property and forms a socialist State.. ultimately the State must conform to the market. money is a common medium of exchange.. money can only serve this function (as a medium of debt settlement) because it is a medium of exchange....... must it be done in physical gold.. .... the legal system must specify what types of goods are acceptable to satisfy the contract..............

people would hoard the undervalued metal and try to spend the overvalued metal. In this regard. The Influence of the State on the Monetary System Originally the State’s only role in the monetary sphere was to supply coins of the greatest possible degree of similarity in appearance. and knew that it was genuine. converting them into credit money or even fiat money. but this merely means a partial repudiation of the debt. Even so. weight. the State cannot avoid the laws of economics. Furthermore. but also because of its control of the mint. gold—and then producing hunks of the money in convenient shapes. Study Guide to The Theory of Money and Credit they are worth. The State can exert great power over what its subjects choose as the common medium of exchange. The failed attempts at bimetallist legislation—where the government established a fixed ratio between the value of gold and silver—showed the operation of Gresham’s Law. the State was merely facilitating commerce: if everyone recognized the State’s one-ounce gold coin. By producing suitable coins. That is. since it can (for example) withdraw coins of one metal and replace them with coins of a different metal. when the actual market values of gold and silver deviated from the legal ratio. to do its task well the State would manufacture coins that were hard to counterfeit. but was instead merely taking what the market had chosen as the money—for example. and that bore a recognizable stamp. . . The State’s influence in the monetary sphere has grown because its size (relative to the economy) has grown. the State wasn’t defining money. then merchants wouldn’t have to resort to chemical tests and scales to evaluate the yellow metal their customers presented in payment. The State also influences the monetary sphere through its ability to suspend the immediate redemption of money substitutes. and fineness.

....... In this chapter we already see the benefit of Mises’s fastidious classification scheme regarding money..... ) If an Austrian economist disputes the theory that money derives its value from the State........ –) • . and credit money..................... Mises can explain exactly how a State influences the money used by its subjects... Armed with his categories of money substitutes......... Important Contributions • Carl Menger’s explanation of the origin of money (laid out in chapter ) offers a satisfactory rebuttal to the “State theory of money” offered by Knapp and other theorists. Mises instead looks at the State’s role in minting coins and its power to change money substitutes into credit money (by suspending immediate redemption of the claims to money). (pp....... the argument is more compelling if the Austrian can show—using Menger’s approach—how money arose spontaneously on the market.............Chapter : Money and the State  . (p................... While many others place great importance on State legislation regarding tax payments and debt contracts..... ....... commodity money..

............. For a different example... quarters minted in the year ) will circulate in trade.... then everyone will try to buy with silver. and no one will use gold for making purchases................. For example.. whereas coins with high metal content (such as U.......... then coins with low metal value (such as U. Study Guide to The Theory of Money and Credit .. and only silver will be used in commerce..... also accept payment in silver ounces at a fixed multiple of the gold price... For example........ Gresham’s Law: Popularly summarized as “bad money drives out good.. if the government passes legal tender laws on all government-stamped coins. and will spend the money that is overvalued by legislation.... the government might require that merchants who post a price in gold ounces......” the phenomenon by which people will hold money that is undervalued by legislation. New Terminology Bimetallist legislation: Efforts by the government to establish a fixed conversion ratio between gold and silver.... ... Gold will seem to disappear... if bimetallist legislation requires that merchants accept silver and gold at the ratio of -to-.... quarters minted in the year ) will be hoarded by people who recognize the value of the silver.......... .....S..... when in fact the actual market exchange rate is -to-.S..

” (p... ) . .... this amounts fundamentally to the same thing as granting debtors legal relief from half of their liabilities.......... What are the two mechanisms through which the “State’s influence on commercial usage. but into an alternative standard................ ) ....... has increased”? (pp..Chapter : Money and the State  .....” (p.. ) ...... Explain: “State declarations of legal tender affect only those monetary obligations that have already been contracted........... as the legislators had intended.... Study Questions . not into a double standard.....” (p.” (p.... –) .... Explain: “When notes that are appraised commercially at only half their face-value are proclaimed legal tender....... ) .............. both potential and actual....... Explain: “A country that wishes to persuade its subjects to go over from one precious-metal standard to another cannot rest content with expressing this aspiration in appropriate provisions of the civil and fiscal law. Explain: “The parallel standard was thus turned..

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. consisting of consumption goods....... and media of exchange.... since it is clearly not a consumption good... A solution is to adopt a three-fold system. then money must be a production good. and other production goods allows for the greater satisfaction of human desires........ Money Neither a Production Good nor a Consumption Good Traditionally....... economic goods were divided into consumption goods (what Menger called goods of the first order) and production goods (what Menger called goods of higher orders). Consumption goods directly satisfied human desires.. whereas having more boats..) If we insist on a two-fold scheme. railroads....  MONEY AS AN ECONOMIC GOOD Chapter Outline ...... whereas production goods only satisfied them indirectly... .. because money is not a “commercial tool” in the same way that account books are....... This makes sense...... while an apple seed would be a production good..... because money is very different from other types of production goods. they differ in a crucial way: Increasing the supply of money does not make the community richer....... Yet this is problematic too......... (For example.. This is why money should be classified in a separate category... production goods. Although in a certain sense money “facilitates commerce” just as boats and railroads do.. an apple might be a consumption good to a hungry man..... namely media of exchange................  ......

Money should clearly be included in this category. If we deny that money is a production good. . To explain why people would be willing to pay interest on money loans. is to distinguish it from other production goods and recognize its special ability to be exchanged for them. productive goods. and in fact historically an interestbearing sum of money was the starting point of the concept of “capital. . theorists realized that money was “barren” and did not directly yield its “fruits” the way physical seeds or human labor could.” Over time. Money Not a Part of Social Capital Social (or productive) capital can be defined as the aggregate of the products intended for employment in further production. rather than a production good: the only way to salvage the inclusion of money as a part of private capital. Money as Part of Private Capital Private capital can be defined as the aggregate of the products that serve as a means to the acquisition of goods. This observation reinforces the decision to classify money as a medium of exchange. then obviously it cannot be a part of social (or productive) capital. Study Guide to The Theory of Money and Credit . we must recognize that money can be exchanged for other.

. but also he explains why he favors one view over another..... credit money. For the issues in this chapter.... the great pioneer in (what we now call) Austrian economics after Menger. ) that the groundwork will be important for understanding the discussion of the equilibrium and money rates of interest....... or whether it is part of social capital) may strike some readers as difficult or even tedious.. As with his classification of money substitutes..... in these passages Mises demonstrates his command of the literature................. • .. but instead weighs the arguments by various thinkers.............. ......... and builds the Misesian system with the strongest components of each............... At times Mises differs from Eugen von Böhm-Bawerk. etc........ However. which will occur in part III of the book. Important Contributions • Mises’s summaries of various debates (on whether money is a production good... Mises tells the reader (p.....Chapter : Money as an Economic Good  ...... The reader can see that Mises is not simply following in the path laid out by his predecessors in the Austrian tradition.. in this chapter Mises exercises great precision in defining his concepts and justifying his decisions.......

................................ ...... ............. Social (productive) capital: The aggregate of the products intended for employment in further production. in a process that is explained in part  of the book................. Also known as the natural rate of interest..................... Money rate of interest: The rate of interest determined in the mar- ketplace for loans of money..) Private capital: The aggregate of the products that serve as a means to the acquisition of goods....... Study Guide to The Theory of Money and Credit . New Terminology Equilibrium rate of interest: The rate of interest corresponding to the true supplies of capital goods and consumer preferences for present versus future consumption. (The money rate can deviate from the equilibrium [or natural] rate of interest....

Explain: “Money is obviously not a ‘commercial tool’ in the same sense as account books... changes in the value of money are accommodated in such a way to the demand for it that.............. . the economic position of mankind remains the same......Chapter : Money as an Economic Good  ..... Explain: “[W]hereas the changes in the value of .... .” (p......... ) .. ............ What hindered the development of a scientific understanding of capital and interest? (pp... What are the views of Roscher and Knies with respect to classifying money? (p...... ) ..... changes in their quantity......... . ... Study Questions ... or the credit system. ... –) ..... .” (p.. production goods and consumption goods do not mitigate the loss or reduce the gain of satisfaction resulting from . exchange lists........ ) . the Stock Exchange. What was Helfferich’s objection to those (like Knies) who wanted to deny that a monetary exchange was an act of production? (pp... –) ..... ...... despites increase or decreases in its quantity.

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.  .. and ultimately would foster the development of money... then there is no scope for even direct exchange (let alone indirect exchange) and therefore no room for money.... In this case............) The hostility to gold and silver is particularly intense. sweaters... and so forth.. Money Cranks Throughout the ages.... people would retain ownership rights in personal consumption goods such as cigarettes.. ..... However.. reformers have blamed money for social ills. for if they attempted such a description. apples........ .. some socialist visionaries concede that even in their ideal society...... the problems with their schemes would be obvious..... Money in the Socialist Community If a socialist society completely abolishes all property rights and distributes scarce goods and services according to a central plan... loaves of bread.. Yet these reformers never explain their full vision of a world without money.  THE ENEMIES OF MONEY Chapter Outline ............ people would naturally engage in mutually beneficial trades.......................... (The love of money is famously declared to be the root of all evil..........

. Study Guide to The Theory of Money and Credit Other critics do not call for the abolition of money per se.” According to this particular group of money cranks. the current money and banking system imposes an artificial scarcity by restricting credit and charging higher interest rates than necessary. but merely for an “elastic credit system.” which expands or contracts the money supply according to the community’s “need for currency.

. we could imagine that socialist factory and farm managers hand out one certificate for every labor hour (of suitable quality) that each worker performs........ For example..... Actual money (as opposed to a money substitute) is ..... and believed that in a pure socialist society......Chapter : The Enemies of Money  .......... Then.... such as farmland. Technical Notes • Some socialists viewed money itself as a “dirty” product of the market economy............ once the “crop” of output goods has been “harvested” from all the various factories and farms—including not just bottles of milk but also television sets and basketballs—the socialist leaders determine what fraction of the crop each certificate entitles the bearer to... Although many casual observers think that this is basically what money is—a claim on the “real output” of society—such a view is very superficial.). However. what cannot be allowed in a socialist community—lest it become a system of capitalism—is private ownership in the large-scale means of production.... factories.......... there would be no need for it........ could foster the emergence of genuine money. However. railroads..... based on the size of the harvest and the total number of certificates that were issued.... Mises is not here referring to the “labor certificates” envisioned by some socialist theorists. etc........ .... However..... • Mises concedes that a socialist community that retained private ownership in personal consumption goods. as Mises explains.. some of the more sophisticated theorists imagined that the workers in a socialist community would have property rights in consumption goods (and perhaps personal tools of the trade for skilled artisans etc.........

But with one unit of money. they were merely the logical extension of the prevailing economic doctrines concerning money and banking. Mises explains that the mainstream economists of his day could not effectively refute those who claimed that a massive expansion of the money supply—in order to drive the interest rate down to zero—would bring about material abundance. . to adequately explode this variety of monetary crankishness. then the labor certificates will necessarily entitle their holders to one-half as much. in particular his development of the circulation credit theory of the trade cycle. Although most economists and practical businessmen shied away from such extreme proposals. • When dealing with the last category of “money cranks” on page . it is not necessarily true that its exchange value in the market would drop by exactly onehalf. If a fire destroys half of the crop. It would take Mises’s own work. Study Guide to The Theory of Money and Credit not a claim on anything. it is its own good. and in any event the processes governing its purchasing power are completely different from those governing the “redemption power” of a labor certificate in a socialist community. but of course it is valued because of its expected purchasing power.

.............................. made possible by fiduciary media.......... and that prosperity requires only a sufficient willingness to create more money and/or issue more bank credit............ as capital goods are malinvested during the boom..Chapter : The Enemies of Money  .. The bust is then inevitable.......... New Terminology Circulation credit theory of the trade cycle: The theory developed by Mises (in the present book) explaining the boom phase of the business cycle as due to the artificial expansion of bank credit................ Money cranks: Very naïve writers who believe that scarcity is an artificial institutional constraint.... ........ ..........

.. Does Mises endorse the banking theories of Tooke and Fullarton? (p..... Study Guide to The Theory of Money and Credit ....... If the amount of “real output”—number of apples. ) ....... ) ... What two trends cause the emergence of indirect exchange to become inevitable? (p.... heart surgeries............................. would the purchasing power of money necessarily fall in half? (p. .........—were to fall in half......... ) ... ) . ) . etc. Would the isolated household use money? Why or why not? (p.... Do all socialists propose the complete abolition of money? (p......... Study Questions .......... TVs.......

. THE VALUE OF MONEY .....................................................................................   ............

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. Yet these prices themselves are due to how much his customers enjoy driving the various vehicles.. a unit of money is only useful inasmuch as it can be used to acquire other goods and services.. but on how much he can charge for them in the market..... the term “objective” is not used to mean that this value inherently resides in the object....... In its capacity as a medium of exchange. What sets money apart from all other goods is that money is useful (and hence valuable) to people only because of its purchasing power. ..... All market prices are ultimately determined by subjective human preferences.................... This refers to the amount of goods that someone can obtain in the marketplace with a unit of money....... (For example... This explanation in turn ultimately goes back to subjective valuations..  THE CONCEPT OF THE VALUE OF MONEY Summary The main task of economic theory is to explain money’s objective exchange value.... or what is often called the purchasing power of money......... which could ultimately explain its objective  ................... a car manufacturer will produce cars based not on his personal whims.. When we say a particular good has objective exchange value........ and therefore are subject to change whenever people’s valuations change....) The one essential difference with money is that it has no subjective use-value...... A typical good’s “objective” exchange value is still determined by the subjective usevalues of the end user......

they would be helpless to explain the purchasing power of fiat money. This is why applying modern subjective value theory to the explanation of objective money prices is such a tricky affair. were completely evading the issue. Those economists of Mises’s day who tried to explain the purchasing power of money based solely on its industrial applications. In particular. . Its only value—qua money—derives from its ability to exchange for other goods in the market. Study Guide to The Theory of Money and Credit exchange value.

he or she takes this preference as a given.. or what is often called the purchasing power of money..... say..... In its capacity as a medium of exchange.... the economist starts with the fact that some people place a very high subjective value on holding such artwork......Chapter : The Concept of the Value of Money  . Yet when it comes to money..... This rule holds even for money. What sets money apart from all other goods is that money is useful (and hence valuable) to people only because of its purchasing power.......... an original painting by Picasso... the main task of economic theory is to explain its objective exchange value.. Chapter Outline ......... the .... This refers to the amount of goods that someone can obtain in the marketplace with a unit of money.. then Bill will observe the same purchasing power as well... Subjective and Objective Factors in the Theory of the Value of Money When it comes to money... all prices in the market must be explained by reference to individuals’ subjective valuations.... This is an objective fact: if Tom sees that a dollar bill can purchase three postage stamps.......... Even though economics focuses on the explanation of money’s objective exchange value. The economist has no obligation to explain why people enjoy the mere possession of a canvas covered in paint. the explanation itself ultimately goes back to subjective valuations.... For the economist grounded in the modern subjective value theory (developed by Carl Menger and his followers)... a unit of money is only useful inasmuch as it can be used to acquire other goods and services........... and proceeds to explain the exchange value of the Picasso in the marketplace....... When it comes to explaining the price of..............

” Nowadays we might use the term market value to express the same concept as objective exchange value. The objective exchange value of money refers to the possibility of obtaining a certain quantity of other goods in exchange for the money. as Mises explains on page . But a good’s market value is still “objective” in the sense that any individual can take it as a given fact. The Objective Exchange Value of Money The objective exchange value of goods can be defined as “their objective significance in exchange” or “their capacity in given circumstances to procure a specific quantity of other goods as an equivalent in exchange.. purchasing power) merely by saying that people enjoy acquiring and holding cash balances. When we say a particular good has objective exchange value. Such an argument—by itself—would be circular. the owner of an automobile factory . we are not using the term the same way that a good might have an objective weight or color. That is why explaining the “price” of money is a much subtler task than explaining the price of a Picasso. but are very similar. For example. Study Guide to The Theory of Money and Credit economist can’t explain its “price” (i. The Problems Involved in the Theory of the Value of Money In modern economies.) All market prices are ultimately determined by subjective human preferences.) . . while the price of money is this actual quantity of other goods. because the reason people want to hold cash balances is that money has purchasing power. (In other words. the term “objective” is not used to mean that this value inherently resides in the object. rather than subjective use-value.e. and therefore are subject to change whenever people’s valuations change. (The terms are not identical. producers as a rule evaluate their output on the basis of subjective exchange value.

versus piloting yachts or eating steak). how many automobiles would trade for one yacht.. This is why applying modern subjective value theory to the explanation of objective money prices is such a tricky affair. based on what his customers want to drive. he instructs his employees to make cars that he plans on selling to others. which could ultimately explain its objective exchange value. In order for the owner of the automobile factory (and other producers) to accurately envision the tradeoffs of different production decisions. . he also needs to know how much money he can raise by selling different models of his cars. he is guided by his personal. the economist ultimately could explain their relative exchange values (i. its only value—qua money—derives from its ability to exchange for other goods in the market. The one essential difference with money is that it has no subjective use-value. Thus most production decisions involve a complex interdependence on both subjective and objective valuations. when it comes to the automobiles. But with money. and steak dinners. he needs to know the objective exchange value of the various cars he could manufacture. subjective valuations of the other goods he will be able to buy (houses. It’s not enough that the car producer knows that he values yachts and steak dinners. yachts. Those economists of Mises’s day who tried to explain the purchasing power of money based solely on its industrial applications.e.Chapter : The Concept of the Value of Money  doesn’t order his employees to produce cars that he himself wants to drive.) with the revenues from the sale of his cars. yachts. etc. When formulating his business plans. then.) by reference to individuals’ subjective usevalues from them (i. On the contrary. In contrast. they would be helpless to explain the purchasing power of fiat money. and how much money he will need to spend if he wants to acquire yachts and steak dinners. how much people liked driving cars.e. fancy meals. etc.. In particular. were completely evading the issue.

both the vegetarian and the meat-lover would agree that the objective exchange value of the pig is much higher than that of the tomato seed........ However...... while a meat-lover might do the opposite........ it would be an indisputable fact that the pig could fetch more grams of gold (or dollar bills) than the tomato seed.. On the other hand. Mises spends time placing his analysis of money within the framework of subjective value theory.... But to properly explain the process by which subjective individual valuations generate objective market prices.. even those who have studied Austrian economics. Study Guide to The Theory of Money and Credit .. One way is to claim that money’s ..... as it had been developed by his Austrian predecessors (notably Menger...... Mises explains (pp........ if both were put up for sale.. For example.. Some of the terminology may appear quaint to modern economists.... and these concepts in turn both come with a subjective and an objective dimension. a vegetarian would probably assign a lower subjective use-value to the pig than to the tomato seed... Böhm-Bawerk.............. • Applying these concepts to money.... while the objective use-value of a tomato seed would include the tomatoes it could physically yield. .......... –) that there are two acceptable ways of making an important point..... Technical Notes • In the beginning of this chapter..... and Wieser). These would be empirical facts..... it is necessary to distinguish between use-value and exchange value.... For example.... not subject to opinion.. the objective use-value of a pig would include the collection of bacon strips it could physically yield....

the significance that a particular individual attributes to a quantity of money.Chapter : The Concept of the Value of Money  subjective use-value is the same as its subjective exchangevalue. (Of course Mises is talking about money qua money.) . he merely wants to stress the fundamental point that people consider money useful and valuable only because they expect to use it to acquire other goods. for example. Mises doesn’t take a position on which of these alternate descriptions is better. can still possess use-value for its industrial or ornamental applications. must be the same significance that he or she attributes to the goods for which the money can be exchanged. because the money can’t be used to satisfy wants directly. because any value it possesses necessarily derives from its exchange value. (That is.) A different way to make the point is to say that money has no use-value at all. A bar of gold.

... Use-value: The significance of a good due to its ability to be directly used by the owner in consumption or production....... (Use-value can be qualified as either subjective or objective..................... New Terminology Exchange value: The significance of a good due to its ability to be traded for other goods....) Market value: Synonymous with the objective exchange value of a good....... Price of money: The quantity of goods (or services) that must be given up in exchange to acquire a unit of money.... Study Guide to The Theory of Money and Credit ..... Objective exchange value of money: The possibility of obtaining a certain quantity of other goods in exchange for a unit of money.... (Exchange value can be qualified as either subjective or objective............ typically quoted in money terms. ....................) ..................

............ ... .....g...... –) .............” (p.... ) ... Study Questions .......” (p.... ...... What is the central element in the economic problem of money? (p. Explain: “In the case of money............ If money (e. Explain: “It should be observed that even objective exchange value is not really a property of the goods themselves. as to all other goods? (p.... ) ..... ) . what will be the relation between its objective exchange values in those two different applications? (pp. gold) has an industrial use as well as a monetary use.Chapter : The Concept of the Value of Money  ........ subjective use-value and subjective exchange value coincide............ .. ) . Does the subjective theory of value apply to the case of money... bestowed on them by nature....

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..... today’s valuation of money is dependent on its purchasing power yesterday.................... when goods were only valued for their direct use. .... they can’t explain the actual exchange ratio between money and other goods at a particular time.... because at some point in the past we arrive at the state of direct exchange..........  THE DETERMINANTS OF THE OBJECTIVE EXCHANGE VALUE.... OF MONEY Summary The usefulness of money derives solely from its purchasing power...e............ and can only explain deviations from this stipulated starting point.... marginal-utility  .... Therefore. The problem with many rival theories of the purchasing power of money—such as a simple quantity theory or “supply and demand” explanation—is that they have to take the value of money as given. The subjectivist.... but people do evaluate the usefulness of a quantity of money based on its purchasing power............. They can’t explain the absolute level of money-prices... Such reasoning does not lead to an infinite regress.... This theory of the origin of money is the only one compatible with a subjectivist explanation.... i.... People do not derive their utility from apples or oranges based on their prices.... The historical continuity in the value of money distinguishes it from all other commodities.. which in turn was influenced by money’s purchasing power two days ago. OR PURCHASING POWER......

Modern value theory must explain the demand to hold money by starting with the subjective preferences of the individual. . Money certificates are money substitutes that are fully “covered” by money proper. while fiduciary media are money substitutes that are issued above the redemption fund. absolute money-prices of the market today. say. Study Guide to The Theory of Money and Credit theory developed by Menger and his successors can explain the precise. The exchange ratio between money and all other goods—in other words. the purchasing power of money—may be affected by changes in people’s valuations of the money side or the (other) commodities side of the ratio. No individual can make use of the popular “macro” approaches. the quantity theory of money is obviously wrong: It is simply not true that. The community’s demand to hold money is simply the summation of the individual demands. In its crudest form. a doubling in the quantity of money will lead to an exact doubling of all prices (quoted in money). which employ formulas involving “total volume of transactions” and “velocity of circulation.” Economists therefore should not use such concepts when explaining the purchasing power of money.

