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 e/ Mency ená Crcáit was rianslareo íiom rle Ceiman lv
!.!. Barson ano pullisleo lv Jonarlan Cape (!onoon) in 1o:±.
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isnx: o¬8-1-ó1o1ó-::¡-¬
C0NIlNI!
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Pieíace . . . . . . . . . . . . . . . . . . . . . . . ix
|. IklNkI0kl0|M0Nl\
1. Tle !uncrion oí Monev . . . . . . . . . . . . . :
:. Òn rle Measuiemenr oí Value . . . . . . . . . . 11
:. Tle Vaiious Kinos oí Monev . . . . . . . . . . . ::
±. Monev ano rle Srare . . . . . . . . . . . . . . :¡
¡. Monev as an !conomic Cooo . . . . . . . . . . . ±:
ó. Tle !nemies oí Monev . . . . . . . . . . . . . ±o
||. IklVk|0l0|M0Nl\
¬. Tle Concepr oí rle Value oí Monev . . . . . . . . ¡¬
8. Tle Ðereiminanrs oí rle Òljecrive !xclange Value,
oi Puiclasing Powei, oí Monev . . . . . . . . . . ó¬
v
vi Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
o. Tle Piollem oí rle !xisrence oí !ocal Ðiffeiences
in rle Òljecrive !xclange Value oí Monev . . . . . 8¡
1o. Tle !xclange Rario Berween Monev oí Ðiffeienr
Kinos . . . . . . . . . . . . . . . . . . . . . o1
11. Tle Piollem oí Measuiing rle Òljecrive
!xclange Value oí Monev ano Vaiiarions in !r . . . oo
1:. Tle Social Conseouences oí Vaiiarions in rle
Òljecrive !xclange Value oí Monev . . . . . . . . 1o¡
1:. Moneraiv Policv . . . . . . . . . . . . . . . . 11¡
1±. Tle Moneraiv Policv oí !rarism . . . . . . . . . 1:¡
|||. M0Nl\kN08kNK|N6
1¡. Tle Business oí Banking . . . . . . . . . . . . . 1:¡
1ó. Tle !volurion oí !iouciaiv Meoia . . . . . . . . 1±¡
1¬. !iouciaiv Meoia ano rle Ðemano íoi Monev . . . . 1¡:
18. Tle Reoemprion oí !iouciaiv Meoia . . . . . . . 1ó¡
1o. Monev, Cieoir, ano !nreiesr . . . . . . . . . . . 1¬¡
:o. Piollems oí Cieoir Policv . . . . . . . . . . . . 18:
|V. M0NlIkk\klC0N!Ik0CI|0N
:1. Tle Piinciple oí Souno Monev . . . . . . . . . . 1o¬
::. Conrempoiaiv Cuiiencv Svsrems . . . . . . . . . :o¡
::. Tle Reruin ro Souno Monev . . . . . . . . . . . :1:
Centcnts vii
k||lN0|Cl!
a. Òn rle Classificarion oí Moneraiv Tleoiies . . . . ::¡
n. Tianslaroi’s `ore on rle Tianslarion oí Ceirain
Teclnical Teims . . . . . . . . . . . . . . . . ::1
Clossaiv . . . . . . . . . . . . . . . . . . . . . . . :::
!noex . . . . . . . . . . . . . . . . . . . . . . . . :±o
|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 e/ Mency ená Crcáit, saving ir
was “impoiranr ieaoing íoi rlese rioulleo rimes.” Alrlougl Aus-
riians weie glao rlar someone was liinging arrenrion ro Mises’s
classic woik, manv weie unoeisranoallv skeprical. Aírei all, Thc
Thcery e/ Mency ená Crcáit is a herá look ro ieao.
Tle piesenr sruov 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
merlooicallv, le oi sle will see rlar Mises svsremaricallv luilos
lis aigumenr íiom one claprei ro rle nexr. \irl rle lelp oí rlis
sruov guioe, even rle lavpeison will le alle ro unlock rle amazing
insiglrs conraineo in rlis rome, fiisr pullisleo a cenruiv ago.