.. they must have some basis for forecasting its future purchasing power..... which the individuals can consult...... The only way they can do this. goods such as gold and silver—which would become money..... today’s valuation of money is dependent on people’s observations of its purchasing power yesterday.. In this sense........ in turn............... The Necessity for a Value Independent of the Monetary Function Before an Object can Serve as Money The previous discussion has established that in order for individuals to place a value upon money........... they must first consider its usefulness which is derived solely from its purchasing power. The Dependence of the Subjective Valuation of Money on the Existence of Objective Exchange Value In order for individuals to evaluate the subjective value of money.. ..... down the road—were valued exclusively for their industrial and ornamental purposes.Chapter : The Determinants of the Objective Exchange Value  .... when goods were only valued for their direct use.......... And yesterday’s purchasing power......... Such reasoning does not lead to an infinite regress. ..... because at some point in the past we arrive at the state of direct exchange......... Chapter Outline I...... THE ELEMENT OF CONTINUITY IN THE OBJECTIVE EXCHANGE VALUE OF MONEY .. At that time. is if the money good already has a history of objective exchange value... was influenced by money’s purchasing power two days ago....

in order to explain Wednesday’s purchasing power of money. lead to a new car price that is higher than . Menger’s theory of the origin of money—in which the money commodities were originally used as ordinary commodities—is the only one compatible with a subjectivist explanation. it is correct to say. For example. “If a car originally has a price of . it is unlikely that  apples will trade for  orange on Wednesday. but people do evaluate the usefulness of a quantity of money based on its purchasing power. . The Applicability of the MarginalUtility Theory to Money The problem with many rival theories of the purchasing power of money—such as a simple quantity theory or “supply and demand” explanation—is that they have to take the value of money as given. the underlying determinants of Tuesday’s price (such as people’s subjective preferences for the two fruits) probably will not change very much by Wednesday.. if  apples trade for  orange on Tuesday. other things equal.. People do not derive their utility from apples or oranges based on their prices. then an increase in the stock of money will. . In contrast. and can only explain deviations from this stipulated starting point. Study Guide to The Theory of Money and Credit This reasoning shows the flaw in the myths about the creation of money being due to a social pact. But it is not true that Tuesday’s exchange ratio somehow influences Wednesday’s. Rather. economic theory does need to rely on Tuesday’s purchasing power of money. Rather. The Significance of PreExisting Prices in the Determination of Market Exchange Ratios The historical continuity in the value of money distinguishes it from all other commodities.” . It is true that there appears to be “inertia” with respect to exchange ratios between goods.

For example.) It is now acceptable to focus on the laws or principles governing changes in the value of money. (Namely. until the point at which the money commodity was valued solely for its nonmonetary uses. we are not arguing in a circle.e..Chapter : The Determinants of the Objective Exchange Value  Yet this isn’t really a full explanation. before it became a medium of exchange. even though logically they should have explained the original value of money first. The subjectivist. it can’t explain the actual exchange ratio between money and other goods at a particular time. marginal-utility theory developed by Menger and his successors can explain the precise. We are explaining today’s purchasing power of money by reference to yesterday’s purchasing power. At first it appears that money is a peculiar case that cannot be handled this way. on Tuesday Jim may choose to drink soda over cough medicine. But once we introduce the time element. Economists usually start at this step. i. why wasn’t the car’s original price . . i. because people’s marginal utility of money is itself derived from its objective purchasing power.e. The exchange ratio between two goods can be affected by changes in the valuation for just one of the goods.. . We can logically follow the chain all the way back in time. absolute money-prices of the market today.? The simple “supply and demand” approach—correct as far as it goes—by itself can’t explain the absolute level of money-prices. “Monetary” and “Nonmonetary” Influences Affecting the Objective Exchange Value of Money The preceding sections have established the origin of the value of money. or . just as it can explain the precise exchange ratios between apples and oranges. subjective marginal utility analysis—coupled with Menger’s explanation of the origin of money—can explain today’s absolute level of the purchasing power of money. and so on.

the quantity theory of money is obviously wrong: It is simply not true that. FLUCTUATIONS IN THE OBJECTIVE EXCHANGE VALUE OF MONEY EVOKED BY CHANGES IN THE RATIO BETWEEN THE SUPPLY OF MONEY AND THE DEMAND FOR IT . In the same way. the purchasing power of money— may be affected by changes in people’s valuations of the money side or the (other) commodities side of the ratio. writers have noted the patterns. The community’s demand to hold money is simply the summation of . say. The germ of truth in the historical expositions of the quantity theory is that a connection exists between variations in the value of money on the one hand. and choose the medicine over the soda. a doubling in the quantity of money will lead to an exact doubling of all prices (quoted in money). . II. the exchange ratio between money and all other goods—in other words. and variations in the relations between the demand for money and the supply of it on the other. This obviously needn’t be due to Jim’s sudden distaste for soda. Study Guide to The Theory of Money and Credit But on Wednesday he may reverse his preferences. The Quantity Theory In its crudest form. The Stock of Money and the Demand for Money Modern value theory must explain the demand to hold money by starting with the subjective preferences of the individual. but the task for the modern economist is to express these truisms with the tools of modern subjective value theory. Throughout history.

The former is the individual’s demand to hold both money and money substitutes (i. No individual can make use of the popular “macro” approaches.Chapter : The Determinants of the Objective Exchange Value  the individual demands. while fiduciary media are money substitutes that are issued above the redemption fund. (In commercial practice the notes are indistinguishable. of the notes are money certificates. we . The Consequences of an Increase in the Quantity of Money While the Demand for Money Remains Unchanged or Does Not Increase to the Same Extent A crude. while  are fiduciary media. and so we can say that about  percent of a given note is “covered” while the remainder is “unbacked..” Economists therefore should not use such concepts when explaining the purchasing power of money. The logic behind such a view rests on the true observation that any given quantity of money can perform all the services of money for the community. if a particular commercial bank accepts . but issues . paper banknotes entitling the bearer to an ounce of gold upon presentation. mechanical version of the quantity theory of money holds that a doubling of the stock of money will lead to a uniform doubling of the money prices of all other goods and services.”) . then .e.” For example. The latter is the individual’s demand to hold money proper. In certain cases it is useful to distinguish between the individual’s demand to hold money in the broader sense versus money in the narrower sense. Money certificates are money substitutes that are fully “covered” by money proper. perfectly secure and immediate claims on money). For example. ounces of gold in deposits which it keeps in the vault. with the appropriate “price level. which employ formulas involving “total volume of transactions” and “velocity of circulation.

say. the prices of all goods and services have to be exactly double their values in the first community. different individuals would respond differently to the increase in their holdings of money. a doubling of the quantity of sugar would lead to an exact halving of the exchange ratio of sugar against all other goods and services. Nobody would ever be so foolish as to claim that. Everyone would of course revise downward his or her marginal utility for a unit of money—because the stock in possession increased—but these downward movements would not be equal for all people. as the first recipients spend the new money. It is clear that in the second community. in order to render these economies equal in all “real” respects. Study Guide to The Theory of Money and Credit can imagine two economies side-by-side. Thus the new money ripples out into the economy. Yet from this thought experiment. people would now go out and buy more goods. Another complication is that in the real world. then the second recipients spend it. But different people would increase their purchases in different ways. tending to push up prices. Instead. new influxes of money do not magically augment the cash balances of everyone in the community proportionally. Yet that is precisely what the crude Quantity Theorists assert when it comes to money. and so on. Because the marginal unit of money would be less valuable than before the magical increase. new money enters the community through increased holdings of a small group of people (such as the owners of gold mines. For one thing. or the customers who borrow money from a bank issuing fiduciary media). and (in any realistic scenario) would push up the prices of some goods more than others. and then magically doubled everyone’s holding of money. that we would end up with the second community. we cannot conclude that if we started with the first community. which are equal in all ways except that the second community has twice the amount of money as the first. .

Chapter : The Determinants of the Objective Exchange Value  . say these critics. Another objection people have raised against the quantity theory is that its predictions are in actual practice nullified by the behavior of “hoards. when “other things are held equal”). the critic of the quantity theory might say that a large influx of new money won’t have a tendency to push up prices. Yet this is hardly a good objection against the quantity theory. when we analyze why people hold money . there is no such thing as money “in circulation” that could be contrasted with money “sitting idle. there is no distinction between the normal demand to hold cash versus “hoarding. because the hoards will release some of their cash into the community to satisfy the new demand. they are both holding the money because they expect to achieve greater satisfactions from what it can buy in the future. The fundamental problem with this view is that economically. even so we can defend it from some invalid objections. since a critic could say the same thing about any law or principle in economic science. this won’t lead to a fall in prices (as the quantity theory would predict). the quantity theory is erroneous. some writers object that the quantity theory only holds ceteris paribus (i. than from what it could buy in the present.” The money held by a hoarder performs the same economic function as the money held by a normal businessperson. For example. Criticism of Some Arguments Against the Quantity Theory Although in its crude form.e. Because of uncertainty. people do not necessarily “earmark” every unit of money for a particular future purchase. every unit of money in the community is in someone’s cash balance.” At any moment in time.. because some people in the community will simply expand their holdings of cash.” For example. if the demand to hold money (for reasons of commerce) should suddenly increase. Nonetheless. On the other hand.

If everyone in the community decides he or she is holding “too much money. is that someone carries cash balances larger than his peers’. the seller necessarily increases his cash balance by the same amount. while the stock of money remained the same. . we realize that there is no qualitative difference between the hoarder and the nonhoarder. All hoarding really means. Rather than focusing merely on crude aggregates. due to population increases and the intensification of the division of labor (and hence the need for exchange transactions). The given stock of money is rearranged among the people in the community. a more satisfactory explanation needs to take into account the subjective valuations of individuals. Eventually.” the only way to restore equilibrium is for prices to rise. it is better to analyze the scenario by saying that when the demand for money falls (while the stock of it remains constant). . For this reason. the purchasing power of money would fall) uniformly. Study Guide to The Theory of Money and Credit at all. we would conclude that prices would rise (i.e. it was only a theoretical curiosity for economists to try to explain what would happen if the demand for money fell. they seek to exchange some of their excess cash holdings for other goods or services. Further Applications of the Quantity Theory Generally speaking. in direct proportion to the drop in demand for money. However. individuals discover that they are holding larger cash balances than they desire. To improve their position. If we were to mechanically apply the quantity theory to such a situation. In doing so.. If one person reduces his cash balance by spending. they push up the prices of these items. the demand for money increases over time. the fall in money’s purchasing power reduces the “real” size of an individual’s cash balance until he is happy with it.

Chapter : The Determinants of the Objective Exchange Value

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per capita cash balances have to remain the same. Even so, the rise in prices can satisfy everyone’s desire to hold smaller cash balances, because cash is held for the purpose of acquiring other goods and services. People evaluate the size of their cash holdings in terms of its purchasing power, not really by how many units of money they possess. Although historically the demand for money itself generally grows—except perhaps for financial crises—there are cases where the demand for particular kinds of money may fall dramatically. A notable example is the demonetization of silver. As this precious metal ceased being used as a medium of exchange, and became valued solely for its industrial and ornamental applications, its exchange value fell.

III. A SPECIAL CAUSE OF VARIATIONS IN THE OBJECTIVE EXCHANGE VALUE OF MONEY ARISING FROM THE PECULIARITIES OF INDIRECT EXCHANGE

. “Dearness of Living”
Thus far in the chapter the analysis of the objective exchange value of money has only relied on determinants that could have just as well been applied to any commodity, not just the commonly accepted medium of exchange (i.e., the money commodity). In contrast, section  examines possible changes in the objective exchange value of money that can only apply because it is a medium of exchange. The context of the discussion is the layperson’s complaint of the “dearness of living,” meaning that every generation prices seem to be higher than before.

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Study Guide to The Theory of Money and Credit

. Wagner’s Theory: The Influence of the Permanent Predominance of the Supply Side over the Demand Side on the Determination of Prices
Wagner explains the general rise in prices—or what is the same thing, the general fall in the purchasing power of a unit of money— by the alleged superior power of the “supply side” of the economy. The sellers of goods and services stand more to gain from price hikes than their customers stand to lose, because the price of beef (say) affects the livelihood of the butcher far more than it affects the fortunes of the average household. Wagner’s theory is flawed, however, because it cannot easily incorporate the fact that retail prices must also respond to changes in wholesale prices.

. Wieser’s Theory: The Influence on the Value of Money Exerted by a Change in the Relations Between Natural Economy and Money Economy
Wieser attempts to explain the persistent rise in prices over time by the gradual transformation of a “Natural Economy” into a “Money Economy.” As more and more people and regions are brought into the practice of monetary exchange, Wieser argues that certain things that were previously handled through home production must now be included in the final price of goods intended for market. Wieser offers a specific example of the prices of milk and eggs rising in a rural village, once the villagers become involved with frequent trade with the much larger town. However, Wieser ignores the obvious flip-side of the development: the prices of milk and eggs will be lower in the town because of the new source of supply. The integration of the rural village into the monetary nexus gives no reason for a general rise in prices, it merely explains why the gap in prices (between the town and village) should be whittled away.

Chapter : The Determinants of the Objective Exchange Value

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. The Mechanism of the Market as a Force Affecting the Objective Exchange Value of Money
In direct exchange, if a potential buyer believes that the asking price of the seller is too high, the exchange will not occur. However, with the use of money, there is another possible outcome, that seems to happen in the real world. The buyer may go ahead and pay a price (in money) that he originally deemed “too high,” but will compensate by increasing the asking price for the goods that he has to sell. Thus wage earners might acquiesce in higher food prices, yet demand pay increases from their employers. The employers, in turn, might agree, knowing that they will raise prices themselves. None of this discussion renders the basic theory of price determination invalid. It merely underscores that with the special case of money, peculiar situations can affect its valuation that simply cannot occur in the case of direct exchange.

IV. EXCURSUSES
. The Influence of the Size of the Monetary Unit and Its Subdivisions on the Objective Exchange Value of Money
It is often asserted that the size of the monetary unit can affect its purchasing power, i.e., the general height of prices. In regard to wholesale prices, this is clearly absurd: merchants would adjust their large-scale transactions to achieve their desires, regardless of the unit. However, there is some truth to the assertion when it comes to retail trade. For practical reasons, everyday purchases that have very low prices compared to most other goods (such as letter postage or pieces of fruit) must correspond somewhat to the lowest

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Study Guide to The Theory of Money and Credit

available denomination of the money. The use of token coinage (which can represent fractions of the standard monetary unit) and money substitutes, as well as the practice of selling multiple units of goods (e.g., a dozen eggs) as a package, can provide a wide range of flexibility, but even so it must be admitted that the size of the monetary unit does have an influence on prices quoted at the retail level.

. A Methodological Comment
In a review of the first edition of the book, Professor Walter Lotz defended Laughlin from the critique leveled by Mises (on pages – in the present edition of the book). To review, Laughlin had tried to explain the value of paper gulden (which for a time were not redeemable in precious metal) by the prospect of their eventual redemption. Mises examined the discount investors placed on bonds issued by the same government and concluded that there must be some other factor at work, to explain the premium investors placed on the paper gulden. The answer, of course, was that the paper gulden were used as money, whereas the bonds were not. Therefore the paper gulden were valued on account of their use as media of exchange. Lotz defends Laughlin by referring to statements from influential figures that they truly did speculate on the eventual redemption of the paper gulden. Mises points out that this entirely misses the point of his critique: Even if it is admitted that the paper gulden would eventually be redeemable for gold, that fact wouldn’t explain why the notes traded at a premium to bonds issued by the same government. More generally, Lotz approaches economic problems not through theoretical reasoning, but by appeal to historical circumstances, a procedure that Mises rejects on methodological grounds.

Chapter : The Determinants of the Objective Exchange Value

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Important Contributions

On page , Mises alludes to Menger and Böhm-Bawerk’s explanations of how prices are determined in direct exchanges (i.e., what most people call “barter”). For example, suppose people in a community own horses, and others own cows. Each person will rank various units of each animal on his own subjective scale of values. Bill might consider his first horse as the most important animal, then his first cow, and then his second horse. John, in contrast, might consider his first and then second cows to occupy the highest- and second-highest ranks in his scale of values, while his first horse comes in at the third slot. (Note that everyone exhibits diminishing marginal utility in each animal.) People will trade horses for cows so long as there are mutually beneficial trades; perhaps Bill will trade his th and th cows for John’s th horse, because such a trade makes both men better off in their own subjective views. (In this case, the “price” of one horse is two cows.) To understand the description Mises gives to the range of possible market prices under bilateral competition, the reader should consult the numerical example in Murray Rothbard, Man, Economy, and State (scholar’s edition, nd edition; Auburn, Ala.: Mises Institute, , pp. –). The first sections of this chapter lay out Mises’s famous regression theorem, which successfully applies subjective value theory to the case of money. Earlier economists had been unable to accomplish this feat, because they thought the approach would lead to a circular argument in the case of money. (How can we explain the objective purchasing power of money by reference to subjective valuations, when those subjective valuations in turn are completely

i. (This explains money’s purchasing power today. • On page  Mises gives a simple illustration (involving a pear. their observations of money’s purchasing power yesterday.) of how an individual’s scale of values can be transformed with the possibility of market exchange..e. dependent on money’s objective purchasing power? It seemed to Mises’s predecessors that this approach said. We can push the explanation all the way back until the point at which (commodity) money had an objective exchange value due entirely to its use in nonmonetary applications. “Money is valuable because money is valuable.”) Mises broke out of the circularity by introducing the time element: People are willing to sell other goods and services for money today because they expect that same money to command purchasing power tomorrow. Study Guide to The Theory of Money and Credit .) But people’s expectations about the future purchasing power of money are formed by their observations of the recent past. lemonade. . etc.

.....” Hoards (noun): People who accumulate large cash balances in cer- tain circumstances...... allegedly counteracting the predictions of a naïve quantity theory of money................ ......... (There are many versions of the quantity theory... Fiduciary media: Money substitutes issued over and above the money (in the narrower sense) held in the redemption fund......Chapter : The Determinants of the Objective Exchange Value  .. New Terminology Quantity theory of money: An old doctrine explaining changes in the purchasing power of money by reference to the quantity of money and the demand to hold it..... Fiduciary media are “unbacked........ until the point at which the money good was valued as a regular commodity in direct exchange.. with the more mechanical ones—which posit that a doubling of the money stock will lead to a doubling of all prices—being obviously wrong. Regression Theorem: Mises’s argument that the current purchas- ing power of money is influenced by people’s memory of yesterday’s purchasing power............ The causality is traced back in time............. ............) Money certificates: Money substitutes that are fully backed by money (in the narrower sense).........

) .... –) .. If the “past value of money is taken over by the present.. ........ Explain: “If all the exchange ratios of the past were erased from human memory. but it would not become impossible............ how can Mises explain fiat money? (pp.......... –) .” (p. ) ..... Explain: “[A] mechanical theory of price-determination was arrived at—a doctrine of Supply and Demand. Explain: “The subjective value of money must be measured by the marginal utility of the goods for which the money can be exchanged............” (pp...” does that mean current conditions and expectations have no influence on the value of money today? (p..” (p. ) ...... .. ... ........ .. Study Questions .. ...... according to the content given to the words Supply and Demand..... If all types of money must have originally had a nonmonetary source of valuation....... Study Guide to The Theory of Money and Credit . the process of market-price-determination might certainly become more difficult ...... It is correct or incorrect.........

..  ......... Gold stored in the cellars of the Bank of England can be used as a common medium of exchange anywhere in the world. “Coffee in Brazil” is not the same good as “coffee in England.  THE PROBLEM OF THE EXISTENCE OF LOCAL DIFFERENCES IN THE OBJECTIVE EXCHANGE VALUE OF MONEY Chapter Outline ...... unless there are institutional limits restricting exchange.......... checks. Therefore..... has a subjective use-value qua consumption good at the place where it is..... physical location is a crucial feature of other economic goods. and clearing systems... through the use of banknotes........... (In the real world.. .. the money-price of any commodity in any place must be the same as the money-price at any other place.. there are possible costs of the transport of money......” from the perspective of English consumers.... and qua production good at those places to which it may be transported for consumption...... once we adjust for the money-cost of transportation. then we can derive the law that every economic good that is ready for consumption......... If we completely disregard the possible (but small) influence of the position of money on its valuation..... In contrast....... Interlocal Price Relations Money can perform its services from virtually any location..................

 Study Guide to The Theory of Money and Credit the need to re-coin it. A cocktail in a bar in Manhattan is a different good from the “same drink” in a bar in Boise. and so on. On the contrary. Alleged Local Differences in the Cost of Living Closely related to the fallacy that the purchasing power of money can vary from region to region. economically speaking. people would move out of the area until its prices had fallen enough to eliminate the discrepancy. It is simply not true that the same lifestyle can be obtained more cheaply in the rural town than in the resort town. etc. Alleged Local Differences in the Purchasing Power of Money Despite the arguments put forward in the previous section. the purchasing power of money will tend to be equalized in all regions where it is used. Here too we need to consider the subjective valuations of individuals.) . . that would affect the foreignexchange rate such as the cable rate. is the claim that the “cost of living” is higher in one area versus another. If the “cost of living” really were higher in one location. versus a rural area with no special attractions. However. many people still cling to the belief that one’s money “goes further” in some regions compared to others. the local night life. An apartment carries a higher rental price in a resort town near a popular beach. . this erroneous view neglects the fact that the same physical item is a different good. depending on its location. rather than the physical attributes of goods and services. precisely because people value the proximity to the beach. These complications do not arise if we assume the money itself stays put. so their different money-prices cannot lead us to conclude that the “value of money” is higher in Boise than in Manhattan. and any apparent discrepancies are due to differences on the commodity side.

.. Technical Notes • Mises says on page  that the money-price of a commodity must be the same in all places..... parking.......... for those workers who move to a region and do not subjectively value its amenities. Namely........” This caveat is necessary because the time dimension affects the subjective valuation of goods..... and disregarding “the time taken in transit... .. which is more valuable than having to wait a year to receive the same amount of money from Martian consumers.................. For example...... a hospital located in a resort beach town may need to offer a higher salary to attract (say) a qualified brain surgeon......... .Chapter : The Problem in the Objective Exchange Value of Money  ...... For an extreme example...... even after adding in explicit shipping expenses... due account being made for the money-cost of transport........ the high money-prices for rent. and so on must be compensated by an appropriate increase in their money-wages or salaries. if there happen to be no brain surgeons eager to live near the beach and who are therefore willing to accept the “normal” salary in the face of above-average prices for housing in the resort town...... if it takes one year to ship a new computer to a colony on Mars.. • Mises concedes on pages – that there is a limited sense in which a region’s higher “cost of living” is both valid theoretically and important in practice..... the manufacturer would insist on a higher retail price (obtainable in one year) than the current spot price on Earth. This is because the computer manufacturer could receive revenues from Earthbased customers immediately.... food.....

so that only net claims need be settled through the actual transfer of money................. New Terminology Clearing systems: Arrangements that cancel out or “clear” recipro- cal financial claims............ Study Guide to The Theory of Money and Credit ..............S............ Foreign-exchange rate: The exchange ratio between a domestic and foreign currency.................. Cable rate: Slang used by foreign-exchange traders to denote the exchange rate between the U.. dollar and British pound sterling........................ . ....

...... ) . Explain: “It is hardly possible to agree with these arguments [put forward by Wieser].......... Can government restrictions on the movement of commodities and workers explain differences in retail prices? (p.... Study Questions ...” (p. ) .. What does Mises intend with his example of a hotel on the peaks and valleys of the Alps? (p...... ) .............Chapter : The Problem in the Objective Exchange Value of Money  ..... ........ –) . What complementary good is necessary to turn the production good “coffee in Brazil” into the consumption good “coffee in Europe”? (p.................... Explain: “To what absurd conclusions should we not come if we regarded goods lying in bond in a customs or excise warehouse and goods of the same technological species on which the duty or tax had already been paid as belonging to the same species of goods in the economic sense?” (pp............. ) ........... which smack a little too much of the cost-of-production theory of value and are certainly not to be reconciled with the principles of the subjective theory......

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.. or whether one money is used  ......... it is clear that both monies are media of exchange among people in both countries... ..................... ... The Static or Natural Exchange Ratio between Different Kinds of Money Whether two different monies operate side by side in the same country under a parallel standard. and the two countries are closely tied economically through trade................. and silver the only one in the second country.......... while a second country uses a different money (such as silver) for their domestic purchases......  THE EXCHANGE RATIO BETWEEN MONEY OF DIFFERENT KINDS Chapter Outline ....... On the contrary... because merchants from one country can only trade goods with the other country’s merchants through the use of the other domestic money.... then it is incorrect to say that gold is the only common medium of exchange in the first country........... The Twofold Possibility of the Coexistence of Different Kinds of Money If the inhabitants of one country exclusively use a certain money (such as gold) for their domestic purchases...........

if the price of a barrel of crude oil. with no institutional obstacles to trade among its inhabitants. In that case.. there would be arbitrage opportunities for buying oil with one currency and selling it for the other. while the price of a barrel of crude oil quoted in Japan is . The theory of purchasing power parity says that the exchange ratio between two monies is determined by the respective exchange ratios of each money and other goods and services. There is no question of a dangerous “trade deficit” that could cause a “drain of money” from some people to others. will be distributed among the population in accordance with marginal utility. and buy a barrel of crude oil. it is because their demand for this good is higher than average.. a Japanese investor could take . including money. For example. into . Study Guide to The Theory of Money and Credit exclusively for domestic trade in one country while the other money is likewise used in a second country. and push down the yen-price of a dollar bill. suppose the exchange rate were  for  (rather than the equilibrium price of  for ). if some people acquire larger cash balances than others.. Then he could sell the oil to an American for . the same principle operates to regulate the exchange ratio (or what nowadays would be called the exchange rate) between the two monies. For example. If some people end up holding an above-average amount of (say) blankets. Finally he could go to the foreign exchange market and trade his  for . is . since he would be acting to push up the yen-price of oil. (His efforts to profit from this arbitrage opportunity would eventually eliminate it. By the same token. . it is because their demand to hold money is larger. then it is clear that all commodities. measured in American dollars. Thus the Japanese investor would have taken advantage of the existing price ratios to effortlessly turn his original .) If we first imagine a unified region using a single money. then the exchange rate between the two currencies must be  for . push down the dollar-price of oil. If the exchange rate were different.

An accumulation of money in one country versus another can only be sustainable if the demand to hold money increases in the first country relative to the second. as the prices in the country accumulating money will rise and the prices in the country losing money will fall.Chapter : The Exchange Ratio Between Money of Different Kinds  The same principles hold for nations. The aggregate figures of imports and exports are simply the summation of the trading activities between the individuals in each country. A trade deficit not accompanied by such a shift in the demand for money will be quickly self-reversing. .

...... because the definition of money is “a commonly accepted medium of exchange. while .... but the cause.. In that respect....... “[Classical political economy] demonstrated that international movements of money are not consequences of the state of trade..... but rather that we understand Mises’s point that international trade requires businesspeople to accept the monies used in foreign lands... • On page  Mises writes.. must at some point in the transaction exchange dollars for yen or vice versa..” Updating to our times.............................” To be sure.... nonetheless if the regions are closely bound by international trade. of a favourable or unfavourable trade-balance.... the important point is not whether we say that the yen is money in the United States... ..... However....... that they constitute not the effect.... However.. the yen is commonly accepted among Americans doing business with Japan.... in addition to all of the Japanese..... the yen is a medium of exchange that is accepted in trade by the American businessman.. what Mises has in mind is that the American businessman who wants to import cars from Japan... but it is not commonly accepted in the United States per se..... Study Guide to The Theory of Money and Credit .. then “from the economic point of view both [monies] must be regarded as money for each area... it is still not obvious that this should mean that the yen is money even in the United States.” He has in mind the following contrast in analysis: Suppose the English spend one million gold ounces importing wine from France... Technical Notes • Mises argues on pages – that even in cases where the consumers in two different countries use different monies in everyday transactions...

Chapter : The Exchange Ratio Between Money of Different Kinds

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the French spend only , gold ounces importing sweaters from England. An English mercantilist would probably bemoan the fact that his countrymen were importing more than they were exporting, and that this “unfavorable trade balance” was unwittingly losing , ounces of gold to the dastardly French. However, the classical economists such as Hume, Smith, and Ricardo could point out that the French (in the aggregate) apparently desired to increase their holdings of gold, while the English apparently desired to reduce their holdings. In that case, the only way to satisfy these shifts in money demand would be for the French to ship the English , gold ounces worth of goods, for which the English would not ship any (nonmonetary) goods in return.

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Study Guide to The Theory of Money and Credit

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New Terminology

Parallel Standard: A monetary system in which two different goods

both serve as monies. (For example, gold and silver might both serve as money under a Parallel Standard.)
Exchange rate: The ratio at which one currency trades against an-

other in the foreign-exchange market.
Purchasing Power Parity: The theory stating that the exchange

ratio between two monies is determined by the respective exchange ratios of each money and other goods and services.

Chapter : The Exchange Ratio Between Money of Different Kinds

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Study Questions

. When England operated on a gold standard, while Germany operated on a silver standard, does Mises think that silver should have been considered as money even in England? (pp. –) . How does the doctrine of purchasing power parity explain the exchange ratio between gold and silver in the example of cloth and wheat? (p. ) . Explain: “If no other relations than those of barter exist between the inhabitants of two areas, then balances in favor of one party or the other cannot arise.” (p. ) . What was the train of thought that Mises says “dealt the Mercantilist Theory its death-blow”? (p. ) . Explain: “[I]nternational movements of money, so far as they are not of a transient nature and consequently soon rendered ineffective by movements in the contrary direction, are always called forth by variations in the demand for money.” (p. )

 

THE PROBLEM OF MEASURING THE OBJECTIVE EXCHANGE VALUE OF MONEY AND VARIATIONS IN IT
Chapter Outline

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. The History of the Problem
Some of the greatest minds in economics have devoted themselves to the development of indexes that would provide an objective measurement of the change in the purchasing power of money. However, such statistical techniques have never lived up to their promises, as even their own creators often admitted.

. The Nature of the Problem
Just as we can express the price of any commodity by reference to how many units of money it takes to purchase one unit of the commodity, the opposite approach can yield the “price” of a unit of money in terms of the commodity. However, this technique yields as many “prices” of money as there are commodities. What economists desire is a method for combining all of this information into a single measurement of “the” purchasing power of money. Then, a second task is to ask of any particular commodity’s
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in practice it is only possible to carry out such calculations by making ad hoc assumptions about the relative importance of various factors. However. with a technique involving the contrast between nominal and real income. For example. Thus the average or net change in the prices of all the goods (as quoted in money) will demonstrate whether the purchasing power of money has risen or fallen. Methods of Calculating Index Numbers Nearly all attempts at measuring the objective exchange value of money have relied on the assumption that if a large enough collection of goods are included in the “basket” to be measured. robbing Wieser’s technique of its desired precision. . Study Guide to The Theory of Money and Credit price change. In the end. . the economic theorist does not gain much from studying the various statistics of price movements that he could not obtain from deductive reasoning about the nature of exchange and money. even Wieser’s approach had several fatal flaws. over large stretches of time. how much can be attributed to forces arising from the side of money (in contrast to a change in the relative scarcity of the good which would also make its price rise). Unfortunately. Wieser’s Refinement of the Methods of Calculating Index Numbers Wieser devised the most careful and satisfactory approach to measuring the objective exchange value of money. . then changes in the relative scarcities of the goods themselves will largely cancel out. the types of income people could earn become incommensurable.

these techniques provide a rough guide to changes in the purchasing power of money. .Chapter : The Problem of Measuring the Objective Exchange Value of Money  . The Practical Utility of Index Numbers The criticisms leveled against various techniques for calculating index numbers refer to the problems of economic theory. In practical use for government policy.

....... then it would be clear that the purchasing power of money had fallen and was the driver of the price increases..... But in the real world.. On the other hand. and the price movements are not in the same percentages across commodities... they run into the problem that there are no such invariable benchmarks.. and merely reflect a shift in demand away from televisions and into oil. There is no nonarbitrary way to determine how much of a given good’s change in price is due to changes in its relative value (with respect to other commodities) versus a change in the purchasing power of money........ ................ If the exchange ratio between money and any other commodity changes.. If the price of oil increases from  to .. if a person is using a meter stick to measure length.... if all prices (quoted in money) in the community increased exactly by  percent in one year. .... while the price of a television falls from  to . ..” For example... Yet when economists try to measure changes in the objective exchange value of money (i......... . “Invariability in respect of the property to be measured .. then he must be assuming that the meter stick’s length is itself invariable....... is a sine qua non of all measurement. Study Guide to The Theory of Money and Credit ... Typically some prices rise while others fall. things are never so clear-cut..... • Some numerical examples may clarify Mises’s observations on index numbers (pp........ it is possible that these changes have nothing to do with the purchasing power of money.............. Technical Notes • On page  Mises writes.. it is not clear whether the change originates from the side of money or the commodity. –). in the purchasing power of money).......e.

......... ) . ..................... Explain: “He who cares to go to the trouble of demonstrating the uselessness of index numbers for monetary theory and the concrete tasks of monetary policy will be able to select a good proportion of his weapons from the writings of the very men who invented them..... Why are index numbers not very important for the “extension of the theory of the nature and value of money”? (pp. ) ........ why is this approach unhelpful when it comes to the use of index numbers in monetary theory? (p....Chapter : The Problem of Measuring the Objective Exchange Value of Money  ................. –) .. Explain: “Only by letting fall morsels of statistics is it possible for the economic theorist to maintain his prestige in the face of questions of this sort......... Does Mises think that index numbers are completely useless? (p..... Study Questions ...... Even if we grant for the sake of argument that a loaf of bread possesses a constant utility in the objective sense of food value..” (p.” (p... ) ....... ) ..........

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............e..... Although businesspeople take great caution regarding changes in the prices of particular commodities.......  THE SOCIAL CONSEQUENCES OF VARIATIONS IN THE OBJECTIVE EXCHANGE VALUE OF MONEY Chapter Outline ............... rising prices of most goods and services quoted in the currency)....... If both lenders and borrowers expect a weaker currency in the future (i...... they typically do not take into account the possible fall in the objective value of money itself...... Hardly anyone (at the time of Mises’s writing) realizes that the exchange value of gold itself could change during the length of a contract........ then their impact could be offset by altering the terms of credit transactions.. for example by lending money today (a present good) in exchange for a promise of repayment of future principal plus interest....... To the extent that people do protect themselves in contracts from possible changes in the value of a currency.... .. then lenders will insist on charging a  .......... it is only a paper currency the value of which might fall relative to a currency backed by gold..... The Exchange of Present Goods for Future Goods People often exchange present goods for future goods.... or by agreeing today to exchange goods against money in the future. If changes in the purchasing power of money could be anticipated...........

However. because the greater quantity of coal can yield more goods and services. But since the purchasing power of money itself can change. for example). Economic Calculation and Accountancy Accountancy is imperfect in several respects. additional quantities confer no net benefits on the community. . Social Consequences of Variations in the Value of Money When Only One Kind of Money is Employed If the quantity of a commodity such as coal is suddenly and unexpectedly increased. . When new quantities of money enter the economy (from a new gold mine. Insofar as its monetary services are concerned. The chief beneficiaries are the . such as the value of inventory (which is dependent on future demand) and the likelihood of default by the issuers of bonds. it spreads unevenly throughout the system. Things are different with the money commodity. it relies on subjective estimates of uncertain factors. Study Guide to The Theory of Money and Credit higher interest rate and borrowers will be willing to pay it. accountancy is analogous to an architect designing blueprints in a world where rulers have variable lengths. This will hurt those people who were holding large amounts of coal (such as the owners of coal mines and wholesalers) at the moment of the price drop. and it will help the consumers of coal (such as the owners of railroads and power plants). it will cause its price to drop. the gains will exceed the losses for the community as a whole. because loans will be repaid in weaker currency. Yet another major flaw is that accountants use monetary figures as if they were akin to measures of length and weight. Monetary depreciation can cause businesspeople to overestimate their profits and unwittingly engage in capital consumption. For example.

with U. even though their expenses . In this situation. The losers are those whose incomes (measured in money) do not rise even as they see prices going up in the things that they buy. and so on. wheat selling for (say)  and European wheat selling for . while wheat purchased from European farmers would be the original . The prices of wheat in the two currencies would quickly adjust until balance had been restored.Chapter : Social Consequences in the Objective Exchange Value of Money  original owners. from the perspective of European millers. then those upon whom they first spend the new money. Then the Federal Reserve promises to sharply increase the quantity of dollars over the next few months. and that the price of a bushel of wheat initially is  and also . The Consequences of Variations in the Exchange Ratio Between Two Kinds of Money The uneven increase in prices due to an influx of new money (either from gold discoveries or from the issuance of more paper money and fiduciary media) can lead to redistribution even among groups using different currencies. For a modern example. But even after this quick adjustment. suppose initially that one U. there would be a lasting advantage given to American wheat exporters. Wealth is redistributed from some groups to others.S. The demand for American exported wheat would increase. . because they could sell wheat for  instead of .S. wheat would be . dollar trades for one euro. while the American demand for European wheat would collapse.S. the price of U. so that speculators on the foreign exchange market push down the value of the dollar so that it now trades for only one-half of a euro. but the community as a whole is not made richer by the influx of new money (except possibly indirectly if the beneficiaries of the inflation make more productive use of their redistributed wealth than the former owners).

S. Study Guide to The Theory of Money and Credit (on labor. etc.S. even while their money incomes stayed the same. Only after all U. European millers and consumers of bread would also benefit. because from their perspective the price of wheat would have fallen from  to  per bushel. Two large groups of losers would be U. tractors. . consumers and European wheat farmers.) had not yet risen proportionally. domestic prices had adjusted to the new quantity of dollars would the redistribution cease.

. because normally economists would describe the use of futures contracts as themselves “insurance” or “hedging” operations... For example. Technical Notes • On pages –........... The bread producer would thus gladly buy the futures contracts issued by the farmer.. by means of insurance or hedging transactions ........ or sugar futures ... On the other side of the transaction.. .............. if a farmer knows he will have a large harvest of wheat to sell in six months. “When anybody buys (or sells) corn.... ...................... He will carefully weigh the chances of future variations in prices. he is well aware of the risks that are involved in the transaction.. ..... However. which is economically very similar to a futures contract. so that a sudden price spike won’t cripple operations.. and often take steps... ......” His purpose in this passage is to contrast the businessman’s wariness concerning individual price changes over time.. and his ability to make his mortgage payments and pay other expenses depends critically on the price of wheat. a large operation that makes bread may itself want to lock in the price of one of its major inputs. Mises writes.. (Technically we have described a forward contract.. This is a mutually beneficial arrangement in which no money changes hands in the present.....Chapter : Social Consequences in the Objective Exchange Value of Money  ... with the businessman’s (at that time) ignorance of changes in the purchasing power of money over time. . cotton.... to reduce the aleatory factor in his dealings......) The use of futures contracts and other . but the two parties today lock in the price at which they will exchange wheat for money in the future.. the farmer may want to “lock in” the price by selling futures contracts in wheat. Mises’s description is difficult to explain to a novice....

The man realizes that his fancy dinners and cruises were funded not out of profits but by eating away at his business assets. a new machine has a price of . disregarding interest) the man may discover that because of the fall in the purchasing power of money. each year the man might spend the remaining “profit” on fancy dinners and vacation cruises. suppose a man spends . If inflation causes him to earn far more than he originally anticipated over the years from the sale of his goods. If prices are stable (and disregarding interest). after setting aside . on a machine that lasts for ten years. • Mises warns (pp. where they forfeit the potential benefits of a favorable move while avoiding the downside of an unfavorable move. after ten years (with .. For a simple example. This is the sense in which such contracts can serve as insurance. the man needs to earn at least . . Study Guide to The Theory of Money and Credit derivatives can allow market participants to hedge away their exposure to particular price swings. in hand. However. each year in sales revenue over and above labor and other expenses. –) that a depreciating currency can lead to capital consumption. in order to account for the depreciation on his machine. Thus the man unwittingly consumed half of his capital over the decade: he started with one new machine and ended up with the means to buy only half of a new machine.

) These daily episodes of marking-to-market restore the market value of the futures contract itself to zero..... Futures contract: A standardized contract................. Forward contract: Similar to a futures contract........ etc.. Thus the forward contract can achieve a positive or negative market value.. New Terminology Capital consumption: A metaphor denoting the reduction in cap- ital because of a failure to reinvest enough out of current output....... traded on an organized exchange..... the buyer pays the forward price as originally specified in the contract..... not the futures price as originally specified. as conditions change and cause the actual spot price (on the delivery date) to move above or below the originally specified forward price........... As conditions change and alter the futures price pertaining to the delivery date.. Upon delivery.... Hedging transaction: A financial transaction in which an individual attempts to reduce his or her exposure to a market outcome.. the seller of the futures contract delivers the good...... there is no daily marking-to-market.......... ....... (If the futures price goes up...... Furthermore. the exchange will credit or debit the accounts of the buyer and seller of the original futures contract on a daily basis to reflect the change... where two parties agree to exchange a good at a specified price (the futures price) at a specified future date (the delivery date)...... while the buyer pays the current spot price for that date... though a forward contract is not standardized..Chapter : Social Consequences in the Objective Exchange Value of Money  . On the delivery date... . the buyer gains and the seller loses.

Aleatory: Dependent on chance. someone who believes that Stock XYZ will outperform most other stocks might “go long” by purchasing several thousand shares of it. even if XYZ falls in price. But to hedge himself against a general fall in the market. or an uncertain outcome. luck. the investor will still make money. Thus. Study Guide to The Theory of Money and Credit For example. he might also “go short” an index fund holding all the stocks in the S&P . so long as Stock XYZ drops by a smaller amount than most other stocks. .

....... while others hold mostly cash? (Keep in mind that for this argument Mises has assumed away the problem of contracts for future goods.............. furniture and machines.....) .... Does Mises’s argument assume that everyone holds the same fraction of his or wealth in the form of cash balances.... who is hurt—creditors or debtors? (p..Chapter : Social Consequences in the Objective Exchange Value of Money  ...... for gold which it little needed or did not need at all....... ) *. What is necessary to eliminate the undesirable consequences of “unlimited inflationary policy”? (p.. If the purchasing power of money unexpectedly falls......” (p..... metal goods and textiles... or does it also work if some people hold (say) large amounts of real estate.” (p... ) . Relate the following comment to Mises’s earlier discussion (p...... ... Study Questions .... . the relative wealth of individual economic agents would not be affected” (p. for what it had already was enough for all its monetary transactions. ) of the hypothetical possibility of fiat money: “Lenders and borrowers are not in the habit of allowing for possible future fluctuations in the objective exchange value of money.. “If the objective exchange value of all the stocks of money in the world could be instantaneously and in equal proportion increased or decreased..... Mises writes... ) . [and] if all at once the money-prices of all goods and services could rise or fall uniformly................. Explain: “Europe had exported ships and rails... ) * Questions with an asterisk signify the question is a particularly difficult one.. )....

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.... citizens judged the success of monetary policy by the soundness of the coinage it maintained in circulation...” Economics can say.... The chief instrument through which the State carries out monetary policy is its strong influence on the kind of money used by the citizenry. Inflationism is that monetary policy that seeks to increase the quantity of money. In modern times monetary policy refers to government (or central bank) efforts to alter the purchasing power of money...... but they support it too because they believe some essential government programs sometimes must be paid for through an “inflation tax.. A third group of inflationists understands that the policy in general will wreak economic havoc.........  MONETARY POLICY Summary Originally... A second group of inflationists understands that printing more money will cause prices to rise.................. but endorses the policy because they want to help debtors or achieve some other goal.............. . Naïve inflationism believes that money constitutes wealth........... Restrictionism or deflationism is policy that aims at raising the objective exchange value of money...... It is unpopular for various reasons..... without making any value judgments....... that inflationism is a very poor policy for achieving its stated objectives... the only sensible monetary policy is  ..... Because neither inflationism nor deflationism is capable of achieving its stated objectives..... and that creating more money will turn poor into rich......

such that prices tend to fall. In practice. the only coherent definition for inflation is an increase in the quantity of money (in the broader sense of the term) that is not offset by a corresponding increase in the demand for money (in the broader sense of the term). Deflation is the opposite. In technical economic theory. namely a reduction in the quantity of money that is not offset by a fall in the demand for it. which in modern times means either the gold or silver standard. with the necessary result being a fall in the purchasing power of money. this means a rigid adherence to a commodity standard. . The economist who wishes to influence public policy and avert disaster shouldn’t lecture others on their sloppy use of terminology. Study Guide to The Theory of Money and Credit one that aims at eliminating all government interference with the purchasing power of money. but instead should expose the errors of inflationism.

...... The Instruments of Monetary Policy The chief instrument through which the State carries out monetary policy is its strong influence on the kind of money used by the citizenry.. budgetary) ends: the authorities needed more money and so turned to inflation........... the owners of gold mines favoring a return to the gold standard—in general monetary policy nowadays refers to government (or central bank) efforts to alter the purchasing power of money.. .. the modern State has wide discretion in this “choice” by its subjects........... If the State decides to remain on a metallic standard (such as gold or silver).Chapter : Monetary Policy  .. . Monetary Policy Defined Originally........ then the State has the further option of altering the quantity of money at will.......... governments use monetary policy to achieve other socio-political aims......e. If and when governments violated that trust by debasing the coinage.... however....... to achieve its objectives regarding the purchasing power of money...... it was for fiscal (i... if the State opts for a credit or fiat money. citizens judged the success of monetary policy by the soundness of the coinage it maintained in circulation.... As controller of the mint and sole issuer of money substitutes.... Chapter Outline .. Although particular factions may favor one monetary policy versus another because of the specific advantages they expect to derive—for example........ More generally....... In modern times... then it still must choose which precious metal........