Òne oí rle mosr enjovalle suipiises íoi me was ro oiscovei
jusr low impiessive an economisr !uowig von Mises ieallv was,
even ar a ielarivelv voung age. !n rlis single woik, Mises inre-
giareo (wlar we now call) micioeconomics wirl macioeconomics.
!e successíullv applieo suljecrivisr, maiginal urilirv rleoiv ro rle
case oí monev—a rask rlar lao eluoeo eailiei rleoiisrs in rle Aus-
riian riaoirion. As ií rlar weien’r enougl, Mises gave a svsremaric
explanarion oí rle loom-lusr cvcle, llaming ir on rle airificial
ix
x Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
expansion oí lank cieoir ano rle coiiesponoing ieoucrion oí rle
monev iare oí inreiesr lelow rle “naruial” iare.
Tlese accomplislmenrs alone woulo lave eaineo Mises an
impoiranr sear in rle lisroiv oí economic rlouglr. Yer upon mv
mosr iecenr ieaoing, ! iealizeo rlar Mises slowcases mucl moie oí
lis ralenr. !oi one rling, le oisplavs a rloiougl commano oí rle
ielevanr lireiaruie, nor onlv in puie economic rleoiv lur also in
applieo ropics sucl as monev ano lanking. !e also slows a piacri-
cal unoeisranoing oí acrual financial maikers, wlicl oíren lelave
oiffeienrlv íiom rle oepicrion in acaoemic wiirings. !n rle final
secrion oí rle look (wiirren aírei rle oiiginal ielease), Mises offeis
veiv wise policv iecommenoarions íoi ieruining ro souno monev.
Tle íoimar oí rle sruov guioe íollows rle 1o¡: eoirion oí Thc
Thcery e/ Mency ená Crcáit pullisleo lv rle Mises !nsrirure. ! íol-
low Mises’s woik veiv closelv, oown ro rle inoivioual secrion leao-
ings. !acl claprei conrains an oveiall summaiv (excepr íoi veiv
sloir clapreis), íolloweo lv 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 glossaiv) ano finallv a lisr oí five sruov
ouesrions ro ensuie rlar rle ieaoei is giasping rle essenrial poinrs
oí eacl claprei.
!n oioei ro mooeinize rle srvle, lvplens lave leen oioppeo,
ano in a íew insrances, spelling las leen upoareo. !owevei, no
conrenr las leen alreieo íiomrle !nglisl rianslarion as pullisleo
lv rle Mises !nsrirure.
! lope rlar rlis sruov 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 lavpeison) las iemaikeo, ir is impoiranr
ieaoing íoi rlese rioulleo rimes.
Roleir P. Muiplv
`aslville, Tennessee
Julv, :o11
..
vav: i
Ikl NkI0kl 0| M0Nl\
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tuav:iv 1
Ikl |0NCI|0N 0| M0Nl\
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Summary
Monev is necessaiv in a socierv laseo on piivare piopeirv ano
rle oivision oí laloi. Tle íuncrion oí monev is ro íacilirare rlese
riaoes: Monev is a commonlv useo meoium oí exclange.
!n a direct exchange, people accepr gooos in riaoe rlar rlev
inreno ro peisonallv 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 awav 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 monev, riaoeis woulo lave ouicklv 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, lv riao-
ing lis gooo íoi somerling rlar was moie maikeralle.
Because eveiv riaoei woulo acr in rlis íaslion, rlose gooos
rlar weie iniriallv moie maikeralle, woulo see rleii maikeralilirv
enlanceo even íuirlei. Òvei rime, a communirv woulo giavirare
ro one oi a íew commooiries rlar woulo le accepralle ro eveiv-
one in riaoe. Tlis is low monev emeigeo íiom an inirial srare oí
:
± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
lairei. !isroiicallv rle maiker las oíren closen golo ano silvei as
monev.
Alrlougl orlei wiireis ourline orlei “íuncrions” oí monev—
sucl as a sranoaio oí oeíeiieo pavmenrs oi a sroie oí value—rlese
all flowíiomirs oefinirion: monev is a commonlv accepreo meoium
oí exclange.