But when the programs are funded (partially) through the printing press. because they want to help debtors. Its proponents candidly admit that the public would never support certain programs (such as major wars) if they were forced to explicitly bear the full financial burden through taxation or government deficits financed by genuine savings. then prices in the present can rise in expectation. But what economics can . Yet even so this second group endorses the policy. Inflationism Inflationism is that monetary policy that seeks to increase the quantity of money. Ironically. by raising prices. there may appear a shortage of notes. a third group of inflationists understands that the policy in general will wreak economic havoc. Economic science cannot judge the policy objectives of inflationism. Naïve inflationism believes that money constitutes wealth. Finally.” This third defense of inflation underscores the anti-democratic nature of the policy. Study Guide to The Theory of Money and Credit . if the public anticipates a sharp future decline in the purchasing power of money because of an influx of new notes (printed by the government). in order to satisfy the apparent “needs of commerce. Yet until the new notes physically exist. it cannot say whether it is proper to (say) help debtors or exporters at the expense of others. but they support it too because they believe some government programs (such as defense from foreign invaders) are absolutely essential. and that creating more money will turn poor into rich. it is not clear to the average voter what is causing prices to rise and his standard of living to fall. Thus the public and academics may clamor for more inflation. not government spending.” Yet it is inflationism itself that has caused the problem. A second group of inflationists understands that printing more money will cause prices to rise (an elementary fact that the first group fails to see). or achieve some other goal. and sometimes must be paid for through an “inflation tax. and further bouts will only exacerbate the situation. He blames unions or currency speculators.

Invariability of the Objective Exchange Value of Money as the Aim of Monetary Policy If neither inflationism nor deflationism is capable of achieving its stated objectives. For example. a nation with an appreciating currency would see a “deteriorating” trade balance in the eyes of the public. . who generally speaking are a small and unpopular group. . governments do not benefit from it because they must sacrifice potential spending in order to (say) retire some of the notes collected through taxation. the only sensible monetary policy is one that . In general it must be concluded that deflationism is a poor method for achieving the specific aims of its proponents. Each of its alleged goals (helping debtors. a policy of deflationism does not simply reverse the harms of the prior inflation. the primary beneficiaries of deflationism are creditors. The only time deflationism is politically viable occurs after a period of inflationism. but instead causes many new harms of its own. is that inflationism is a very poor policy for achieving its stated objectives. In this sense economics can criticize inflationism. Second. etc. First. Yet even here.) can be achieved much more directly by other interventions besides a general debasement of the monetary unit. many of the creditors who will be helped by the current round of deflation were not the same people harmed during the inflation.Chapter : Monetary Policy  say. Finally. which is also unpopular. either for matters of prestige or to assure international creditors to continue using a certain country’s financial institutions. helping exporters. It is unpopular for various reasons. without making any value judgments. Restrictionism or Deflationism Restrictionism or deflationism is policy that aims at raising the objec- tive exchange value of money.

outside the realm of technical economics. namely a reduction in the quantity of money that is not offset by a fall in the demand for it. which in modern times means either the gold or silver standard. . However. Study Guide to The Theory of Money and Credit aims at eliminating all government interference with the purchasing power of money. the terms inflation and deflation have certain connotations. with the necessary result being a fall in the purchasing power of money. Deflation is the opposite. such that prices tend to fall. but instead should expose the errors of inflationism. this means a rigid adherence to a commodity standard. long-run effects of their efforts to manipulate the currency. the only coherent definition for inflation is an increase in the quantity of money (in the broader sense of the term) that is not offset by a corresponding increase in the demand for money (in the broader sense of the term). . and this is one of the strongest arguments against such manipulation in the first place. The economist who wishes to influence public policy and avert disaster shouldn’t lecture others on their sloppy use of terminology. Excursus: The Concepts Inflation and Deflation In technical economic theory. in this realm as in others the government’s power is limited. The Limits of Monetary Policy As all government efforts to influence the purchasing power of money must ultimately work through the subjective valuations of individuals. The authorities cannot anticipate the precise. . In practice.

... Thus a metallic standard keeps sharp limits on the inflationary policies of any single country.... the U.. while the British government pegged its own currency at the rate of ..... would have to abandon its inflationary path... grains of gold (working out to around ...S.. Technical Notes • On page  Mises writes....... this would tend to cause domestic prices (quoted in dollars) to rise faster than they did (quoted in pounds) in Great Britain..Chapter : Monetary Policy  ... But since both currencies were tied to gold at fixed rates... .... for example... the United States government pegged the dollar to ....... per ounce). to an ounce of gold...... as its gold reserves began to dwindle.... Thus...” What Mises has in mind—and this is borne out by the important phrase “by itself”—is that the classical gold standard placed strict limits on each of the participating countries....... to a pound............ In the period before the first World War..S...... authorities in exchange for gold. then the only measure of currency policy that it can carry out by itself is to go over to another kind of money..... Thus the exchange rate between the dollar and British pound was fixed at . the falling dollar would open up an arbitrage opportunity for speculators to turn their dollars into the U...... If the United States government began printing up excessive amounts of new dollars.... This in turn would put pressure on the foreign exchange rate........ and the resulting trade deficit would allow the British to accumulate more and more dollars... “If a country has a metallic standard. which would (under a fiat standard) simply cause the dollar to depreciate against the British pound. . Americans would start importing more from (cheaper) British producers....

For a modern example.-fold rise in prices.S. Even ignoring the step-by-step process of inflation. it has been observed that the decrease in the value of the money has occurred faster than the increase in its quantity. . because Americans would no longer want to hold dollars. the end result would not simply be a general . prices would have to rise not merely on account of the extra quantity of dollars. then. in the course of a week. prices (quoted in U. “In all countries where inflation has been rapid. dollars to rise by a factor of .S.” On the following page he explains that the value of money is influenced by both supply and demand. They would no longer view the dollar as a safe currency. suppose that the Chairman of the Federal Reserve announced that he would cause the quantity of U. but also because of the sharp drop in the subjective desire to hold them. Study Guide to The Theory of Money and Credit • On page  Mises writes. In order to restore equilibrium. Instead. and would seek to replace their dollar holdings with either other currencies or perhaps the precious metals. dollars) would rise by much more than that.

..... (Note that this is a technical economic definition...................... (Note that this is a technical economic definition. such that prices tend to fall... not necessarily having the connotations of “inflation” in popular discussions..) .................. Inflation: An increase in the quantity of money (in the broader sense of the term) that is not offset by a corresponding increase in the demand for money (in the broader sense of the term).......... Inflationism: Monetary policy that seeks to increase the quantity of money............ with the necessary result being a fall in the purchasing power of money...) Deflation: A reduction in the quantity of money that is not offset by a fall in the demand for it.... .. New Terminology Monetary policy: Government or central bank efforts to alter the purchasing power of money.... Inflation tax: The redistribution of wealth from the citizenry to the government (or its designated beneficiaries) through inflation................ Restrictionism/Deflationism: Monetary policy that aims at raising the objective exchange value of money. Naïve inflationism: Inflationism supported by the belief that money constitutes wealth.....Chapter : Monetary Policy  .. not necessarily having the connotations of “deflation” in popular discussions.

...... Is it possible for someone to support inflationism. It could not be used as a standard of deferred payments” (p.. Explain: “[I]nflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed...... “In the long run. What unflattering possibility does Mises suggest regarding Ben Franklin’s support of paper money early in his career? (p...” (pp...... Study Questions ... since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them........ policy. and so in this sense it can be called an instrument of unpopular..................... a money which continually fell in value would have no commercial utility.. Study Guide to The Theory of Money and Credit . Would Mises have been surprised by the second half of the twentieth century.....e.. –) ... i... )? .. –) .......... ) ......... Why does “naïve inflationism” recommend an increase in the quantity of money? (pp.. even if he understands that it will have grave economic consequences? (pp........ .. of anti-democratic....... since he writes. –) ......

.. because the outflow of metal will lead to falling domestic prices.  THE MONETARY POLICY OF ÉTATISM Summary Étatism as a theory is the doctrine of the omnipotence of the State.... The étatist views money as a creature of the State............... For countries on credit or fiat money.. or where a wealthy country had a very weak currency. However. As a policy.. controlling more prices and possibly compelling people to work against their will........ Often the authorities will try to mitigate the consequences of inflationism by imposing price controls.... étatism is the attempt to regulate all social and economic affairs by authoritative commandment and prohibition... then shortages will develop because the producers of these items will see other prices rise but will not be able to charge appropriate prices for the items in question. if a country uses purely metallic money........ The authorities must then either abandon their policy or intervene further still...... until the underlying defects are rectified...... But history is full of cases where even the victors in a war saw the collapse of their currency..... and hence (erroneously) believes that a powerful and rich State should have a correspondingly “good” money... a similar principle holds... A debit balance of payments per se cannot .........  ...................... then a debit balance of payments will eventually reverse itself automatically..... If the controls are applied to a small number of items. A popular view holds that a country experiencing a debit balance of payments cannot stabilize the value of its money.....

a country can always choose sound money. No matter the foreign trade situation. . If the government wishes to avoid having its currency “attacked” by speculators. it need only abandon inflationist policies. Study Guide to The Theory of Money and Credit unilaterally cause a nation’s currency to depreciate. because the debit balance itself is caused by inflation.

... Chapter Outline ..e........ The Regulation of Prices by Authoritative Decree Often the authorities will try to mitigate the consequences of inflationism by imposing price controls. As a policy........................ The Monetary Theory of Étatism Étatism as a theory is the doctrine of the omnipotence of the State..... ... and hence (erroneously) believes that a powerful and rich State should have a correspondingly “good” money (i. étatists seek to discredit these fields... If the controls are applied to a small number of items. Because sociology and economics detail the limits on what sheer might can achieve in attempting to redesign human society....... ... or where a wealthy country had a very weak currency.... money with a high exchange rate)............ étatism is the attempt to regulate all social and economic affairs by authoritative commandment and prohibition. National Prestige and the Rate of Exchange The étatist views money as a creature of the State. This outcome is the ..... in practice étatism can only be realized as State Socialism...... in which people are punished by fines or prison sentences for asking (or even paying) prices above the legal ceiling...... then shortages will develop because the producers of these items will see other prices rise but will not be able to charge appropriate prices for the items in question.....Chapter : The Monetary Policy of Étatism  .... But history is full of cases where even the victors in a war saw the collapse of their currency........... Although the outward appearances of private property and entrepreneurship may be left intact..

However. then a debit balance of payments will eventually reverse itself automatically. A debit balance of payments per se cannot unilaterally cause a nation’s currency to depreciate. . because the outflow of metal (such as gold) will lead to falling domestic prices. not to eradicate them from the store shelves. Thus the debit balance will turn into a credit balance of payments.” Yet . For countries on credit or fiat money. The BalanceofPayments Theory as a Basis of Currency Policy A popular view holds that a country experiencing a debit balance of payments cannot stabilize the value of its money. the authorities must either abandon their policy or intervene further still. they had imposed the price controls to keep the items accessible to the public. Study Guide to The Theory of Money and Credit opposite of what the authorities intended. If a country uses purely metallic money. At this point. and foreign purchasers will prefer to buy more cheaply from them as well. a similar principle holds. and the monetary metal will tend to flow back into the country that originally experienced the drain. Eventually. government officials will often denounce foreign speculators for “attacking the currency. because the debit balance itself is caused by inflation. The Suppression of Speculation When inflationist policies lead to a depreciation of a country’s money against other currencies. No matter the foreign trade situation. until the underlying defects are rectified. controlling more prices and possibly compelling people to work against their will. . a country can always choose sound money. residents will prefer to buy from domestic producers rather than foreigners. the classical economists and later the Currency School demonstrated the flaws in this view.

they simply smooth out the ups and downs. The speculator tries to buy low and sell high (or vice versa). the speculator pushes up the price toward its long-run level. . If the government wishes to avoid having its currency “attacked” by speculators. it need only abandon inflationist policies. the speculator pushes them down toward the “correct” level. speculators cannot alter the average price of a good (including money). and by selling overvalued currencies. By buying undervalued currencies.Chapter : The Monetary Policy of Étatism  in general.

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Study Guide to The Theory of Money and Credit

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Important Contributions

On pages –, Mises explains the process by which limited interventions lead to undesirable consequences, even from the point of view of the authorities. These in turn lead to further interventions, in an attempt to counteract the bad consequences. The process continues until the authorities either abandon their program or reach full-blown socialism. Although economists before Mises understood the undesirable effects of price ceilings, this broader dynamic was something that Mises stressed throughout his career. Mises contrasted the virtues of a free market versus outright socialism, precisely because he thought it was a mirage to endorse a “mixed economy” that avoided either extreme. In fact in  he would deliver a speech entitled, “Middle of the Road Policy Leads to Socialism.” On pages –, Mises showcases his numerous talents as an economist. He demonstrates a command of pure economic theory, the history of economic thought, and the day-to-day activities in the actual foreign exchange market. It is only because of his mastery of all three areas that he can so confidently explain the errors in rival doctrines, and why the businessman is fooled by correlations that do not represent actual causality when it comes to trade flows and exchange rates.

Chapter : The Monetary Policy of Étatism

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New Terminology

Étatism (as theory): The doctrine of the omnipotence of the State. Étatism (as policy): The attempt to regulate all social and economic

affairs by authoritative commandment and prohibition.
Mixed economy: An economy possessing aspects of both capital-

ism and socialism, in which private individuals retain nominal ownership of the means of production, but the government extensively regulates their use of this property, including wages, interest rates, and other prices set on the market.
Debit balance of payments: The situation occurring when the peo-

ple of a country collectively spend more on foreign goods and assets than vice versa. It is settled by an outflow of money from the country.
Credit balance of payments: The situation occurring when the peo-

ple of a country collectively spend less on foreign goods and assets than vice versa. It is settled by an inflow of money to the country.
Shortages: A shortfall in the quantity of goods offered for sale,

compared to the amount consumers wish to purchase. Shortages are caused when a price ceiling holds the price below the market-clearing level.

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Study Questions

. Why does economic science pose a threat to étatism? (p. ) . After a price ceiling is imposed, what happens once the stocks of goods that were already on the shelves have been sold off? (p. ) . Explain: “If the regulation of prices had been successful, it would have paralyzed the whole economic organism. The only thing that made possible the continued functioning of the social apparatus of production was the incomplete enforcement of the regulations that was due to the paralysis of the efforts of those who ought to have executed them.” (p. ) . Explain: “Price fluctuations are reduced by speculation, not aggravated, as the popular legend has it.” (p. ) . Explain: “The fluctuations of the foreign-exchange rate are not determined solely by bears selling but just as much by bulls buying.” (p. )

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MONEY AND BANKING

....... Loans of the first type (in which the lender actually renounces the use of his money) involve commodity credit while loans of the second type (in which the bank issues fiduciary media) involve circulation credit........  ... and () those in which one party has the benefit of obtaining a good in the present while the other party does not suffer any corresponding disadvantage..... The business of banking falls into two distinct categories: () the negotiation of credit through the loan of other people’s money and () the granting of credit through the issue of fiduciary media........... banks borrow from lenders at a certain rate of interest and then lend it to borrowers at (what promises to be) a higher rate of interest. Credit transactions involve the exchange of present for future goods.......  THE BUSINESS OF BANKING Summary A banker is one who lends out other people’s money...... ........ He retains the full use of his money.... Credit transactions can be divided into two groups: () Those in which one party has the benefit of obtaining a good in the present while the other party has the disadvantage of providing a good in the present.... In their role as negotiator of credit (or credit intermediaries)............. even as the bank lends it to someone else......... a capitalist lends out his or her own money............... The crucial feature in loans of fiduciary media is that the original depositor is not engaged in a credit transaction........

. can the economist hope to understand the broader role that fiduciary media play in economic cycles. Study Guide to The Theory of Money and Credit This process increases the total amount of money in the broader sense. Only by recognizing the fundamental distinction between notes and current accounts that are either (a) backed versus (b) unbacked by money.

.......... Credit transactions can be divided into two groups: () Those in which one party has the benefit of obtaining a good ...... In this activity...” if they want to avoid the risk of insolvency................. will not eliminate all risks of course... The business of banking falls into two distinct categories: () the negotiation of credit through the loan of other people’s money and () the granting of credit through the issue of fiduciary media. The Banks as Issuers of Fiduciary Media Credit transactions involve the exchange of present for future goods...... prudent banks will obey the golden rule by which their liabilities will not mature earlier than their assets. because any investment could go sour and the borrower default on the loan from the bank...... Following the golden rule........ banks borrow from lenders at a certain rate of interest and then lend it to borrowers at (what promises to be) a higher rate of interest.. by matching the maturities of assets and liabilities.. In other words.. a capitalist lends out his or her own money.. Chapter Outline .) .. Types of Banking Activity A banker is one who lends out other people’s money........... the banks should not “borrow short to lend long.................. ....... (Recall that fiduciary media are notes and bank balances—claims on money—that are not actually covered by money in reserve.. The Banks as Negotiators of Credit In their role as negotiator of credit (or credit intermediaries)...Chapter : The Business of Banking  ...

He is not lending the bank his money. an absolutely secure and immediately redeemable claim will inherit the market value of the good itself. They are not mere credit intermediaries. since (unlike all other goods) nobody ever is the final “consumer” of money proper. unbacked claims to money) are issued. which then is the basis upon which fiduciary media (i. the banks increase the total amount of money in the broader sense. The crucial feature in these operations is that economically speaking. A customer will deposit actual money with the bank. without taking it away from the original group. Study Guide to The Theory of Money and Credit in the present while the other party has the disadvantage of providing a good in the present. Therefore by granting new loans on top of such deposits. This second class of credit transactions is possible when a creditor issues fiduciary media. Deposits as the Origin of Circulation Credit The issue of fiduciary media is intimately connected with the deposit system. but instead are granting the economic use of money to a new group.. but is merely depositing it. . this person lends without really giving anything up. . Therefore. However. what makes fiduciary media special is that they can indefinitely function as money substitutes. Loans of the first type (in which the lender actually renounces the use of his money) involve commodity credit while loans of fiduciary media involve circulation credit. claims to it can circulate in the community without ever being redeemed. which allows the banks to issue fiduciary media in the first place. because he still retains the full economic use of his money in the present. the original depositor is not engaged in a credit transaction. and () those in which one party has the benefit of obtaining a good in the present while the other party does not suffer any corresponding disadvantage.e. For all goods.

Fiduciary Media and the Nature of Indirect Exchange Only by recognizing the fundamental distinction between notes and current accounts that are either (a) backed versus (b) unbacked by money.com/watch? v=6HAEPSt_12U] Some writers treat the expansion of banks’ note-issue as akin to an increase in the community’s demand for credit. “The Theory of Central Banking. it is also a mistake to deny fiduciary media’s ability to facilitate indirect exchanges.Chapter : The Business of Banking  . When someone sells a commodity for a banknote. then the interest rate tends to go up. with the depositor’s money serving as part of the reserves behind the new loan. [: A full description of the accounting of fractional-reserve banking is available in the lecture. the bank supplies credit: when it issues more notes. can the economist hope to understand the broader role that fiduciary media play in economic cycles. The Granting of Circulation Credit The specific method of issuance of fiduciary media is irrelevant for its effects on the value of money. and then uses the banknote to purchase another commodity. this is an indirect exchange just as surely as if the person had used money proper. In contrast. or () grant new loans in the form of checkbook accounts. the rate of interest (at least initially) goes down. perhaps by issuing more bills of exchange. . On the other hand.youtube. But if the community tries to borrow more. () issue other bank clients banknotes which may be redeemed with the depositor’s money. The bank might () literally lend out the original depositor’s money (while the original depositor still believes he has full and immediate claim to it).” at: http://www. .

Mises is designing his theoretical edifice to highlight the phenomenon........ and the issue of fiduciary media..... Study Guide to The Theory of Money and Credit ............ classifies the two activities as loan banking versus deposit banking. • .. .e... Continuing with the previous note..... deposit banking) that some earlier economists had discovered.... in his work on banking............................ (Murray Rothbard..... Mises shone a spotlight on the distinction and will go on to point out the problems with the issue of fiduciary media (i....) Although other writers are familiar with these concepts.................. Precisely because he believes the issuance of fiduciary media play such a crucial role in the boom-bust cycle in market economies.... Mises explains his settling on the terms commodity credit and circulation credit on pages –.. Mises divides banking into two categories: the negotiation of credit through the loan of other people’s money..... Important Contributions • In the beginning of this chapter......

................ Circulation credit involves the use of fiduciary media.. Commodity credit may involve money certificates but not fiduciary media.. increases in short-term interest rates can lead to disaster... Current accounts (in banking): Accounts held with a bank................. so that the bank is not dependent on the ability to “roll over” maturing debt......Chapter : The Business of Banking  ......... If a bank does not follow the golden rule... giving the owner the ability to write drafts or withdraw money upon . Bill of exchange: A non-interest-bearing written order that binds one party to a pay a fixed sum of money to another party at a specified future date or upon demand. New Terminology Banker: A person who lends out other people’s money... when the bank must pay its own creditors while its assets are not yet due. A bill of exchange is generally transferable through endorsement... Credit intermediaries: Institutions that act as “middlemen” between lenders and borrowers.......... Circulation Credit: A loan granted even though the lender does not sacrifice the use of present goods....... .......... Commodity Credit: A loan granted through the renunciation of the use of present goods by the lender....... Capitalist: A person who lends out his or her own money........... Golden rule (of bank lending): Matching the maturities of assets and liabilities.

The depositors consider this money to be part of their cash balances. where the bank receives deposits into current accounts from one group of clients in order to make loans to another group of borrowers. Study Guide to The Theory of Money and Credit demand. . (Today a standard “checking account” would be an example. The savers do not consider this money as part of their cash balances during the term of the loan to the bank.) Loan banking: Banking through the use of commodity credit. even though much of it has been lent out to others. Deposit banking: Banking through the use of circulation credit. where the bank receives loans from one group of savers in order to itself make loans to another group of borrowers.

.......... ) .......... Why does Mises say that fiduciary media “can therefore be created only by banks and bankers”? (p................... Explain: “[Credit circulation] loans are granted out of a fund that did not exist before the loans were granted........ Does Mises realize that modern banks perform other operations besides the two types of banking he mentions? (pp. ) .” (p........ . ) ................... Explain: “A person who has a thousand loaves of bread at his immediate disposal will not dare to issue more than a thousand tickets each of which gives its holder the right to demand at any time the delivery of a loaf of bread...... ) ......... –) .... It is otherwise with money.......Chapter : The Business of Banking  ...” (p.. Study Questions . How does the issue of fiduciary media affect the objective exchange value of money? (p..