Cheptcr 1: Thc Fun.tien e/ Mency ¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe 6eaera| lceaem|c Cea6|t|eas fer the 0se ef Meae¡
A peison living lv limselí on a riopical islano woulo nor neeo
money. Seveial people living in rle same louselolo woulo nor
neeo monev eirlei, so long as rlev pioouceo eveivrling rlev
neeoeo wirlin rle louselolo. !ven an enriie communirv—con-
sisring oí rlousanos oi millions oí louselolos, eacl oí wlicl spe-
cializeo in piooucing oiffeienr gooos ano seivices—coulo ger lv
wirlour rle use oí monev, assuming rleie weie a cenrial gioup oi
peison wlo acreo as a “plannei” ano rolo eveivone wlar ro make,
ano oecioeo wlicl poirion oí rle roral ourpur eacl peison woulo
ger ro consume.
!owevei, in a socierv 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),
monev is essenrial. !n sucl a socierv, rleie is no one peison oi
gioup wlo oecioes low scaice iesouices will le oeploveo. !acl
inoivioual musr make lis oi lei own plans, wlicl usuallv ieouiie
exclanging piopeirv íoi orlei people’s piopeirv. Tle íuncrion oí
monev is ro íacilirare rlese riaoes: Monev is a commonlv useo
mediumof exchange.
z. Ihe 0r|e|a ef Meae¡
!n a direct exchange, people accepr gooos in riaoe rlar rlev inreno
ro peisonallv use, wlerlei íoi consumprion oi piooucrion. !oi
example, suppose Alan las a muffin lur le is ieallv lungiv íoi
fisl. Bill, on rle orlei lano, las a ner (wlicl can le useo ro carcl
fisl) rlar le ooesn’r ieallv wanr, lur le rlinks Alan’s muffin looks
ó Stuáy Cuiác te Thc Thcery e/ 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 awav again in rle íuruie. !oi example, suppose rleie is
a woman wlo las knirreo a ouilr, ano sle wanrs ro exclange ir íoi
a ceirain paiakeer. !níoirunarelv, rle man wlo owns rle paiakeer
ooesn’r wanr a ouilr, lur is insreao inreiesreo in olraining a new
iaoio. Tle ownei oí rle iaoio, lowevei, lares liios, lur is veiv
colo ar niglr. Tle woman wirl rle ouilr, uníoirunarelv, is veiv
laio oí leaiing ano las no use íoi a iaoio.
!n rlis scenaiio, no oiiecr exclange is possille. !owevei, rle
woman coulo riaoe awav lei ouilr íoi rle iaoio—even rlougl sle
peisonallv 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.
!ogicallv, rleie musr lave leen a rime wlen people lao gooos
ano riaoeo wirl eacl orlei, lur leíoie monev lao aiisen. !ven
leíoie rle use oí monev, riaoeis woulo lave ouicklv 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, plilosoplv looks, maclineiv). A
riaoei wlo came ro maiker wirl an unmaikeralle gooo sucl as
a relescope piolallv woulon’r le alle ro ouicklv fino someone
wlo (e) lao rle irems rlar rle fiisr riaoei lopeo ro acouiie ano
(/) wanreo a relescope. !n rlis case, rle riaoei coulo impiove lis
laigaining posirion lv riaoing awav 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 e/ Mency ¬
Because eveiv riaoei woulo acr in rlis íaslion, rlose gooos
rlar weie iniriallv moie maikeralle, woulo see rleii maikeralil-
irv enlanceo even íuirlei: Tlev woulo le oemanoeo nor onlv lv
people inrenoing ro use rlem oiiecrlv, lur also lv people inreno-
ing ro use rlem as meoia oí exclange. !n anv pairiculai inoiiecr
exclange, a riaoei woulo naruiallv 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 ulrimarelv oesiieo. Òvei rime,
a communirv woulo giavirare ro one oi a íew commooiries rlar
woulo le accepralle ro eveivone in riaoe. A commonlv accepreo
meoium oí exclange is monev.
!isroiicallv, golo ano silvei lave leen rle rwo commooiries
mosr íieouenrlv emploveo as monev. Tlev lave veiv similai piop-
eiries ano aie lorl excellenr meoia oí exclange.
). Ihe “!ecea6ar¡” |aact|eas ef Meae¡
Monev is, lv oefinirion, a common meoium oí exclange, wlicl
rleieíoie seives ro íacilirare rle exclange oí gooos ano seivices.