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The Two Ways of Issuing Fiduciary Media Fiduciary media may be issued by banks or by non-banks (primarily the government)........................ Fiduciary Media and the Clearing System The use of fiduciary media can reduce the demand for money in the narrower sense. Banks treat their outstanding fiduciary media as liabilities on their balance sheets............ For example. ...... because people can open checking accounts with commercial banks and  . ........ in the modern United States. and must loan or directly invest them wisely. the demand to hold actual Federal Reserve notes (green pieces of paper with pictures of dead presidents) is much lower... a modern-day checking account).......... Governments may also issue fiduciary media such as convertible Treasury notes and token coins....e.................... Instead governments will pocket the seigniorage as income just as surely as tax revenue... Governments often do not set aside a credit fund out of their capital to “cover” the increased obligations...  THE EVOLUTION OF FIDUCIARY MEDIA Chapter Outline ........... Banks can issue fiduciary media either through banknotes or by granting deposits in a current account (i....

an entirely different phenomenon is the reduction in the demand for money in the broader sense—including money proper and even money substitutes (including fiduciary media)— brought about by the development of credit and the clearing system. only the difference needs to be settled by actual money or money substitutes. If the other party later delivers goods or performs services such that the original debt is partially or fully offset. Study Guide to The Theory of Money and Credit write checks or use debit cards (where these deposits are partly fiduciary media. a particular supplier in the United States might grant credit to a merchant in France. fiduciary media themselves are still limited by national boundaries. However. the community’s demand for money in the broader sense falls below what it otherwise would have been. . because of the longer distances and time involved. . If one party to a transaction is willing to defer receiving payment. For example. As more such transactions are incorporated into such arrangements. because they are not fully backed up by cash in the vault). However. Fiduciary Media in Domestic Trade So long as a country has a stable legal framework that permits the building of trust in issuers. the use of clearing operations and fiduciary media can grow to dominate transactions and almost completely displace the use of money in the narrower sense. he has thus granted credit. Fiduciary Media in International Trade The practice of using claims and counter-claims in clearing operations to reduce the need to transport money was of particular benefit in international trade. but .

Chapter : The Evolution of Fiduciary Media  the claim on the French merchant would not circulate from hand to hand in the same way that a banknote in the United States (or in France) could. with clientele drawn from every country. Only with the development of a world bank. could fiduciary media transcend national boundaries. .

.. Study Guide to The Theory of Money and Credit . which must be balanced by a corresponding increase on the credit side if the whole transaction is not to figure as a loss... and then write checks to buy themselves sports cars and designer clothes....... in interest income can be safely spent without draining the bank’s cash reserves...... in claims on the actual cash reserves of the bank....... This way of dealing with fiduciary media makes it necessary for the issuing body to regard them as part of its trading capital and never to spend them on consumption but always to invest them in business............. When the .. Thus fractional-reserve bankers create money out of thin air not to directly spend it—which would be incredibly reckless and short-lived—but instead to earn interest income from it.... .... is repaid in a year. “[Bank fiduciary media] are entered as liabilities.. the .. Even though such bankers in a sense “create money out of thin air..” This is a crucial point that newcomers to fractional-reserve banking often miss...... to a productive business at (say)  percent interest.... and the issuing body does not regard the sum issued as an increase of its income or capital............. but as an increase on the debit side of its account...” they can’t simply open up a new account for . What fractional bankers do instead is loan out the ................. that was initially created can be “destroyed” (through bookkeeping) and the ............ .. Technical Notes • On page  Mises writes. and ultimately the bank’s vault would run out of the genuine money. The reason is that the merchants in the community would then have ...

the modern subjective value theory explodes the very notion of money as a measure. Instead. But this is precisely what happened in India. at a certain exchange rate. which retained silver coins in circulation that could be redeemed for the official money. they employed claims to gold. people rarely used actual gold when buying goods and services.Chapter : The Evolution of Fiduciary Media  • On page  Mises rejects the claim that India and other Asiatic countries used gold as a “measure of prices” while retaining silver as a medium of exchange. Yet of more relevance to this passage. . since value is not an objective property like length or weight that can be measured. For one thing. Mises is pointing out that even in the classical gold standard countries. gold.

.......... ....... ......................... Study Guide to The Theory of Money and Credit ........ Credit: The ability to receive present goods in exchange for the promise of delivering (typically a greater number of ) future goods............................. New Terminology Convertible Treasury notes: Paper notes issued by the government that entitle the bearer to redemption in money upon demand. Seigniorage: The difference between the market value of money and the cost to produce it.....................

.. Study Questions .... If a hypothetical world bank had deposits and notes that were backed up  percent by money on reserve.... but its employment in this capacity is independent of its physical existence.Chapter : The Evolution of Fiduciary Media  . Money which is not present performs an economic function.. Use is made of money. could it economize on money payments? (p..... .................. Does Mises classify bills of exchange as fiduciary media? (pp....... ) ... Explain: “Money in these cases [of international clearing operations] is still a medium of exchange.... ) ...” (p.. . ) ....... it has its effect solely by reason of the possibility of its being able to be present.. ) .... –) ........ but not physical use of actually existing money or money substitutes....... by full or partial cancellation of counter-claims offers important advantages in comparison with direct exchange: all the freedom connected with the use of money is combined with the technical simplicity that characterizes direct exchange transactions........... What does Mises think is the importance of credit for the monetary system? (p....... Explain: “To complete [a] transaction ...” (p....... .....

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. Although the extension of the clearing system does reduce the demand for money in the broader sense. Some writers argue that the payment system in an advanced market economy is “elastic” and responds to the “needs of commerce.. barrels of crude oil..........) produced per person doesn’t rise.................... Many writers (such as those of the Banking School) argue that the banks do not have the power to independently increase the  ......  FIDUCIARY MEDIA AND THE DEMAND FOR MONEY Summary If labor and other resources are used to extract more gold from mines. .................... etc. there is no reason that its development should be related to the demand for money........” rather than the actual stock of money in the narrower sense. then from a social point of view the labor and other resources have been wasted.... but merely the prices of these items quoted in gold or silver... It is an independent phenomenon that may either strengthen or counterbalance changes in the demand for money originating from other causes.... and this additional gold goes into the cash balances of people in the community.... The development of fiduciary media kept the objective exchange value of money lower than it otherwise would have been....... and thereby avoided a large diversion of resources into mining more of the precious metals for cash holdings...... The quantity of “real output” (pounds of steak.............

Businesses seek loans from the banks because they desire capital. If the banks want to issue fiduciary media. so that they can conveniently acquire the physical capital goods that they ultimately desire for their operations. the mere issuance of fiduciary media does not increase the amount of tractors. The only way the banks can provide these goods to their clients is through redistribution of purchasing power away from members of the community who do not receive the influx of the newly created money. . Study Guide to The Theory of Money and Credit quantity of fiduciary media. fertilizer. they must lower the market rate below the natural rate of interest. Of course. It makes no sense to speak of how much money the banks’ customers wish to borrow. or power tools. without specifying a rate of interest. What these writers fail to understand is that the demand for loans depends on the rate of interest. they simply want capital in the form of money.

..... a person who holds (airtight and instantly redeemable) claims to gold.....) produced per person doesn’t rise... etc.......... but instead increases the cash balances of people in the community...Chapter : Fiduciary Media and the Demand for Money  .. Chapter Outline . The development of fiduciary media reduces the demand to hold money in the narrower sense. The Influence of Fiduciary Media on the Demand for Money in the Narrower Sense In one sense... If labor and other resources are used to extract more gold from mines..... In this sense the widespread use of fiduciary media “economizes” on the amount of metal that must be allocated into the function of serving as the medium of exchange... simply because people hold more gold or silver in their cash balances.. Increasing the quantity of money may redistribute existing wealth to make some individuals richer....... The community as a whole doesn’t achieve a higher standard of living.. and this additional gold goes not into industrial or commercial uses (such as for dental fillings or jewelry)............... then from a social point of view the labor and other resources have been wasted............ doesn’t need to carry as much actual gold on a day-to-day basis. In a community using gold as commodity money......... Were it not for the simultaneous development of fiduciary media.. but only at the expense of making others (who are last to receive the new money) poorer.. The quantity of “real output” (pounds of steak.. more gold is freed up to be used in jewelry or industrial applications. the employment of the precious metals (or any other useful commodity) to enlarge the stock of money is wasteful. barrels of crude oil. but merely the prices of these items quoted in gold or silver. the intensification of the division of labor as the world . which are accepted in commerce by everyone in the community.....................

as more people around the world became part of the global market which used gold as the international money. Study Guide to The Theory of Money and Credit became one giant integrated market would have led to a sharp increase in the objective exchange value of money. The Elasticity of the System of Reciprocal Cancellation Some writers argue that the payment system in an advanced market economy is “elastic” and responds to the “needs of commerce. there are cyclical patterns based on agriculture and the payment of workers. . because (say) an increase in the demand for money will automatically be counterbalanced by other forces. The demand for money changes during boom and bust periods. more people would have tried to obtain gold as part of their cash holdings. And even in a typical year. . These claims are often difficult to evaluate because they fail to make the crucial distinction between the extension of the clearing . If actual gold had to satisfy this huge growth in demand. The Fluctuations in the Demand for Money Some of the fluctuations in the demand for money are quite predictable. An increase in population and the spread of the money economy increase the demand for money.” rather than the actual stock of money in the narrower sense. prices (quoted in gold) would have fallen and the owners of gold mines would have intensified their extraction efforts. But the simultaneous development of fiduciary media counterbalanced this tendency. so that the purchasing power of a unit of gold did not rise as much as it otherwise would have. In other words. The quantity of money is said to have little influence on the objective exchange value of money.

The Significance of the Exclusive Employment of Bills as Cover for Fiduciary Media The German Bank Act of  followed the famous Peel’s Act in imposing requirements on the cover that banks could accept when . Although the extension of the clearing system does reduce the demand for money in the broader sense. It is an independent phenomenon that may either strengthen or counterbalance changes in the demand for money originating from other causes. there is no reason that its development should be related to the demand for money.Chapter : Fiduciary Media and the Demand for Money  system. If the banks want to issue fiduciary media. If business needs require more transactions. Especially on Commodity Bills Many writers (such as those of the Banking School) argue that the banks do not have the power to independently increase the quantity of fiduciary media. business will get it—either from banks issuing more fiduciary media. they must lower the market rate below the natural rate of interest. It makes no sense to speak of how much money the banks’ customers wish to borrow. without specifying a rate of interest. versus the increased use of fiduciary media. What these writers fail to understand is that the demand for loans depends on the rate of interest. . On the other hand (so the argument continues). . then somehow or other. The Elasticity of a Credit Circulation Based on Bills. or from businesses developing techniques to economize on the use of money. these excess notes will come flowing back to the banks. if the banks try to issue more fiduciary media than the business community desires.

it was significant because it placed an obstacle in the issuance of fiduciary media. . . Thus the insights of the quantity theory are upheld. Rather. fertilizer. The requirement was significant not because it somehow tied the expansion of credit to the desire of the community for more money. . The only way the banks can provide these goods to their clients is through redistribution of purchasing power away from members of the community who do not receive the influx of the newly created money. there is no reason that the expansion or contraction of fiduciary media should mirror changes in the demand to hold money. The Influence of Fiduciary Media on Fluctuations in the Objective Exchange Value of Money As with the extension of clearing operations. Of course. they simply want capital in the form of money. the mere issuance of fiduciary media does not increase the amount of tractors. or power tools. keeping the quantity of money in the broader sense lower than it otherwise would have been. so that they can conveniently acquire the physical capital goods that they ultimately desire for their operations. The Periodical Rise and Fall in the Extent to Which Bank Credit is Requisitioned Businesses seek loans from the banks because they desire capital. there is no “automatic” mechanism by which the objective exchange value of money is stabilized. Study Guide to The Theory of Money and Credit issuing new loans in excess of their gold deposits.

. If the man wanted to use this credit not to buy alcoholic drinks. but rather to buy (say) a pair of shoes.. However. Finally. saying the man can have up to  in drinks without having to pay for them upfront.... The man could use them to buy anything he wanted. because the man doesn’t have any transferrable claim (issued by the bartender) that others in the community would accept. to see the limited role of clearing systems. The bartender agrees...... . the quantity of money in the man’s possession hasn’t increased. Whether the bank loan consists of a new checking account (with  as the initial balance).Chapter : Fiduciary Media and the Demand for Money  .. the bartender has extended credit to the man.. but he also receives an addition to his cash balances..... revert to the original assumption................ actual money........... then in this case too the man receives an extension of credit. Then it might be possible to arrange a deal whereby the man acquires ............. Technical Notes • An example will clarify the terminology and arguments running throughout this and earlier chapters... he would have to find a shoe seller who also wanted to buy drinks from the particular bar in question... these would all be classified as money in the broader sense..” meaning that he will obtain drinks in the present but will pay money for them later (perhaps at the end of the month)................. where the man’s credit consists of a “tab” issued by the bartender with a limit of ... if the man goes to his local bank and applies for a  loan (to be paid back at the end of the month).......... including drinks at the bar... In contrast.. By doing so.... or notes issued by the bank... Suppose a man asks his bartender if he can “run a tab...

If any single bank unilaterally lowers its interest rate and issues more fiduciary media (compared to the policies of its competitors). Mises objected that the demand for the additional loans could be influenced by the rate of interest the banks charged. • Mises concludes his discussion of section  on page  by saying. and hence the Banking School’s views were mistaken. if the community didn’t want to hold them. the banks can convince the community to accept any amount of new fiduciary media. Mises does not mean that an individual bank has no checks on its issue. . or that there is only one bank that issues fiduciary media. “[A]ll of this is true only under the assumption that all banks issue fiduciary media according to uniform principles. in exchange for telling the bartender to put the shoe seller’s drinks on his own tab (rather than charging the shoe seller for them). Thus the lone bank engaged in an expansionary policy will soon see its reserves of money proper dwindle.” In the section. and will have to abandon its experiment. Yet this mechanism is not what the Banking School theorists had in mind when they said banks couldn’t issue more notes than the needs of the community warranted. Mises had criticized the writers of the Banking School who argued that the banks couldn’t get the community to accept extra issues of fiduciary media. Study Guide to The Theory of Money and Credit the shoes. then eventually those notes will fall into the hands of people who are not clients of the expanding bank. So long as they are willing to sufficiently lower the rate of interest below the natural rate. these notes will be presented for redemption in money in the narrower sense. However. When these people deposit the bank’s newly issued notes with their own banks (which are competitors).

......... the Currency School thought the suppression of the issue of fiduciary media in the form of banknotes (which was codified in Peel’s Act) would solve the problem... which itself was required to maintain  percent metallic backing for any new notes that it issued......... because the market would use clearing operations.... because its members erroneously excluded demand (or current account) deposits from their analysis....... meaning that private banks could create more . the hypothetical rate of interest that would occur if goods were traded directly against each other without the use of money.............. Peel’s Act [Bank Charter Act ]: An important legislative act that took the power of issuing new notes away from private banks and vested it completely with the Bank of England... (Wicksellian) natural rate of interest: Developed by economist Knut Wicksell. ................ New Terminology Banking School: An English school of thought which argued that the banks were incapable of independently altering the rate of interest or the purchasing power of money...... However........... and other techniques to receive the credit it demanded for business purposes............... the Act crucially did not impose such a restriction on the extension of deposits. Currency School: An English school of thought which argued that the banks caused economic crises through the expansion and contraction of credit. bills of exchange. However....Chapter : Fiduciary Media and the Demand for Money  ......

Depending on the regulations. Fixed capital: Assets embodied in durable investments such as fac- tories and specialized equipment that will be used over a long period. More generally. a bank might issue fiduciary media not backed by money itself. Cover (of note issue): Assets backing the issue of new banknotes. but backed by another asset such as a commodity bill. Working capital: Current assets minus current liabilities. Study Guide to The Theory of Money and Credit fiduciary media by granting loans (not backed by gold) to their customers. a measure of a firm’s ability to quickly turn some of its assets into cash in order to finance an expansion. .

. –) ...................... . when consumption credit is involved........ Explain: “The demand for money and money substitutes that is expressed on the loan market is in the last resort a demand for capital goods or.......” (p....... ) ....................... –) .Chapter : Fiduciary Media and the Demand for Money  ..... ) ... Why would population growth influence the demand to hold money? (pp....... does it still make sense to use fiduciary media to economize on the use of money in the narrower sense? (pp.. ) .... Who bears the “cost of creating capital for borrowers of loans granted in fiduciary media”? (p..... Study Questions ... If fiat or credit money is employed.. for consumption goods..... What was Adam Smith’s analogy to explain the drawback of using the precious metals as money? (p......

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...... for transactions among themselves........ However.. then everyone does..... some writers suggest an outright prohibition on the practice......... Consequently... and raise at least enough money to pay off all of its creditors............. because the other person will not wish to accept the bank’s promises to pay..  THE REDEMPTION OF FIDUCIARY MEDIA Summary The confidence in a bank’s ability to redeem its fiduciary media is an all-or-nothing proposition: if a portion of the community panics and rushes to redeem their claims....... historically this requirement would have led to a much larger diversion of resources into the production of the precious metals as the demand for money increased...... it is solvent.. If a firm is liquid.... ........ the customer must convert his claims into money in the narrower sense. but it might be solvent while illiquid.. A bank operating in a competitive environment can only issue as much fiduciary media as its own customers wish to hold... Whenever a bank’s customer seeks to do business with someone outside the clientele of the bank... meaning that the institution’s assets deliver a cash flow allowing it to pay its liabilities on time... Solvency means that an institution (such as a bank) could shut down....... Banks issuing fiduciary media are always illiquid. Liquidity is a stronger condition.....  ....... sell off all of its assets.... fiduciary media cannot all be honored by the bank at once....... By their very nature.

This is a quite valid preference. . compels the banks to give preference to short-term rather than long-term loans. but always public opinion. Study Guide to The Theory of Money and Credit Sometimes legislation. simply because it limits a bank’s ability to issue fiduciary media. backed up by centuries of experience.

..... The Necessity for Complete Equivalence Between Money and Money Substitutes So long as some people believe that a claim to money issued by a particular institution is absolutely reliable and can be redeemed upon demand...... i.. in order to maintain this trust. then everyone does....... This is what makes them money substitutes. No matter how wisely a bank manages its assets........................ Chapter Outline ....... these people may pass such claims among themselves as if they were money.......Chapter : The Redemption of Fiduciary Media  .. ....e......... ... However.. The Return of Fiduciary Media to the Issuer on Account of Lack of Confidence on the Part of the Holders The confidence in a bank’s ability to redeem its fiduciary media is an all-or-nothing proposition: if a portion of the community panics and rushes to redeem their claims.......... Such redemptions will be requested whenever the bank’s own clientele wish to use their claims to do business with someone outside the clientele..... if customers show up en masse and demand redemption—assuming the bank has been issuing fiduciary media..... it will not be able to pay out money in the narrower sense for all of its outstanding claims.. fiduciary media cannot all be honored by the bank at once.... By their very nature.. a person who does not consider the claim to be a substitute for money in the narrower sense...... the issuing institution must always keep a reserve fund of money in the narrower sense to redeem the claims whenever they are presented...

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Study Guide to The Theory of Money and Credit

. The Case Against the Issue of Fiduciary Media
Because of the internal contradiction of the nature of fiduciary media—which renders every issuing institution liable to ruin— some writers suggest an outright prohibition on the practice. However, historically this requirement would have led to a much larger diversion of resources into the production of the precious metals as the demand for money increased. The banks could survive even if they were legally required to maintain  percent reserves covering all note issues and deposits; it is not consideration for the practice of banking that led legislators to tolerate fiduciary media. Rather, it was the desire to avoid a large increase in the objective exchange value of money (i.e., a general fall in prices of goods and services).

. The Redemption Fund
A bank operating in a competitive environment—where its rivals may pursue different policies and where its own clientele is only a fraction of the whole community using the same money—can only issue as much fiduciary media as its own customers wish to hold, for transactions among themselves. Whenever a bank’s customer seeks to do business with someone outside the clientele of the bank, the customer must convert his claims (whether in the form of notes or a checkbook deposit) into money in the narrower sense, because the other person will not wish to accept the bank’s promises to pay.

. The Socalled “Banking” Type of Cover for Fiduciary Media
Solvency means that an institution (such as a bank) could shut down,

sell off all of its assets, and raise at least enough money to pay off all of its creditors. Liquidity is a stronger condition, meaning that

Chapter : The Redemption of Fiduciary Media



the institution’s assets deliver a cash flow allowing it to pay its liabilities on time. If a firm is liquid, it is solvent, but it might be solvent while illiquid. Some writers suggest that “prudent” banks will invest in shortterm assets, in order to remain liquid. Yet by their very nature, banks issuing fiduciary media are illiquid: their liabilities are immediately due if presented, while their assets are necessarily of longer duration. The best such banks can strive for is solvency.

. The Significance of ShortTerm Cover
Sometimes legislation, but always public opinion, compels the banks to give preference to short-term rather than long-term loans. This is a quite valid preference, backed up by centuries of experience. However, the explanation for its wisdom is not that it allows the banks to redeem fiduciary media in the event of a panic—the bank’s asset maturities are irrelevant if everyone shows up, demanding redemption. The actual benefit from focusing bank loans on short-term investments is simply that the constraint checks the bank’s ability to issue fiduciary media.

. The Security of the Investments of the CreditIssuing Banks
There is similar confusion when it comes to proposals seeking to guarantee the (eventual) redemption of all fiduciary media by means of reserve funds consisting of illiquid assets (such as mortgages). Even if the public is certain that they will be eventually paid in money (in the narrower sense) for the claims to money that they currently hold, even so, if there is any doubt about the immediacy of the payment, then the claims will no longer be money substitutes. Instead, the public will take into account the delay before

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Study Guide to The Theory of Money and Credit

receiving payment, and such claims will trade at a discount to the money itself. (Note that if the claims continue to circulate as generally accepted media of exchange, even though everyone knows that redemption at best will occur after some delay, then the claims will have become credit money.)

. Foreign Bills of Exchange as a Component of the Redemption Fund
A bank cannot increase its issue of money substitutes (consisting of both money certificates and fiduciary media) beyond the demand of its own clientele, for use in their dealings with each other. However, to the extent that sometimes its clients need to exchange their money substitutes when dealing with foreign citizens, the bank has the option of keeping some of its reserve fund in the form of foreign money substitutes, as opposed to money in the narrower sense. (This is because the foreigners with whom the bank’s clients wish to do business, will accept money substitutes issued by institutions from their respective countries.) Yet this practice means that the original bank’s reserve fund has a smaller proportion of money in the narrower sense, and hence that its own money substitutes consist of a higher fraction of fiduciary media (versus money certificates).

Chapter : The Redemption of Fiduciary Media

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Technical Notes

• In modern times, one of the major controversies within
the Austrian School concerns the legitimacy of fractional reserve banking. Some Austrians follow Murray Rothbard who argued that bank issuance of fiduciary media leads to the boom-bust cycle and is inherently fraudulent—akin to a warehouse manager renting out the goods that were supposedly placed with him for safekeeping. Other Austrians such as George Selgin and Steve Horwitz call their position “free banking” and believe that there is no reason for banks to necessarily keep  percent reserves of money in the narrower sense, in order to fully cover all outstanding customer deposits. The free bankers argue that market forces will determine the proper ratio of money certificates to fiduciary media in a competitive banking system. (Virtually all modern Austrians agree that government-sponsored central banking and fiat currency are both economically destructive and morally illegitimate. The dispute concerns the proper practice of private banks operating in a laissez-faire environment.)

• Continuing with the above note, both groups point to passages in Mises’s writings to lend credence to their position. Even within this very chapter, Mises offers statements that—viewed in isolation—would seem to definitively side with one camp versus the other. (Two of these quotations are the opening selections for the study questions below.) Although Mises agrees with the Rothbardian, -percentreserve camp that there is a paradox in the very nature of what fiduciary media claim to be, on the other hand he

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Study Guide to The Theory of Money and Credit

also agrees with the free bankers that the historical development of fiduciary media economized on resources (that would have otherwise gone into the socially wasteful production of more gold and silver for monetary purposes). Thus Mises does not clearly fall into one camp or the other. (Of course Mises’s own view wouldn’t settle the modern dispute: he could have been simply mistaken, regardless of his position.)

and that such an outcome is almost always associated with government-supported issues of fiduciary media.......... (All liquid enterprises are also solvent. Liquidity: The situation in which an institution’s assets will deliver a cash flow allowing it to pay its liabilities on time..) Cash flow: The stream of money payments over time due to an asset or collection of assets..Chapter : The Redemption of Fiduciary Media  . Hypothecary loans: Loans granted with an asset such as real estate serving as collateral. only that excess quantities of fiduciary media do... but not necessarily vice versa............... Free banking theorists do not believe that the issue of fiduciary media per se causes the business cycle... which may be below  percent................ Solvency: The situation in which the market value of an institu- tion’s assets exceeds its liabilities......................... .... New Terminology Free banking (among modern Austrians): The doctrine holding that a free market in banking will pick the optimal fraction of reserves................... .......

) .” (p........ or an industry of banks operating with uniform policies....... ) ............. would suffer no limitations on their ability to issue fiduciary media? (pp..” (p.. –) ... Explain: “Thus there lies an irresolvable contradiction in the nature of fiduciary media........... Study Guide to The Theory of Money and Credit ...... Why does Mises say that a single bank with no competitors... When Mises says of coins that their “smooth faces tell no tales of the methods by which they have been acquired........ Their equivalence to money depends on the promise that they will at any time be converted into money at the demand of the person entitled to them and on the fact that proper precautions are taken to make this promise effective............” is he making an argument for or against the possibility of customers paying banks for providing them with (fullybacked) deposit and checkbook services? (p...... ) .. Explain: “Whether the assets of a credit-issuing bank consist of short-term bills or of hypothecary loans remains a matter of indifference in the case of a general run..... Study Questions ......” (p.. ) . But—and this is likewise involved in the nature of fiduciary media—what is promised is an impossibility in so far as the bank is never able to keep its loans perfectly liquid... and reduced the cost of the monetary apparatus.... ......... Explain: “The issue of fiduciary media has made it possible to avoid the convulsions that would be involved in an increase in the objective exchange value of money...

.. On the Nature of the Problem Interest accrues as the difference between what a producer pays upfront for inputs versus the total revenue he receives for the product (down the road)........... Fullarton....... because any excess issue of fiduciary media would be immediately returned to them... and other members of the Banking School thought that the banks had no power to influence prices........... Up till now in the book.......e. the banks could induce the public to accept more fiduciary media. Tooke...... Now we will investigate whether changes in the supply of and demand for money can affect the money-prices of goods of higher orders (i... Torrens. producer goods) to a different extent.. AND INTEREST .... Yet Lord Overstone.. They correctly recognized that by lowering the rate of interest...... we have studied the forces that can change the exchange ratio between money and consumer goods.................. This is the mechanism through which bank credit policy can influence the purchasing power of money and the rate of interest......  . or what are called goods of the first order.... and other members of the Currency School thought otherwise................  MONEY. Chapter Outline . CREDIT....

will release gold into industrial purposes and thereby make the community wealthier. the immediate result is a reduction in the rate of interest. such variations can directly affect the rate of interest by directly affecting the subsistence fund.) When prices are falling. First. (Nowadays this is called a purchasing power or inflation premium in the contractual rate of interest. the rate of interest tends to be lower. by permanently changing the distribution of property and income. The Connexion Between Variations in the Ratio Between the Stock of Money and the Demand for Money and Fluctuations in the Rate of Interest There are three senses in which variations in the stock of and demand for money can influence the rate of interest. Study Guide to The Theory of Money and Credit . in the case of metallic currency. Variations in the stock of and demand for money can influence the rate of interest indirectly and in the long run. as entrepreneurs are willing and able to offer more to borrow money. who tend to save more. Finally. The Connexion Between the Equilibrium Rate and the Money Rate of Interest When the banks issue more fiduciary media. . For example. Thus the rate of interest would be permanently lower because the overall rate of saving would have increased. the rate of interest tends to be higher. When prices are generally rising. Because the banks typically . a reduction in the stock of money could redistribute wealth into the hands of creditors. a fall in the demand to hold gold as money. in the same sense as if the amount of wheat stored in silos had increased. variations can influence the rate of interest in the short run as prices adjust to the new realities of the stock of and demand for money. For example.

When the banks lower the money rate of interest by issuing fiduciary media. and the fall in the interest rate. that forces will eventually restore the Money Rate back to the Natural Rate. Are there any forces tending to reestablish the natural premium of present versus future goods? Wicksell argued that if the banks push the Money Rate of Interest below the Natural Rate of Interest.Chapter : Money. The gratuitous nature of credit refers to the fact that the banks can push down the rate of interest apparently at will. the subsistence fund will not be able to feed the workers while they labor in the longer processes. However. the rate of interest governs the time for which resources are “tied up” in production processes. The lower the rate of interest. or lend it to businesses for productive investment. Credit. But his argument for why this should occur is unsatisfactory. the subsistence fund tends to increase and the rate of interest will remain permanently lower than the original level (though not as low as it was after its initial drop). It is technically possible to lengthen the structure of production. and Interest  invest the new issue themselves. . and entrepreneurs invest resources in processes such that their fruits (consumption goods) are completed just as the available savings (subsistence fund) is exhausted. they induce entrepreneurs to act as if the . The Influence of the Interest Policy of the CreditIssuing Banks on Production As Böhm-Bawerk explained [see Technical Notes]. there is no quantitative relationship between the amount of new fiduciary media issued. but without additional savings. the longer the processes that entrepreneurs will select. the money rate of interest equals the natural rate. In equilibrium. no matter how much new money the banks create and lend out. Indeed. they will never force the contractual rate of interest below zero percent.

and lenders insist on greater and greater premiums in the contractual rate of interest. A bust (what we now call a recession) sets in. Yet because the issue of fiduciary media doesn’t actually make society richer. Entrepreneurs borrow money at the lower rates. Realizing their errors. and try to bid away resources from others to begin longer-term processes. until the time when the new (longer) processes yield their final consumption goods. eventually they would fail. There are physically not enough savings to carry society forward. A general boom period ensues. . The growing expansion of the quantity of money in the broader sense drives prices higher and higher. Yet even if the banks stubbornly tried to hold the money rate down. the worse is the eventual crisis. the bust occurs when the banks slow down their issue of further fiduciary media. The longer the banks hold the money rate below the natural rate. thereby allowing the money rate to rise toward its proper level. the entrepreneurs discontinue those projects that were only apparently profitable. because of the false interest rate. Study Guide to The Theory of Money and Credit subsistence fund had really grown (when in fact it has not). hire workers. Credit and Economic Crises In practice. where most people feel prosperous. As the output of consumption goods declines. . and the money rate of interest returns to the natural rate. The prices of producer goods fall. the boom must necessarily come to an end. their prices rise.

netting a  percent annual return on his capital......... investment....... and Interest  ....... For example....... and hence command a higher market value than the initial .. A capitalist who buys factors of production invests in “future goods” which then grow in market value as they ripen into “present goods.... suppose consumers would pay  for a mature Christmas tree.. shingles.. as the house is built..........Chapter : Money...” Also note that the term “ripen” is not reserved for agricultural products: Böhm-Bawerk would say that a capitalist can invest (say) .. labor....... If these were the final prices as determined by consumers’ subjective preferences. ... Technical Notes • Eugen von Böhm-Bawerk was a successor of Menger and a predecessor of Mises in the development of Austrian economics.. then the market price for an immature tree—one that needed another year to fully develop—would be  as well......... Over the months... in lumber..... a capitalist who invested  in such a tree could wait one year... Assuming nothing else changed. then sell the mature version for ...... ...... the goodsin-process gradually become a present house. One of Böhm-Bawerk’s great contributions was to explain the capitalists’ interest income as a premium given to present versus future goods.. Thus Böhm-Bawerk explained the ability to earn interest over time as due to the underlying subjective preference for present versus future goods...... but would only pay  for an airtight claim guaranteeing them a mature Christmas tree to be delivered in twelve months...... Credit...... and other inputs which represent a future house.

a direct approach is to climb the tree and grab them with his bare hands. if someone wants to get coconuts from tree branches. Then with this capital good. and society would advance to a permanently higher standard of living. (If the person is ravenous and wants to eat a few coconuts as quickly as possible. The savings would have augmented the subsistence fund to tide everyone over until the higher output of the more roundabout processes came online. versus getting the coconuts sooner rather than later. If some people in the community saved more (by stockpiling coconuts. Study Guide to The Theory of Money and Credit • In explaining the boom and bust cycle. say). For example. in order to construct a long pole.) Böhm-Bawerk argued that the rate of interest reflected the community’s preferences for the timing of consumption as well as the technical opportunities for increased output resulting from further lengthening (or making more roundabout) the methods of production. as workers could gather more coconuts per hour with the use of their new tools. The rate of interest in this scenario would permanently decline. Yet a more roundabout (and physically productive) approach is to spend some time gathering sticks and vines. then the workers would be able to eat while production shifted out of tree-climbing and into pole-production. The tradeoff then is between getting more physical output per unit of labor. he will just climb the tree rather than search for sticks. the person can knock down far more coconuts per hour of his labor. Mises relies on Böhm-Bawerk’s capital theory. Böhm-Bawerk viewed the use of capital goods as a “roundabout” way of satisfying goals. .

.......... in order to feed and otherwise support the workers as they engage in time-consuming production processes.... etc........) Subsistence fund: A concept used by Böhm-Bawerk to denote the savings the capitalists must have first accumulated......... Purchasing power/inflation premium: An increase in the contrac- tual rate of interest due to the expected rise in prices...Chapter : Money............... ....... . Goods of higher orders: Goods used to produce consumer goods.......... (A capital good used to produce a consumer good is a secondorder good... A capital good used to produce a second-order good is a third-order good.......... and Interest  ........... Goods of the first order: Consumer goods....... due to the higher valuation placed on present versus future goods... Credit..... New Terminology Interest: Income accruing to the owner of future goods as they mature into present goods....

..... Explain: “Certainly................. . the banks would be able to postpone the collapse....... what happens to commodity prices.. Why might the distribution of income and property alter the long-run rate of interest? (p.... ) .. . after having been pushed down by the banks? (pp... ) ... ) .. Study Questions ... according to Wicksell? (p.. the moment must eventually come when no further extension of the circulation of fiduciary media is possible....” the nature of which is outlined in section ? (pp... the normal rate of interest)........ What is “the problem... ... Then the catastrophe occurs.. –) ..... Study Guide to The Theory of Money and Credit .... .. –) .......... What are the two main mechanisms by which the money rate of interest rises back to the natural rate..... ... .. but nevertheless ............. If the Money Rate of Interest is pushed below the Natural Rate of Interest (or more accurately.” (p...

..... However. Then the gold was even further concentrated into the central banks of just a few major countries. citizens ceased using gold in everyday transactions......... in order to avoid economic crises.. a  ...... .......... which issued paper notes instead...... and the actual gold was stockpiled in the vaults of each country’s central bank... so that not even the central banks (of most countries) had gold in their vaults...... the Act crucially did not impose such a restriction on the extension of deposits... Although it would have undesirable deflationary consequences.... Peel’s Act thus contained a “safety valve” that prevented a sharp rise in the objective exchange value of money..................... However.. which itself was required to maintain  percent metallic backing for any new notes that it issued..... The degradation of the classical gold standard was already well underway before the outbreak of World War I... but at the same time it failed to eliminate economic crises because it erroneously thought they were due exclusively to unbacked notes...  PROBLEMS OF CREDIT POLICY Summary The governments of Europe and America have been guided by the idea that the natural desire of the banks to issue fiduciary media must be checked.. Peel’s Bank Act [Bank Charter Act ] took the power of issuing new notes away from private banks and vested it completely with the Bank of England.. this goal conflicts with the other desires for low interest rates and high selling prices......... First............

The alleged evils of a free market in banking are nothing compared to the actual evils under a government monopoly of the currency. In order to prevent recurring economic crises. the absolute prohibition of the further issuance of fiduciary media is necessary. as a coordinated policy of expansion—perhaps under a World Bank—would have no checks on its inflationary potential. it leaves open the destruction of the entire monetary system. The original étatist arguments for regulating the issue of competing notes by private banks do not look nearly as compelling after the experience of German hyperinflation. . People must choose between a fiat system regulated by index numbers of prices. If banks continue with the ability to issue fiduciary media. or a return to an actual gold currency. Study Guide to The Theory of Money and Credit transition back to an actual gold currency—in which people used genuine gold coins in daily purchases—is the only realistic check on government-sponsored inflation.

... falling prices of goods and services).......................... II.. However.” i. The Conflict of Credit Policies Since the time of the Currency School. Peel’s Act contained a “safety valve” that prevented a sharp rise in the objective exchange value of money (i.. low interest rates and high prices for certain producers..... which itself was required to maintain  percent metallic backing for any new notes that it issued.... in order to avoid economic crises........... In other words....e........ ........ this goal conflicts with the other desires to foster “cheap money” and “reasonable prices.. the governments of Europe and America have been guided by the idea that the natural desire of the banks to issue fiduciary media must be checked. PREFATORY REMARK ........ PROBLEMS OF CREDIT POLICY BEFORE THE WAR .. the Act crucially did not impose such a restriction on the extension of deposits... In this way...Chapter : Problems of Credit Policy  . private banks could create more fiduciary media by granting loans (not backed by gold) to their customers..... thus lowering the rate of interest and expanding the stock of money in the broader sense... Chapter Outline I..... However.... Peel’s Act Peel’s Bank Act [Bank Charter Act ] took the power of issuing new notes away from private banks and vested it completely with the Bank of England..e.......

people also fail to understand that domestic interest rates must reflect conditions in the world market. percent) on requests to exchange francs for gold. The policy hindered capital outflows and inflows. . to . Study Guide to The Theory of Money and Credit but at the same time it failed to eliminate economic crises because it erroneously thought they were due exclusively to unbacked notes. The only way to truly insulate Bank policy from the rest of the world market would be to leave the gold standard . do not understand the “real” economic forces behind movements in interest rates. if its reserves of money in the narrower sense are being drained because it has issued more fiduciary media than its competitors. and hindered the full incorporation of France into the world market. The GoldPremium Policy The Bank of France implemented a well-known gold-premium policy. it is in the nature of banking that an individual bank must raise the interest rate it charges on new loans. . The purpose of the policy was to widen the gap by which the Bank of France could maintain a lower discount rate than prevailed in other countries. This behavior would occur whether or not government or central bank rules required it. For example. if the gold were going to be invested abroad seeking a higher return. than (say) a foreign crop failure raising domestic fruit prices. The Nature of Discount Policy Many writers. as well as the general public. When it comes to international movements of capital. in which it charged a premium (somewhere in the range of . There is nothing more mysterious in foreign events altering domestic interest rates. instead they view increases in interest rates as arbitrary and unnecessary constraints on the community’s prosperity.

. Moreover. what if a foreign company wanted to withdraw deposits that it had previously invested in a country? Would the authorities permit a “loss” of gold in this circumstance? . Other Measures for Strengthening the Stock of Metal Held by the Central BanksofIssue While central banks-of-issue adopted policies to raise the upper gold point and thus discourage the export of gold. Systems Similar to the GoldPremium Policy Central banks have adopted other techniques to hinder the export of gold. . adopting credit money or fiat money and thereby suffering inflation. The NonSatisfaction of the Socalled “Illegitimate” Demand for Money Attempts to only provide gold for export when the purpose is “legitimate” would fail to achieve their objective in the longterm. For example. or they might give worn-out coins that had slightly less metal content than the coins intended for domestic use. at the same time many adopted policies to reduce the lower gold point and thus encourage imports of gold. The two sets of policies largely offset . For example. as speculators would find other means to achieve the same end. they might not surrender gold to exporters in the most convenient form.Chapter : Problems of Credit Policy  entirely. there is a whole spectrum of intermediate cases between “legitimate” demands for commodity importation and “illegitimate” speculation on foreign investments.

The Promotion of Cheque and Clearing Transactions as a Means of Reducing the Rate of Discount In Germany before the first World War. there is no necessary connection between the long-run rate of interest and the quantity of fiduciary media. they too had paper claims entitling them to the gold that was stored elsewhere. In this way. This would allegedly allow the Reichsbank to hold a larger reserve of metal. the degradation of the classical gold standard was already well underway before the outbreak of war. However. which had a more and more tenuous . PROBLEMS OF CREDIT POLICY IN THE PERIOD IMMEDIATELY AFTER THE WAR . so that not even the central banks (of most countries) had gold in their vaults. . Study Guide to The Theory of Money and Credit each other. However. and keep a lower discount rate. there was an effort to reduce the German people’s everyday use of gold. which issued paper notes instead. the major powers (except the United States) explicitly suspended the gold standard. so that the actual gap between the gold points did not change as much as might have been supposed. III. virtually the entire world became accustomed to using paper as their money. citizens ceased using gold in everyday transactions. First. Then the gold was even further concentrated into the central banks of just a few major countries. and replace it with the use of check and clearing transactions. and the actual gold was stockpiled in the vaults of each country’s central bank. Instead. The GoldExchange Standard During the World War I.

Yet such an outcome is the antithesis of the whole rationale for the gold standard: to keep political interference out of money. A Return to a Gold Currency Although it would have undesirable deflationary consequences. the world price of gold was dominated by the actions of the United States government. it would have been much more difficult for their governments to run the printing presses to pay for armaments. Had the citizens of the great powers been using gold on the eve of World War I. First. . . The Problem of the Freedom of the Banks The original étatist arguments for regulating the issue of competing notes by private banks do not look nearly as compelling after the experience of German hyperinflation. . there is no scientific way to .Chapter : Problems of Credit Policy  link to gold. The alleged evils of a free market in banking are nothing compared to the actual evils under a government monopoly of the currency. Fisher’s Proposal for a Commodity Standard The famous American economist Irving Fisher proposed that index numbers would track an average of commodity prices. the various index numbers are arbitrary. There are several problems with Fisher’s proposal. As of . so that the dollar itself could be defined as a variable weight of gold that possessed constant purchasing power in terms of the commodities in the index. a transition back to an actual gold currency—in which people used genuine gold coins in daily purchases—is the only realistic check on government-sponsored inflation.

and include bank deposits as well as notes. The Basic Questions of Future Currency Policy People must choose between a fiat system regulated by index numbers of prices. Only by freeing money and banking from political influence can people avoid economic crises while maintaining the highest possible stability of the purchasing power of money. Another problem is that the market already has techniques for handling changes in the purchasing power of money. Finally. In order to prevent recurring economic crises. even ignoring the other problems. If the price index increases by  percent in a certain month. for economically the two are equivalent. Fisher’s proposal would simply lead to an adjustment of the techniques. as a coordinated policy of expansion—perhaps under a World Bank—would have no checks on its inflationary potential. . it leaves open the destruction of the entire monetary system. while others increased by less. or a return to an actual gold currency. Fisher’s proposal would not counteract the differential impact that inflation has as it unevenly spreads through the economy. . this is because some prices increased by more than  percent. the absolute prohibition of the further issuance of fiduciary media is necessary.) If banks continue with the ability to issue fiduciary media. (Such a prohibition must go beyond Peel’s Act. Study Guide to The Theory of Money and Credit measure the “true” change in the purchasing power of gold from month to month.

. then French investors would turn their francs in for gold.... or else the bank that is ...e.. competitive banking system were “thoroughly unsound. In the absence of such a premium. . Mises describes the “gold-premium policy” implemented by the Bank of France............ Mises points out that most arguments criticizing the operation of a private..Chapter : Problems of Credit Policy  .....” The one legitimate argument came from the Currency School...... fiduciary media). this danger only exists when the banks all operate under a uniform discount policy—they must all inflate in unison...... Ironically.. the gold-premium policy gave the Bank of France a wider margin to keep interest rates relatively low.............. which (correctly) pointed out that if private banks issued notes in excess of their gold reserves (i. However. then investors would only adopt the above strategy if the difference in interest rates were sufficiently large...... The result would be a higher rate of return (measured in francs) than if the investors had lent the money in France... Therefore.... If the Bank of England’s discount rate were higher than the Bank of France’s... and would put their capital where it would earn the highest return............. use the gold to buy bonds in England.. if turning francs into gold involves payment of a (small) premium to the Bank of France.. before suffering from an outflow of gold.. Technical Notes • On pages –.. this could cause economic crises... investors wouldn’t distinguish between domestic and foreign investments (except perhaps for a slight psychological preference for the former)... • On page .. then convert the gold back into francs after earning their interest.................

and it will quickly lose its gold reserve to its competitors. “Now the monopolization of the banksof-issue in each separate country does not merely fail to oppose any hindrance of this uniformity of procedure. Study Guide to The Theory of Money and Credit the most aggressive will have its fiduciary media returned to it (through clearing operations). Yet somehow. As Mises says. it materially facilitates it.” . these observations led to the call to abolish competitive banknote issue and replace it with a government monopoly.

..... and have the gold shipped out of the original country....... New Terminology Upper gold point: Under the gold standard....... etc.......... ........... .. the maximum market price of gold (quoted in a country’s currency) above which it is profitable—including all costs of transport..... Lower gold point: Under the gold standard.... re-coinage.........Chapter : Problems of Credit Policy  . etc.... the minimum market price of gold (quoted in a country’s currency) beneath which it is profitable—including all costs of transport....... re-coinage.................—for foreigners to exchange the domestic currency for gold (at the official redemption rate..—for citizens to import gold and exchange it with the authorities at the official redemption rate for the domestic currency.......... which is below the current market price).........

.......... would endanger its “solvency” (p... –) *. engaging in a more inflationary policy than its competitors..............................” (p. Study Guide to The Theory of Money and Credit .... How did France’s gold-premium policy hinder both the outflow and inflow of capital? (p. ).. Study Questions ......... What was the theoretical error of the Currency School...... is that consistent with his definition of the term (versus “liquidity”) on page ? .. Explain: “The banks would still have to have a discount policy even if there were no legislative regulation of the note cover......... When Mises claims that a sole bank..... and why was this mistake an “advantage” with respect to the implementation of Peel’s Act? (pp..... ) .. This danger is infinitely greater and more threatening under a system of monopoly..... ) .” (p... that of its being released from the commonlaw obligation under which everybody who enters into a commitment is strictly required to fulfill it at all times and in all places... ) ........ Explain: “There is only one danger that is peculiar to the issue of notes.... ..