!n a maiker economv, rlis is a ciucial “íuncrion” ano we see
monev’s impoirance lv íocusing on ir. Alrlougl orlei wiireis our-
line orlei “íuncrions” oí monev—sucl as a sranoaio oí oeíeiieo
pavmenrs, 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 e/ 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 e/ Mency o
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New Terminology
Direct exchange: An exclange in wlicl lorl pairies inreno ro oi-
iecrlv use rle ieceiveo gooo, eirlei in consumprion oi pio-
oucrion.
Indirect exchange: An exclange in wlicl ar leasr one pairv inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir awav in rle
íuruie íoi somerling else.
Division of labor: Tle siruarion in wlicl people specialize in pai-
riculai occuparions, piooucing íai moie rlan rlev peisonallv
can consume, ano riaoe awav rleii suiplus ro ieceive some
oí rle suiplus cieareo lv orleis.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion oí riaoing ir awav ro acouiie somerling else in rle
íuruie.
Money: A meoium oí exclange rlar is geneiallv accepreo in rle
communirv. Monev rvpicallv sranos on one sioe oí viiruallv
eveiv exclange.
..
1o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \oulo a socierv laseo on roral cenrial planning in lorl
piooucrion ano consumprion neeo monev? \lv oi wlv
nor? (p. :o)
:. \lv ooesn’r a oiiecr exclange involve rle use oí a meoium
oí exclange? (p. :o)
:. Can vou rlink oí ieasons rlar riaoeis evenruallv giavirareo
rowaio golo ano silvei as monev, as opposeo ro orlei irems
sucl as carrle oi aluminum?
±. Ðio meoia oí exclange exisr /c/erc rle exisrence oí monev?
(pp. :o–::)
¡. !oi rle vaiious seconoaiv íuncrions oí monev lisreo lv
Mises, explain loweacl is ielareo ro monev’s iole as a com-
monlv accepreo meoium oí exclange. (pp. :±–:ó)
tuav:iv :
0N Ikl Mlk!0klMlNI 0| Vk|0l
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle classical economisrs ielieo on an objective theory of value, ano
naruiallv rlouglr rlar monev 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 lv a peison.
Suljecrive value is louno up wirl rle ioea oí exclange. !acl
pairv ro a volunraiv 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-
allv leneficial riaoes. !noiviouals’ suljecrive valuarions give iise ro
e/ic.titc exclange iarios oi prices.
Tle law of diminishing marginal utility srares rlar rle value oí
rle lasr unir oí a commooirv oecieases as rle peison acouiies a
giearei ouanrirv oí rle commooirv. 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 inrensirv oí value. !r is impossi-
lle ro peiíoim aiirlmerical opeiarions on rle maiginal uriliries oí
vaiious unirs in oioei ro compure rle “roral urilirv” oi roral value
oí rle enriie srock oí rle gooo. !í someone savs, “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 e/ Mency ená Crcáit
Knowleoge oí oljecrive monev piices causes people ro ievise
rleii suljecrive value scales. Òljecrive monev piices piovioe a
“common oenominaroi” íoi rle maiker exclange values oí all rle
vaiious gooos ano seivices availalle.
!owevei, monev piices rlemselves aie consranrlv clanging.
Tlar is wlv Mises ano Mengei pieíei ro sav rlar monev is an inoex
(nor a measuiemenr) oí piices, since ir is less lialle ro coníusion.
Cheptcr :: On thc Mcesurcmcnt e/ 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 commooirv
was laseo on an oljecrive ciireiion (sucl as rle amounr oí laloi
ieouiieo íoi irs piooucrion). !n rlis minoser, ir was naruial ro view
monev as a measuiing ioo oí rlis oljecrive value. Jusr as a rlei-
momerei slows a liglei ieaoing on a lor oav rlan on a colo
oav—ieflecring rle oljecrivelv 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 plvsical
rlings pei se, lur insreao is an arriilure asciileo ro plvsical rlings
lv suljecrive pieíeiences. Value is rle significance given ro a pai-
riculai gooo lv a peison, wlo can imagine wavs 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 lv lis “exclanges” wirl naruie. !oi example, le mav
value sarisíving lis lungei moie rlan le values sarisíving lis oesiie
ro lounge on rle leacl, ano rlar is wlv le “exclanges” lis leisuie
rime íoi coconurs (lv climling riees).