............. MONETARY RECONSTRUCTION ...........................   ..........................................................

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.. .. Just as a constitution or a bill of rights would be adopted...  THE PRINCIPLE OF SOUND MONEY Chapter Outline ...... classical liberal program of containing government tyranny..... and the public fell sway to erroneous inflationary doctrines.... The Virtues and Alleged Shortcomings of the Gold Standard It is true that the public generally welcomes inflationism as opposed to the orthodoxy of the gold standard................... Sound money involves a metallic standard... In practice. .... in light of historical abuses of civil liberties...... Producers welcome “high  .... but only because they misunderstand the true situation.. in the same way the classical liberals of the nineteenth century wanted to prevent governments from wrecking currencies as had occurred throughout history... Although their ideas were correct........... the classical liberals did not adequately defend the gold standard from its critics........... The Classical Idea of Sound Money The principle of sound money must be placed in the context of the broader. with all tokens and paper notes being redeemable in the metallic money upon demand....................... this has meant gold since the late nineteenth century...

Contrary to its critics. For this reason. but only because it effectively lowers the workers’ real wages. they will begin demanding automatic wage increases tied to the “cost of living. In this setting.” Rather. The Emergency Argument in Favor of Inflation Some writers concede the negative effects of inflation. but argue that in certain emergency situations. in situations where the majority don’t recognize what is happening. the gold standard did not “collapse. Once the labor unions realize what is happening. This will decrease the unemployment rate. it was systematically and intentionally destroyed by governments bent on inflation. Study Guide to The Theory of Money and Credit prices” when it is their own prices in question. If the employer would lose money by hiring the man. it is the only method by which . Inflation can only give even the appearance of prosperity. but they don’t welcome increasing prices in the items they themselves must purchase. The FullEmployment Doctrine An employer will only hire a man if he is productive enough to justify the wage he expects to be paid. inflationism cannot be a lasting economic policy. Those writers who blame the “rules of the gold standard game” for keeping interest rates high. When government policies and unions use coercion to hold wage rates above the market-clearing level. it is true that monetary inflation may cause commodity prices to rise faster than wage rates. do not understand the function of interest rates and how credit expansion causes economic booms and busts. institutional unemployment results. .” Then the apparent benefits of inflation (in reducing unemployment) will disappear. . he will remain unemployed.

he is admitting that the public would not agree with the government’s war expenditures if it fully understood the sacrifice they would entail. Yet inflation per se does not increase the physical and human resources at a country’s disposal. . If an apologist for inflation claims that it is the only way to finance a war.Chapter : The Principle of Sound Money  governments can carry out vital tasks.

” These classical economists argued that a general business depression was not caused by a “dearness of money...... In order to wean the public off gold....” In Mises’s view.. governments actively combat the public’s preference for a sound commodity money.. the various sectors increased their output • ..... Say’s discussion (which later came to be summarized as “Say’s Law”) explained that ultimately..... maintenance of a commodity money doesn’t require a special commitment from the government...... Important Contributions • On pages – Mises responds to a critique of the gold standard that its opponents continue to use............ On pages –... the grocer’s customers earned the purchasing power to demand his products by first supplying their own goods and services. customs guards.. As an economy grew over time... ... prisons...... in some countries even executioners....” and consequently could not be solved by monetary inflation...... exploded by Adam Smith and Jean-Baptist Say.. Contrary to the claims of the inflationists.....” What they mean is that governments were no longer willing to renounce the (short-term) benefits to themselves of inflation... Mises places Keynesian analysis in a tradition of faulty theories going back to the “spurious grocer philosophy . and so they refused to redeem their currencies in specie........ Modern-day critics still say (as they did in Mises’s time) that the gold standard “collapsed” and that governments are no longer willing to play the “rules of the gold standard game... they employed “policemen... but rather requires only that the government obey its contractual obligations like everybody else in a market economy...... .... penal courts... Study Guide to The Theory of Money and Credit ........ Yet Mises points out that the governments did much more than this....... .

.Chapter : The Principle of Sound Money  . across the board. but there was not a danger that the economy as a whole could produce a “general glut” that could only be remedied by an expansion of the stock of money. Say argued that relative prices would adjust to maintain the proper balance among the sectors.

....... ..................................................... .. yet cannot find employers to hire them...... Real wages: Wage rates relative to the prices of goods and services.......... New Terminology Institutional unemployment: The situation where workers are qual- ified and willing to accept jobs at prevailing wage rates................. Study Guide to The Theory of Money and Credit ......

...... Study Questions ....... What’s wrong with the emergency argument in favor of inflation? (pp.. –) .... How did governments manage to abandon the gold standard? (p.......... ... What connection does Mises make between the gold standard and representative government? (p............................ ) .. ) .... What is the only efficacious way to raise real wage rates? (p... ) . ) ......Chapter : The Principle of Sound Money  .................... What was the “serious blunder” of the nineteenth-century advocates of the gold standard? (p............

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.... the central banks of the world still exchanged their respective currencies against gold at the official (and inflexible) rates.... Here there was no legal redemption requirement.. The difference between the two systems was one of degree..e....... The Inflexible Gold Standard Under both the classical gold standard and the gold-exchange standard—as they had existed before World War I—each nation’s currency unit was legally tied to an inflexible (i... .. Later.......... an agency (such as the central bank)  ...... constant) exchange rate against gold. Under the classical gold standard. locking in a fixed exchange rate of gold against the national currency... ..... Anybody could exchange gold for national notes and vice versa without delay.......... Instead...... The Flexible Standard The flexible standard arose between the world wars out of the prewar gold exchange standard....... citizens within each country carried actual gold coins and used them in everyday transactions... under the gold-exchange standard... citizens only used the government’s paper notes and token coins in domestic commerce....... However..........................  CONTEMPORARY CURRENCY SYSTEMS Chapter Outline ....

The illusive standard is thus a form of price control. the event would be called a devaluation. not through redemption at the official rate. and leads to a shortage in the foreign exchange market. . The FreelyVacillating Currency A freely-vacillating currency is one with no official peg to gold at all. If the drop in the currency against gold was severe enough. yet this isn’t a flexible standard. . . The Illusive Standard Sometimes a government will announce a (variable) peg to its currency. The government enforces the peg through penalties and confiscation. held on account of its expected future purchasing power. such a money—even though it is a “bad currency”—can persist. Study Guide to The Theory of Money and Credit would be given the authority to peg the currency to gold at a rate that could be subject to a sudden change. If the government exercises restraint. The currency is a credit or fiat money.

...” • After explaining the mechanics of foreign-exchange con- trols. the government of a country actively interferes with this process. Consequently the Ruritanian refiners will complain that they “can’t find dollars” to finance their desired imports. If a barrel of oil (say) sells for  in the United States. foreigners will not want to sell many dollars for rurs at the ratio of -to-..... in order to buy oil and import it.... However... exchange rates adjust on an unhampered market until there is no advantage to buying a commodity in one currency and immediately selling it in another currency.... rurs per barrel......... then the exchange rate will rise to the artificial price (at least within the borders of Ruritania)......... often to keep the price of its own currency above the market-clearing price that would achieve purchasing power parity.. there is no arbitrage opportunity at the correct exchange rate........... Ruritanian refiners will thus try to sell their rurs against dollars. the market clears when one dollar trades for  Ruritanian rurs.. rurs..... At the new exchange rate... .....Chapter : Contemporary Currency Systems  ..... Technical Notes • As Mises explained earlier in the book (pp.. In Mises’s example (p... if the Ruritanian government announces that it will put people in prison who pay more than  rurs for one dollar.... Mises on page  classifies them as “a device for the virtual expropriation of foreign investments. There is an apparent “shortage of dollars... compared to the domestic price of . However..... because the actual market ratio is -to-.. Yet under an illusive standard. and for .. )...... oil purchased abroad will now only cost ............... –).... rurs in Ruritania..” He has ..

the rate of return on the invested capital is five percent per year. the capitalist sells his  million for  million rurs. for  million rurs. The foreign owner would have his local agents sell the  million rurs in the foreign exchange market. Thus from either the viewpoint of the factory manager (reckoning in rurs) or from the foreign investor (reckoning in dollars). double the previous amount. It’s true that officially speaking. Every year the factory earns a net income of  million rurs. However. but the Ruritanian government will punish any of its citizens caught accepting such an offer. in Ruritania to set up the factory. his  million rurs is now worth .. Thus the American’s  million factory in Ruritania has effectively been taken over by the Ruritanian government. . Now when the factory earns its usual  million rurs.. since it controls the foreign-exchange market. the American investor can’t get the money out of the country. the market for dollars dries up. Study Guide to The Theory of Money and Credit in mind a scenario such as the following: Suppose a U.) for  million rurs. etc. At the original. But this is little consolation. market-determined exchange rate. hire workers. People around the world would be willing to trade half that (. converting them to . and wiring the money back to his bank account in the United States.S. when the Ruritanian government imposes foreign-exchange controls and sets a new price of  for  rurs (instead of ). and uses the currency to buy materials. capitalist invests  million building a factory in Ruritania. and converting rurs into dollars is the only way the American owner can derive any benefit from his investment. since no one with dollars will actually trade .

..... In Mises’s usage..... under a classical gold standard...................... Currency peg: The variable and nonlegally-binding rate at which a government is currently maintaining its currency’s exchange rate against gold... Freely-vacillating currency: A credit or fiat currency that has no official peg to gold at all... Devaluation: The situation in which a country on the flexible stan- dard announces a large drop in the value of its currency against gold.. while the actual gold was stored in bank or government vaults............. a portion of the citizens’ cash balances consists of actual gold coins and bullion to be used for making purchases... . In Mises’s usage...... to be announced by the government at its discretion............. .. New Terminology Classical gold standard: The system by which a country’s currency is redeemable on demand for a fixed weight of gold...... under a gold-exchange standard the citizens used only paper notes in everyday transactions. Flexible standard: The system by which a country’s currency is redeemable for a variable weight of gold.. though sometimes only by other governments and central banks........... Its market price fluctuates just as any commodity..Chapter : Contemporary Currency Systems  ......... Gold-exchange standard: The system by which a country’s cur- rency is redeemable on demand for a fixed weight of gold....

 Study Guide to The Theory of Money and Credit Illusive standard: The system by which a country’s currency is pegged to gold at nonmarket rates. The exchange rate is maintained not through the manipulation of gold reserves but rather through the enforcement of foreign-exchange controls. . Foreign-exchange controls: Government restrictions on the mar- ket for foreign currencies.

.. Study Questions ..... ) *.... ) ....... What is the outstanding instance of a freely-vacillating currency? (p...Chapter : Contemporary Currency Systems  ... did it matter if banknotes were endowed with legal tender status? (p. Why did the unorthodox statesman prefer the term “peg” to “redemption”? (p............... Why does Mises dislike the term “scarcity of foreign exchange”? (pp....... Mises says (p......” Does this mean that commodity money is not money proper? ... ) that credit and fiat moneys “are not money substitutes but money proper in themselves........... –) ........... ... ) .... Under the classical and gold exchange standards.........................

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........ the government must first (temporarily) prohibit the further issuance of fiduciary media denominated in “rurs.......S.. This is only possible if the public recognizes the futility of interventionist government...... For a relatively small country (“Ruritania”) the government of which has been using inflation to finance its deficits... dollar or gold (quoted in rurs).. the government of Ruritania locks in the current market price of either a U. The return to sound money still means a return to the gold standard.... An agency will be dedicated with the sole task of maintaining the rur’s redemption rate to either the dollar or gold at this rate.......  THE RETURN TO SOUND MONEY Summary The disintegration of the worldwide classical gold standard has gone hand-in-hand with the march toward all-round central planning..... The return to sound money involves a renunciation of inflation........ forever........ The only way to truly safeguard a nation’s money is to remove all avenues for inflation.......  .. Only under this system will the determination of the monetary unit’s purchasing power remain outside the sphere of government control... Ruritania will be back on the gold exchange standard.................” Once the rur’s exchange rate (as well as the price of gold quoted in rurs) has clearly peaked.... This includes not only the government’s resorting to the printing press to finance its deficits..... but also commercial banks’ ability to issue deposits not fully backed up by money proper............ ...

 Study Guide to The Theory of Money and Credit The United States government must return to the classical gold standard. which would force Americans to once again carry full-weight gold coins in their cash balances. Only an abandonment of the interventionist mindset. coupled with a return to the classical gold standard. In order to provide more resistance to future inflation. . the government should suppress small-denomination paper notes. An agency will be established that will buy or sell gold against dollars upon demand. can safeguard the currency. at this rate.

... In other words.. Rising prices pushes people into higher tax brackets and allows the government to tax “excess profits” from businesses...... Chapter Outline ........... giving the government yet another pretext to expand its power.... The only way to truly safeguard a nation’s money is to remove all avenues for inflation...... The return to sound money involves a renunciation of inflation. governments must spend only what they tax or borrow...........Chapter : The Return to Sound Money  ................... Inflation allows government officials to seize control of more resources than the public would otherwise approve.... Only under this system will the determination of the monetary unit’s purchasing power remain outside the sphere of government control. and banks must be prohibited from issuing new fiduciary media...... This is only possible if the public recognizes the futility of interventionist government.. The trends are related.... ... The Integral Gold Standard The return to sound money still means a return to the gold standard......... This includes not only the government’s resorting to the printing press to finance its deficits.. Monetary Policy and the Present Trend Toward AllRound Planning The disintegration of the worldwide classical gold standard has gone hand-in-hand with the march toward all-round central planning.. but also commercial banks’ ability to issue deposits not fully backed up by money proper.. The social unrest caused by inflation can be blamed upon capitalism...... ...........

the government of Ruritania must (temporarily) prohibit the further issuance of fiduciary media denominated in “rurs. First. the U. established in the Bretton . Currency Reform in Ruritania For a relatively small country the government of which has been using inflation to finance its deficits. In this stage. dollar or gold (quoted in rurs). If people turn in dollars or gold (depending on the choice of the link). it is time for step two. The United States’ Return to a Sound Currency The United States government must return to the classical gold standard. This will cause the exchange rate of the rur to stop falling against other. dollar and gold. whether in the form of Treasury notes or bank balances not backed up  percent by cash deposits. Once the rur’s exchange rate (as well as the price of gold quoted in rurs) has clearly peaked.or gold-exchange standard.S. After the dollar-price of gold stabilizes. the crucial thing is to quickly assure world investors that the currency is stabilized. and begun a definite downward trend. and no new fiduciary media can be issued. At this point. forever.” the currency of the country. major currencies as well as gold.S. It must first prohibit the issuance of new dollars. An agency will be dedicated with the sole task of maintaining the rur’s redemption rate to either the dollar or gold at this rate. the agency is allowed to issue new rurs. which offered a stronger check on inflation than the gold-exchange standard. the government of Ruritania locks in the current market price of either a U. the rur will be back on either a dollar. permanent exchange rate between the U. which are backed up  percent by the new deposit. (The new price might very well be higher than the official rate of  per ounce. government will announce the current market price as the new. There is a two-step process involved. .S. Study Guide to The Theory of Money and Credit .

The arguments of the restorers are inconsistent. the people who were harmed by the prior inflation would not necessarily be the same ones to benefit from a current bout of deflation. The . which was established in the  Gold Reserve Act (and was the gold price used in the Bretton Woods system). it is true that a bond originally issued in (say) . which Roosevelt then dishonored as one of his first acts in office. The stabilizers want to free the market to hold and use gold. For example. The restorers want to go back on gold at the rate of  per ounce. per ounce of gold was the true parity.S. The Controversy Concerning the Choice of the New Gold Parity Within the ranks of those advocating a return of the U. the government should suppress smalldenomination paper notes. then the new owner has already taken into account the new inflationary regime. In order to provide more resistance to future inflation. even if it happens to be more than  per ounce. to the gold standard. There is nothing “honest” about going back to  per ounce. and lasting until Richard Nixon abolished the last remnants of the gold standard in .Chapter : The Return to Sound Money  Woods agreement near the end of World War II. Furthermore. Yet if the original purchaser of the bond sold it in (say) . which would force Americans to once again carry full-weight gold coins in their cash balances. per year for fifty years.) An agency will be established that will buy or sell gold against dollars upon demand. promising to pay . then set the dollar to the new price of gold that will be established in the market. would have had its “real” market value sabotaged when FDR devalued the dollar. A much stronger case could be made that the pre- price of . . there is controversy over the appropriate exchange rate. at this rate.

and an intentional deflation will have undesirable consequences that will occur in addition to—rather than undoing—the earlier consequences of the inflation. to raise the purchasing power of the dollar by restoring gold to its former parity. can safeguard the currency. coupled with a return to the classical gold standard. Money is not neutral. Only an abandonment of the interventionist mindset. Study Guide to The Theory of Money and Credit full capital loss has already been absorbed by the original owner. yet they support those policies (government deficit spending and low interest rates) that require inflation. Concluding Remarks The public and most intellectuals lament the consequences of inflation. At this point. The other major flaw with the restorers’ viewpoint is that inflation is harmful not merely because it affects deferred payments. . would be to present a gift to the new owner of the bond.

.. Mises wants to quickly stop the rapidly depreciating currency of Ruritania.... because the previously issued fiduciary media would still exist........Chapter : The Return to Sound Money  ..... (Note that Mises’s suggested reforms would not transform the banking system into a -percent-reserve arrangement. This latter objective explains Mises’s proposal for abolishing paper notes in denominations of . Technical Notes • On pages –.. the government of which has been monetizing its deficits.. ................... (Recall that the dollar itself was still tied to gold at the official rate of  per ounce when Mises wrote these proposals... Mises is content to stop the downward spiral by restoring Ruritania to either a dollar.... Yet the circulation credit theory of the trade cycle (developed in part ... Mises wants to stop the further issuance of fiduciary media—in order to arrest the boom-bust cycle—and to restore the classical gold standard... Mises’s proposals (in sections  and ) for currency reform in the generic small country “Ruritania” versus the United States are different........... chapter ) shows the weakness in this thinking... since he believes it is the only sure way to avoid future crises that will inevitably discredit capitalism. Mises laments that even many supporters of sound money do not recognize the danger in bank credit expansion when undertaken to support business (as opposed to financing government deficits).................... ... That is why Mises here advocates a complete prohibition on the issuance of new fiduciary media...) • Although they are similar........) For the United States..or a gold-exchange standard........

etc. . so that the public would carry fullweight gold coins (stamped with . and perhaps . Study Guide to The Theory of Money and Credit . .) for these transactions.

........... New Terminology Restorers: Those who want a country to return to a gold standard at a historic parity..............................Chapter : The Return to Sound Money  ................ Stabilizers: Those who want a country to return to a gold standard by locking in the current market price of gold....... ....... Monetizing government deficits: Covering the difference between government expenditures versus tax receipts and loans from private lenders....... ..................... a move that would require deflation.. by resort to the printing press..

........ ......... ) ...... ) ... to an unprecedented height.... –) that said modern governments were no longer willing to follow the rules of the gold-standard game? ......... Study Questions ....... In what consists the “eminence of the gold standard”? (p.....” (p........ . What is the “incurable defect” of the gold-exchange standard (as opposed to the classical gold standard)? (p.” Yet isn’t this a version of the critique of the gold standard (pp......... –) that allegedly progressive governments will not abandon their “most formidable weapon.. inflation..... ) *... they blamed private enterprise for charging outrageous prices and profiteering........ Study Guide to The Theory of Money and Credit .. ...... ) ........... Mises writes (pp... Explain: “While advocating high prices and wage rates as a panacea and praising the Administration for having raised ‘national income’ .... Why does Mises (humorously) pick the name “John Badman” for the Ruritanian in one of his thought experiments? (p..

.......................... APPENDICES ....................... .................................................

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and requires that the economist first consider the formation of prices in the case of direct exchange...........  ON THE CLASSIFICATION OF MONETARY THEORIES Chapter Outline ........... Yet eventually the analysis must be generalized to include indirect exchange and the role of money... Even after the development of catallactics and the modern subjective theory of value..... or else the conclusions may go astray.... the State theory of money doesn’t even attempt to  .. within which exchanges involving money are merely a component. Yet a necessary condition of a satisfactory theory of money is that it is embedded in a more general theory of exchanges... . Economic theory is difficult. ... Catallactic and Acatallactic Monetary Doctrine Money is such an important part of economic life that writers analyzed it before the development of other areas of economic theory............................. acatallactic theories of money persist..... The “State” Theory of Money The “State” theory of money claims that the value of money rests on the authority of the highest civil power.............. Although its proponents may not realize it................. rather than being the result of valuations in the market.

it is acceptable to call money a claim on the general stock of goods. Study Guide to The Theory of Money and Credit explain the purchasing power of money. His failure illustrates that it is a dead end to analyze money as a claim. which is the primary purpose of a monetary theory. “Metallism” Knapp defines metallism as the monetary doctrine claiming that the unit of value is a certain quantity of metal. interpreted the clash between the Currency and Banking Schools as a clash between metallism . influenced by Knapp. . seeking to explain the exchange ratio between money and all other goods and services. but he was forced at the outset to exclude hoards and other important real-world determinants of the value of money. Schumpeter’s Attempt to Formulate a Catallactic Claim Theory As an analogy. Note: The Relation of the Controversy about Nominalism to the Problems of the Two English Schools of Banking Theory Some writers. Knapp’s definition is unclear. The Concept “Metallism” in Wieser and Philippovich Knapp’s cumbersome classification scheme has unfortunately been adopted by other economists. . . allowing the confusion in his work to seep into theirs. Yet the notion of money as a claim cannot serve as an actual theory of money. Schumpeter has made an attempt to do so. . but he uses the term to include all those theories of money that are not nominalistic.

. Because he disdained theory altogether. this is not really the crux of their argument. However.Appendix A: On the Classification of Monetary Theories  and nominalism. Knapp was unable to even express the actual controversy between the two English schools of thought on banking.

.....................” For example.. there is no contradiction here. A theory that disregarded the role of hoards would be unable to explain why the value of money changed. and he also states that people in commerce (rightly) evaluate coins on their metal content........ not on the stamp placed by the legislature...... including “hoards.. since throughout the book Mises clearly endorses the classical gold standard. Mises agrees that the monetary unit should ultimately be a fixed weight of gold (or another commodity)...... grounded in the subjective theory of value... .... Mises explains that a satisfactory theory of money must take into account all determinants of its purchasing power.  and ).e. . However........... pp.... • In his critique of Schumpeter (in section )............g........ if people in the community become fearful and try to accumulate an extra month’s worth of expenses in the form of cash. This may surprise some readers. However..... then other things equal the purchasing power of money will rise (i. prices will fall)....... one needs a theory of indirect exchange.. Study Guide to The Theory of Money and Credit .... Mises rejects the theory that the value of money equals the value of the precious metals.. to explain the value (or the purchasing power) of that monetary unit....... Technical Notes • In this chapter (e.