\irl moie rlan one peison, valuarion guioes exclanges maoe
in rle maikerplace. !acl pairv ro a volunraiv riaoe gives up an
1± Stuáy Cuiác te Thc Thcery e/ 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 peiíecrlv
sensille lecause value is in rle eve oí rle leloloei, i.e., value is
suljecrive.
!n rle maiker, exclanges will occui unril rleie aie no moie
muruallv leneficial riaoes. Tle unoeilving suljecrive valuarions
áriting acrs oí exclange oo nor involve a “measuiemenr” oí value.
(!oi an analogv, someone can iank lis íiienos in oioei oí impoi-
rance, wirlour implving 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 mv lesr íiieno ano Sallv
is mv secono-lesr íiieno” wirlour leing alle ro sav, “Jim is a :±
peicenr lerrei íiieno rlan Sallv.”) All rlar is necessaiv is rlar a pei-
son le alle ro look ar anv rwo possililiries, ano oecioe wlicl le
pieíeis.
!ven rlougl maiker exclanges aie oiiven lv suljecrive valu-
arions rlar aie rlemselves nonouanrifialle, nonerleless rlese ex-
clanges in ruin give iise ro e/ic.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 ligllv
rlan “rliee peais,” wleieas Bol las rle opposire ianking. Tlese
suljecrive valuarions—wlicl oo nor involve anv measuiemenr oí
rle amounr oí value oi urilirv iesioing in eacl comlinarion oí
íiuir—mean rlar rle rwo people can gain íiom riaoing rle rliee
peais íoi rle rwo apples. Tlis muruallv 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 e/ íe/uc 1¡
Tle law of diminishing marginal utility srares rlar rle value oí
rle lasr unir oí a commooirv (in someone’s possession) oecieases
as rle peison acouiies a giearei ouanrirv oí rle commooirv. Tlis
íollows íiom rle olseivarion rlar a peison will necessaiilv assign
sulseouenr unirs oí a commooirv ro rlose puiposes rlar le oeems
less ano less significanr. !oi example, ií a peison las onlv one gal-
lon oí warei, le will arracl a giear significance ro ir, lecause ir is
necessaiv 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 neailv 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
ielarivelv 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 inrensirv oí value. Tle ienowneo Clicago Sclool economisr
!iving !islei, íoi example, oeviseo a clevei aigumenr lv wlicl
le eouareo rle urilirv oí rle 1oorl loaí oí lieao wirl rle urilirv
oeiiveo íiom rle lasr ano secono-lasr unirs oí íuel oil. Ar rle same
rime, rle urilirv oí rle 1¡orl loaí oí lieao was eoual ro rle urilirv
oí onlv rle lasr unir oí íuel oil. !islei concluoes rlar rle 1¡orl loaí
oí lieao musr lave onlv one-lalí rle urilirv oí rle 1oorl loaí. Bur
rlis assumes awav oiminisling maiginal urilirv 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 olviouslv impossille ro peiíoim aiirlmerical opeiarions on rle
maiginal uriliries oí vaiious unirs in oioei ro compure rle “roral
urilirv” 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 e/ Mency ená Crcáit
wirl a roral value oí zeio, since rle maiginal urilirv oí one culic
merei oí aii is zeio in mosr ciicumsrances.
!r musr le iepeareo rlar urilirv oi value is a concepr ielareo
ro rle acrs oí cloice rlar a pairiculai inoivioual conremplares. !í
someone savs, “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 oavs). Ònlv in rlis conriiveo case can we
meaningíullv 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 monev cannor seive as a mea-
suiing ioo oí suljecrive value. Tleie is a sense in wlicl monev is
a measuie oí oljecrive maiker exclange value, lowevei. !oi exam-
ple, ií a cai riaoes íoi s:o,ooo wlile a moroicvcle riaoes íoi s1o,ooo,
rlen rle cai las rwice as mucl exclange value. Someone liinging
a cai ro maiker can olrain “rwice as manv gooos ano seivices” íoi
ir, wleie rle amounr is measuieo in monev piices.
Knowleoge oí oljecrive monev piices causes people ro ievise
rleii suljecrive value scales. Someone wlo oespises smoking ano
loves vegeralles mav nonerleless place a liglei value on an
unopeneo cairon oí cigaierres rlan on a romaro, lecause sle can
sell rle cairon íoi monev, ano rlen use rle monev ro luv a romaro
as well as manv orlei irems. !n rlis wav, oljecrive monev piices
piovioe a “common oenominaroi” íoi rle maiker exclange values
oí all rle vaiious gooos ano seivices availalle.
Cheptcr :: On thc Mcesurcmcnt e/ íe/uc 1¬
!owevei, lecause monev piices rlemselves aie oereimineo
lv rle unoeilving suljecrive valuarions oí rle riaoeis, rlev aie
consranrlv clanging. Tle vaiious comlinarions oí gooos rlar one
moroicvcle can “luv” rooav, mav le oiffeienr romoiiow, nor onlv
lecause rle piice (ouoreo in monev) oí rle moroicvcle can clange,
lur also lecause rle piices (ouoreo in monev) oí all orleis gooos
can clange. Tlar is wlv Mises ano Mengei pieíei ro sav rlar
monev is an inoex (nor a measuiemenr) oí piices, since ir is less
lialle ro coníusion.
..
18 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• The replacement of the classlcal economlsts’ labor (or cost) theory
of value, wlth subìectlve 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 subìectlve valuatlons
ln the market—and then uslng these consumer prlces to explaln
the prlces of the producer goods needed to make them—the sub-
ìectlve value theorlsts resolved these problems. Although other
economlsts partlclpated ln the Subìectlvlst /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 subìectlvlst 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 e/ íe/uc 1o
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 e/ 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 sarisív all luman wanrs rlar
ir can reclnicallv 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 sarisíving 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 rleoiv oí value.)
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiv economv, piices aie rvpicallv ouoreo in
reims oí rle monev gooo.
Scale of values: An analvrical rool lv wlicl rle economisr inrei-
piers rle acrions oí an inoivioual, wlo suljecrivelv 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
eailv 18¬os—speaileaoeo lv Cail Mengei, \illiam Sranlev
Jevons, ano !éon \alias—oveiruineo rle oljecrive rleoiv
oí value ano usleieo in rle suljecrive rleoiv.)
Value: Tle impoirance rlar an inoivioual places on a pairiculai
unir oí a gooo oi seivice.
..
Cheptcr :: On thc Mcesurcmcnt e/ íe/uc :1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “!n rle oloei polirical economv, rle seaicl íoi a
piinciple goveining rle measuiemenr oí value was ro a cei-
rain exrenr jusrifialle.” (p. :8)
:. \lv woulo an isolareo inoivioual srill neeo ro engage in
a “compaiison oí values” leíoie raking acrion wirl iespecr
ro scaice gooos? (p. :8)
:. \lv ooes an exclange oí rwo irems ieouiie rlar rle people
making rle exclange place rle irems in ieveise oioei on
rleii value scales? (p. :o)
±. !xplain: “Tle unrenalilirv oí í\iesei’s] aigumenr is slown
lv rle íacr rlar ir woulo piove rlar rle roral srock oí a íiee
gooo musr alwavs le woirl norling.” (p. ±¡)
¡. !ow ooes monev aio rle enriepieneui? (pp. ±8–±o)
tuav:iv :
Ikl Vkk|00! K|N0! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
A money substitute is a peiíecrlv secuie ano immeoiare claim on
monev. Because rle claims rlemselves can íacilirare inoiiecr ex-
clange, rlev lecome a “sulsrirure” íoi rle oiiginal commooirv
monev.
Tle oefinirion oí mency sloulo seive rle puiposes oí economic
rleoiv, rle mosr impoiranr leing rle explanarion oí rle purchas-
ing power oí monev. !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 lisroiicallv leen useo as monev, ano
ver 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 lv rle appiopiiare aurloiirv. !oi exam-
ple, in rle cuiienr !nireo Srares “gieen iecrangulai pieces oí
papei” lecome monev wlen ceirain ink parreins aie placeo on
rlem.