... .. Nominalism: The monetary doctrine claiming that the unit of value derives from the government’s designation of the legaltender unit of account...... ................ with an emphasis on the determination of price ratios............................... the monetary doctrine claiming that the unit of value is a certain quantity of metal.................... Metallism: As defined by Knapp.......Appendix A: On the Classification of Monetary Theories  ........ New Terminology Catallactics: The study of exchanges or (more narrowly) the study of monetary exchanges..........

........... it would be incorrect to call such money ‘unemployed’. .. Explain: “Facts do not speak... Study Guide to The Theory of Money and Credit .. and consequently fulfils the characteristic function of money... all money that is not changing owners at the very moment under consideration is awaiting employment.......” (p..... –) ... .... they need to be spoken about by a theory........ ) ..... ) ........ Nevertheless.... Study Questions .. but because it is not able so much as to attempt to explain them... for example. Explain: “In a strict and exact sense .. among which. Does Mises think that the paper money experiences of the war years pose a refutation of catallactic theories of money? (pp. Explain: “There are problems of theory full comprehension of which can be attained only with the aid of the theory of indirect exchange. is inevitably to go astray.. with no instruments but those of the theory of direct exchange.. To seek a solution of these problems......... ) .. is the problem of crises.” (p......” (p. ... as part of a reserve it satisfies a demand for money......... ) ......... Explain: “The State Theory of money—and all acatallactic theories of money in general—breaks down not so much because of the facts.....” (p.

............................... Uncovered Bank Deposits and Notes Money Certificates [The translator’s note in Appendix B is self-explanatory and needs no summary here....  TRANSLATOR’S NOTE ON THE TRANSLATION OF CERTAIN TECHNICAL TERMS .......]  ...... However............. we have reproduced the translator’s excellent diagram to illustrate the Misesian classification scheme regarding different monetary concepts...................................... Money in the Broader Sense Money in the Narrower Sense Money Substitutes Fiduciary Media Commodity Money Credit Money Fiat Money Token Money etc..

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..S.... Cable rate: Slang used by foreign-exchange traders to denote the exchange rate between the U...................... also accept payment in silver ounces at a fixed multiple of the gold price...... or an uncertain outcome.. Bill of exchange: A non-interest-bearing written order that binds one party to a pay a fixed sum of money to another party at a specified future date or upon demand......... bills of exchange........ Banker: A person who lends out other people’s money.... A bill of exchange is generally transferable through endorsement... GLOSSARY Aleatory: Dependent on chance.... dollar and British pound sterling.  ..... Banking School: An English school of thought which argued that the banks were incapable of independently altering the rate of interest or the purchasing power of money........ typically entitling the bearer to a specified amount of the money good.. Bimetallist legislation: Efforts by the government to establish a fixed conversion ratio between gold and silver.. because the market would use clearing operations. For example..... luck... and other techniques to receive the credit it demanded for business purposes....... Banknotes: Paper notes issued by banks................. the government might require that merchants who post a price in gold ounces.

with an emphasis on the determination of price ratios. Clearing systems: Arrangements that cancel out or “clear” recipro- cal financial claims. so that only net claims need be settled through the actual transfer of money. Capitalist: A person who lends out his or her own money. under a classical gold standard. Circulation Credit: A loan granted even though the lender does not sacrifice the use of present goods. as capital goods are malinvested during the boom. . Cash flow: The stream of money payments over time due to an asset or collection of assets. Catallactics: The study of exchanges or (more narrowly) the study of monetary exchanges. Study Guide to The Theory of Money and Credit Capital consumption: A metaphor denoting the reduction in cap- ital because of a failure to reinvest enough out of current output. The bust is then inevitable. Classical gold standard: The system by which a country’s currency is redeemable on demand for a fixed weight of gold. In Mises’s usage. Circulation credit theory of the trade cycle: The theory developed by Mises (in the present book) explaining the boom phase of the business cycle as due to the artificial expansion of bank credit. made possible by fiduciary media. Circulation credit involves the use of fiduciary media. a portion of the citizens’ cash balances consists of actual gold coins and bullion to be used for making purchases. Cash (verb): To redeem a claim (such as a banknote) by paying the specified amount of the money good.

valued for nonmonetary reasons. a bank might issue fiduciary media not backed by money itself. not falling due until a (possibly uncertain) future date. It is settled by an inflow of money to the country. Convertible Treasury notes: Paper notes issued by the government that entitle the bearer to redemption in money upon demand.Glossary  Commodity Credit: A loan granted through the renunciation of the use of present goods by the lender. Commodity money: A common medium of exchange that is an eco- nomic good in its own right. but backed by another asset such as a commodity bill. Credit intermediaries: Institutions that act as “middlemen” be- tween lenders and borrowers. . Commodity credit may involve money certificates but not fiduciary media. Currency peg: The variable and nonlegally-binding rate at which a government is currently maintaining its currency’s exchange rate against gold. Cover (of note issue): Assets backing the issue of new banknotes. Depending on the regulations. Credit balance of payments: The situation occurring when the peo- ple of a country collectively spend less on foreign goods and assets than vice versa. Credit: The ability to receive present goods in exchange for the promise of delivering (typically a greater number of ) future goods. Credit money: A common medium of exchange that is a claim on a person or legal person (such as a corporation or government agency).

the Currency School thought the suppression of the issue of fiduciary media in the form of banknotes (which was codified in Peel’s Act) would solve the problem. reducing their precious-metal content. Current accounts (in banking): Accounts held with a bank. It is settled by an outflow of money from the country. However. (Note that this is a technical economic definition. The depositors consider this money to be part of their cash balances. Debit balance of payments: The situation occurring when the peo- ple of a country collectively spend more on foreign goods and assets than vice versa. . Study Guide to The Theory of Money and Credit Currency School: An English school of thought which argued that the banks caused economic crises through the expansion and contraction of credit.) Debase: To dilute the value of the money. because its members erroneously excluded demand (or current account) deposits from their analysis. even though much of it has been lent out to others. where the bank receives deposits into current accounts from one group of clients in order to make loans to another group of borrowers. (Today a standard “checking account” would be an example. Deflation: A reduction in the quantity of money that is not offset by a fall in the demand for it. giving the owner the ability to write drafts or withdraw money upon demand. for example when a ruler introduces “base” metals into the coinage. not necessarily having the connotations of “deflation” in popular discussions.) Deposit banking: Banking through the use of circulation credit. such that prices tend to fall.

either in consumption or production. Direct exchange: An exchange in which both parties intend to directly use the received good. and trade away their surplus to receive some of the surplus created by others. Fiat money is not “backed up” by anything else. Étatism (as policy): The attempt to regulate all social and economic affairs by authoritative commandment and prohibition. producing far more than they personally can consume. Division of labor: The situation in which people specialize in par- ticular occupations. (Exchange value can be qualified as either subjective or objective. Exchange rate: The ratio at which one currency trades against another in the foreign-exchange market.) Fiat money: A common medium of exchange accepted not because of its technological properties. Étatism (as theory): The doctrine of the omnipotence of the State. Exchange value: The significance of a good due to its ability to be traded for other goods. . but because of a special legal designation provided by the appropriate authority. Also known as the natural rate of interest. Equilibrium rate of interest: The rate of interest corresponding to the true supplies of capital goods and consumer preferences for present versus future consumption.Glossary  Devaluation: The situation in which a country on the flexible stan- dard announces a large drop in the value of its currency against gold.

Forward contract: Similar to a futures contract. Foreign-exchange rate: The exchange ratio between a domestic and foreign currency.” Fixed capital: Assets embodied in durable investments such as fac- tories and specialized equipment that will be used over a long period. there is no daily marking-to-market. On the delivery date. Fiduciary media are “unbacked. Free banking theorists do not believe that the issue of fiduciary media per se causes the business cycle. Study Guide to The Theory of Money and Credit Fiduciary media: Money substitutes issued over and above the money (in the narrower sense) held in the redemption fund. to be announced by the government at its discretion. though a forward contract is not standardized. . and that such an outcome is almost always associated with government-supported issues of fiduciary media. Furthermore. Thus the forward contract can achieve a positive or negative market value. which may be below  percent. the buyer pays the forward price as originally specified in the contract. Flexible standard: The system by which a country’s currency is redeemable for a variable weight of gold. as conditions change and cause the actual spot price (on the delivery date) to move above or below the originally specified forward price. Foreign-exchange controls: Government restrictions on the mar- ket for foreign currencies. only that excess quantities of fiduciary media do. Free banking (among modern Austrians): The doctrine holding that a free market in banking will pick the optimal fraction of reserves.

) These daily episodes of marking-to-market restore the market value of the futures contract itself to zero. Futures contract: A standardized contract. Its market price fluctuates just as any commodity. the exchange will credit or debit the accounts of the buyer and seller of the original futures contract on a daily basis to reflect the change. (If the futures price goes up. the seller of the futures contract delivers the good.S. Freely-vacillating currency: A credit or fiat currency that has no official peg to gold at all. etc. under a gold-exchange standard the citizens used only paper notes in everyday transactions. . traded on an organized exchange. though sometimes only by other governments and central banks. while the buyer pays the current spot price for that date.Glossary  Free good: A good that has a price of zero. because it is not scarce. Gold-exchange standard: The system by which a country’s cur- rency is redeemable on demand for a fixed weight of gold. In Mises’s usage. where two parties agree to exchange a good at a specified price (the futures price) at a specified future date (the delivery date). dollar or the British pound) can be redeemed for a definite weight of gold. while the actual gold was stored in bank or government vaults. Upon delivery. There is enough of the good to satisfy all human wants that it can technically fulfill. not the futures price as originally specified. As conditions change and alter the futures price pertaining to the delivery date. Gold standard: The arrangement by which a nation’s money (such as the U. the buyer gains and the seller loses.

If a bank does not follow the golden rule.S. someone who believes that Stock XYZ will outperform most other stocks might “go long” by purchasing several thousand shares of it. if the government passes legal tender laws on all government-stamped coins. and only silver will be used in commerce. quarters minted in the year ) will be hoarded by people who recognize the value of the silver.) Goods of the first order: Consumer goods. then coins with low metal value (such as U. then everyone will try to buy with silver. A capital good used to produce a second-order good is a third-order good. whereas coins with high metal content (such as U. For a different example. Goods of higher orders: Goods used to produce consumer goods. and no one will use gold for making purchases. etc. Gold will seem to disappear. quarters minted in the year ) will circulate in trade. increases in short-term interest rates can lead to disaster. Gresham’s Law: Popularly summarized as “bad money drives out good. For example. so that the bank is not dependent on the ability to “roll over” maturing debt. when the bank must pay its own creditors while its assets are not yet due. Hedging transaction: A financial transaction in which an individ- ual attempts to reduce his or her exposure to a market outcome.S. and will spend the money that is overvalued by legislation. when in fact the actual market exchange rate is -to-. (A capital good used to produce a consumer good is a secondorder good. Study Guide to The Theory of Money and Credit Golden rule (of bank lending): Matching the maturities of assets and liabilities.” the phenomenon by which people will hold money that is undervalued by legislation. But to hedge himself . For example. if bimetallist legislation requires that merchants accept silver and gold at the ratio of -to-.

The exchange rate is maintained not through the manipulation of gold reserves but rather through the enforcement of foreign-exchange controls. Hypothecary loans: Loans granted with an asset such as real estate serving as collateral. (Note that this is a technical economic definition. allegedly counteracting the predictions of a naïve quantity theory of money. not necessarily having the connotations of “inflation” in popular discussions. so long as Stock XYZ drops by a smaller amount than most other stocks. even if XYZ falls in price. Thus. Illusive standard: The system by which a country’s currency is pegged to gold at nonmarket rates. in order to trade it away in the future for something else. . Indirect exchange: An exchange in which at least one party intends to hold the received good.Glossary  against a general fall in the market. the investor will still make money. with the necessary result being a fall in the purchasing power of money. he might also “go short” an index fund holding all the stocks in the S&P .) Inflation tax: The redistribution of wealth from the citizenry to the government (or its designated beneficiaries) through inflation. Inflation: An increase in the quantity of money (in the broader sense of the term) that is not offset by a corresponding increase in the demand for money (in the broader sense of the term). Hoards (noun): People who accumulate large cash balances in cer- tain circumstances.

deducible from the nature of economizing action. at par value. Study Guide to The Theory of Money and Credit Inflationism: Monetary policy that seeks to increase the quantity of money. the minimum market price of gold (quoted in a country’s currency) beneath which .) Loan banking: Banking through the use of commodity credit. a share of corporate stock is much more liquid than a house. due to the higher valuation placed on present versus future goods. Liquid (adjective): The ability of being sold for the full market price with a very short search time.) Liquidity: The situation in which an institution’s assets will deliver a cash flow allowing it to pay its liabilities on time. The savers do not consider this money as part of their cash balances during the term of the loan to the bank. (For example. (All liquid enterprises are also solvent. Law of diminishing marginal utility: The rule. Interest: Income accruing to the owner of future goods as they mature into present goods. Lower gold point: Under the gold standard. but not necessarily vice versa. that each additional unit of a good or service will have a lower value. Institutional unemployment: The situation where workers are qual- ified and willing to accept jobs at prevailing wage rates. where the bank receives loans from one group of savers in order to itself make loans to another group of borrowers. because a person will allocate successive units to satisfying ends that are less and less important. yet cannot find employers to hire them. Legal tender: An item that the government declares to be valid for the payment of debts denominated in money.

Money typically stands on one side of virtually every exchange. Market value: Synonymous with the objective exchange value of a good.—for citizens to import gold and exchange it with the authorities at the official redemption rate for the domestic currency. with the intention of trading it away to acquire something else in the future. the monetary doctrine claiming that the unit of value is a certain quantity of metal. interest rates. typically quoted in money terms. and other prices set on the market. by resort to the printing press. but the government extensively regulates their use of this property. re-coinage. including wages. etc. Monetary policy: Government or central bank efforts to alter the purchasing power of money. Monetizing government deficits: Covering the difference between government expenditures versus tax receipts and loans from private lenders. Money: A medium of exchange that is generally accepted in the community. Medium of exchange: A good that is accepted in exchange. Mixed economy: An economy possessing aspects of both capital- ism and socialism. in which private individuals retain nominal ownership of the means of production.Glossary  it is profitable—including all costs of transport. Metallism: As defined by Knapp. . Money certificates: Money substitutes that are fully backed by money (in the narrower sense).

Money rate of interest: The rate of interest determined in the mar- ketplace for loans of money. such as its cost of production or the amount of labor that went into its construction. or credit money). and that prosperity requires only a sufficient willingness to create more money and/or issue more bank credit. in a process that is explained in part  of the book. which itself circulates as money (in the broader sense) because it fulfills the functions of money. (The money rate can deviate from the equilibrium [or natural] rate of interest. Objective theory of value: An explanation of value that relies on the objective properties of a good. Money in the broader sense: The actual money good (whether commodity. Money substitute: A perfectly secure and instantly redeemable claim on money. (The . Money in the narrower sense: The actual money good (whether commodity. fiat. Objective exchange value of money: The possibility of obtaining a certain quantity of other goods in exchange for a unit of money. Study Guide to The Theory of Money and Credit Money cranks: Very naïve writers who believe that scarcity is an artificial institutional constraint. plus money substitutes. fiat.) Naïve inflationism: Inflationism supported by the belief that money constitutes wealth. or credit money). Nominalism: The monetary doctrine claiming that the unit of value derives from the government’s designation of the legaltender unit of account. not including money substitutes.

which itself was required to maintain  percent metallic backing for any new notes that it issued. gold and silver might both serve as money under a Parallel Standard. Price controls: Government decrees threatening fines or other punishment for people trading at prices that are either too high (in the case of a price ceiling) or too low (in the case of a price floor). Private capital: The aggregate of the products that serve as a means to the acquisition of goods. In a monetary economy.) Peel’s Act [Bank Charter Act ]: An important legislative act that took the power of issuing new notes away from private banks and vested it completely with the Bank of England. held an objective theory of value. Price of money: The quantity of goods (or services) that must be given up in exchange to acquire a unit of money.) Paper standard: The arrangement by which the government does not redeem paper notes for a precious metal. Prices: The market exchange ratios between various goods and ser- vices. meaning that private banks could create more fiduciary media by granting loans (not backed by gold) to their customers. prices are typically quoted in terms of the money good. (A paper standard stands in contrast to a gold standard. such as Adam Smith and David Ricardo. (For example.) Parallel Standard: A monetary system in which two different goods both serve as monies. the Act crucially did not impose such a restriction on the extension of deposits. However.Glossary  classical economists. .

 Study Guide to The Theory of Money and Credit Purchasing power: The amount of goods and services that a unit of money can command because of the various prices in the market.) Real wages: Wage rates relative to the prices of goods and services. Restorers: Those who want a country to return to a gold standard at a historic parity. Scale of values: An analytical tool by which the economist inter- prets the actions of an individual. Regression Theorem: Mises’s argument that the current purchas- ing power of money is influenced by people’s memory of yesterday’s purchasing power. with the more mechanical ones—which posit that a doubling of the money stock will lead to a doubling of all prices—being obviously wrong. Purchasing Power Parity: The theory stating that the exchange ratio between two monies is determined by the respective exchange ratios of each money and other goods and services. until the point at which the money good was valued as a regular commodity in direct exchange. . Purchasing power/inflation premium: An increase in the contrac- tual rate of interest due to the expected rise in prices. who subjectively ranks particular units of goods and services in order from most to least important. a move that would require deflation. Restrictionism/Deflationism: Monetary policy that aims at raising the objective exchange value of money. Quantity theory of money: An old doctrine explaining changes in the purchasing power of money by reference to the quantity of money and the demand to hold it. The causality is traced back in time. (There are many versions of the quantity theory.

and Léon Walras—overturned the objective theory of value and ushered in the subjective theory. Token coins: Coins that serve as representatives of money (usually in very small denominations). Solvency: The situation in which the market value of an institu- tion’s assets exceeds its liabilities.Glossary  Seigniorage: The difference between the market value of money and the cost to produce it. Stabilizers: Those who want a country to return to a gold standard by locking in the current market price of gold.) Subsistence fund: A concept used by Böhm-Bawerk to denote the savings the capitalists must have first accumulated. in order to feed and otherwise support the workers as they engage in time-consuming production processes. Subjective theory of value: An explanation of value that relies on individuals’ subjective rankings of particular units of goods and services. compared to the amount consumers wish to purchase. Social (productive) capital: The aggregate of the products intended for employment in further production. Upper gold point: Under the gold standard. (The so-called Marginal Revolution of the early s—spearheaded by Carl Menger. Shortages: A shortfall in the quantity of goods offered for sale. the maximum market price of gold (quoted in a country’s currency) above which . Shortages are caused when a price ceiling holds the price below the market-clearing level. William Stanley Jevons. even though they do not contain the full weight of metal in the case of a commodity money.

—for foreigners to exchange the domestic currency for gold (at the official redemption rate. (Use-value can be qualified as either subjective or objective. a measure of a firm’s ability to quickly turn some of its assets into cash in order to finance an expansion. More generally. etc.) Value: The importance that an individual places on a particular unit of a good or service. Use-value: The significance of a good due to its ability to be directly used by the owner in consumption or production. . and have the gold shipped out of the original country. which is below the current market price). the hypothetical rate of interest that would occur if goods were traded directly against each other without the use of money. Study Guide to The Theory of Money and Credit it is profitable—including all costs of transport. re-coinage. Working capital: Current assets minus current liabilities. (Wicksellian) natural rate of interest: Developed by economist Knut Wicksell.

 Credit policy. . –.. .  ....  private..  Circulation credit theory of the trade cycle.  Commodity money.  School. . . –... .  Böhm-Bawerk. .......  Bills of exchange. – Banknote.... –...  C Cable rate. – Currency School. .  Clearing systems..  Bimetallism... ..  Credit. . .... ...  Banking business of..  Capitalist. . – Credit transactions.. .  deposit..... .. – Commodity credit.... ... . . . .. ....  D Deflation... –... .. – Deflationism. –. –. . . .  free... – Business cycle.. .. . See Business cycle Classical economists..  Credit money. . . . . .. –.. ... .. . ....  social. ...... .. ...... Eugen von. ..  fractional reserve....   Circulation credit.... . ..... ..  Capital consumption. . . – loan. INDEX B Banker. –... – Currency speculation. .. .. .... . –.. ...  Cost of living... .

 price determination in. Study Guide to The Theory of Money and Credit Diminishing marginal utility. . – Gresham’s Law. .  objective exchange value of. . . –. . –.  relation to theory of money. . . .  Forward contract. . – I Index numbers. –. –. .  free. . .  Fiduciary media. . –. . Steve. . –. law of. – Foreign exchange rate. – Inflationism. .  Direct exchange definition. . . – Horwitz. .  E Étatism. . Irving. .  production. –. . – Indirect exchange definition. – inevitability. . –. . –. –. . – Golden rule (of maturity matching). –. .  H Hoards. –. .  subjective exchange value of.  source of. . . . .  Futures contract. . . . . – present versus future. . –. . . –. . .  relation to fiduciary media.  Inflation. . . . . .  emergence of. . .  natural rate of. . . . . . –. . .  G Gold standard.  . . . –. –. .  Division of labor. – Interest money rate of. –.  Goods consumption. . . . .  role in theory of money. . –. .  F Fiat money.  Fisher.

See Credit money definition. . – state’s influence on. . . –.  credit. .  purchasing power of. .  Q Quantity theory of money.  Monetary policy. .  Parallel standard. . – supply and demand. –. –. –. –. –. .  quantity theory of.  P Paper standard. William Stanley. –. . –. –. . . .  sound. . . . –. –. .  socialism and. See Commodity money cranks. . . . . . . . –.  Prices caused by subjective preferences. Carl. . purchasing power of origin of. . . . .  state theory of.  measure of market exchange value. in the. . See Fiat money function of. . .  Liquidity. –. . .  narrower sense. . .  Medium of exchange. . See Money. . . . –. . –. . – . . . –.  Peel’s Act. –.  L Legal tender legislation. –. . . . .  controls on. –. . . See Quantity theory of money secondary functions of. – Purchasing power parity.Index  J Jevons. .  fiat. in the. . –.  commodity. . –. –.  certificates. – Money broader sense. . –. . –. . . –.  objective exchange value of. . .  M Marginal revolution.  index of prices.  substitute. –. . .  Menger. .

George.  W Walras.  Utility. –.  Scale of values. . .  Seigniorage. .  objective use.  Schumpeter. –. . Murray. . . . . –. . . . –. –. – subjective use. . connection with inflation. . . Knut. .  measurement of. Friedrich von. . . –. .  subjective theory of. .  Solvency.  Trade cycle.  labor theory of. . . . Léon. – V Value cost theory of. . – S Saving.  objective theory of. . . . relation to subsistence fund. David. –. . See Business cycle U Unemployment.  Rothbard. . – Ricardo. – Smith. .  Wicksell. Joseph. Adam. .  T Token coins. .  Selgin.  definition.  .  Trade balance –. .  Wieser. . Study Guide to The Theory of Money and Credit R Regression theorem. .  total. .

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