Credit money occuis wlen a claim on a plvsical oi legal peison,
íalling oue in rle íuruie, is irselí useo as a meoium oí exclange.
::
:± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Some rleoiisrs explain rle value oí monev as oue ro Srare
commanos. Bur rle goveinmenr cannor íoice people ro aoopr a
pairiculai irem as rle commonlv 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 likelv rlar
people will aoopr a pairiculai irem (sucl as gieen pieces oí papei
wirl ceirain ink parreins) as monev, lur economicallv somerling
is monev lecause oí irs usage lv people in rle maiker. A govein-
menr eoicr pei se cannor riansíoim ir inro monev.
Cheptcr ¡: Thc íerieus Kinás e/ Mency :¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meae¡ aa6 Meae¡ !a|st|tates
A money substitute is a peiíecrlv secuie ano immeoiare claim on
monev. !oi example, suppose rle commonlv 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-
munirv aie ceirain rlar rlev will le paio in plvsical golo wlenevei
rlev piesenr rle ricker ro a liancl oí rle lank, rlen sucl rickers
aie monev sulsrirures ano mav clange lanos ouiing puiclases rle
same wav plvsical golo woulo.
!n rle maiker economv, people can issue peiíecrlv secuie ano
immeoiare claims (i.e., ieoemprion rickers) ro all soirs oí gooos,
nor jusr monev. Bur rle ciucial íearuie oí sucl claims on monev is
rlar rle claims rlemselves can íacilirare inoiiecr exclange, ano so
lecome a “sulsrirure” íoi rle oiiginal commooirv monev. !n orlei
woios, pieces oí papei enrirling rle ownei ro an ounce oí golo
can ciiculare in rle maiker rle same wav acrual 1 oz. golo coins
woulo (so long as eveivone is assuieo oí immeoiare ieoemprion).
!n piinciple meiclanrs miglr nevei acruallv ruin rle rickers in, ro
ieceive rle plvsical golo. !n conriasr, people miglr riaoe papei
claims guaianreeing rle ownei ro a loaí oí lieao, lur rlev woulo
evenruallv 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 rleoiv. Tle cenrial rask oí rle economic analvsis oí monev
is ro explain rle exclange iarios lerween monev ano all orlei
gooos, i.e., ro explain rle purchasing power oí monev.
:ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
!n Mises’s juogmenr, rle mosr íiuiríul classificarion scleme ois-
ringuisles lerween rle unoeilving “money in the narrower sense”
veisus peiíecrlv secuie ano immeoiare ./eims ro sucl monev, i.e.,
monev sulsrirures. !e conceoes rlar ir woulo le logicallv consis-
renr ro incluoe monev sulsrirures in rle oefinirion oí mency irselí,
lur lelieves lis pieíeiieo oisrincrion (i.e., lerween monev ano
monev sulsrirures) will make ir easiei ro explain orlei plenom-
ena (sucl as rle puiclasing powei oí monev, as well as rle loom-
lusr cvcle) moie cleailv 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 monev.)
z. Ihe |eca||ar|t|es ef Meae¡ !a|st|tates
!n rle economic analvsis oí monev, 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 monev, ií in pre.ti.c rle loloei oí a roken can easilv
exclange ir íoi rle “eouivalenr” amounr oí acrual monev, rlen c.e-
nemi.e//y spceling rle roken is a monev sulsrirure.
Tle same piinciple applies ro banknotes. !oi example, con-
venrional accounrs sav rlar Ausriia-!ungaiv íiom 1ooo ro 1o1±
possesseo a paper standard, lecause /cge//y rle Ausrio-!ungaiian
Bank lao no olligarion ro ieoeem irs papei nores íoi commoo-
irv monev, ano in íacr rle nores weie oeclaieo legal tender. Yer
in piacrice ouiing rlis peiioo, rle Ausrio-!ungaiian Bank woulo
volunraiilv cash irs papei nores íoi golo upon ieouesr, ano so eco-
nomicallv speaking Ausriia-!ungaiv 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 e/ Mency :¬
even rolacco lave lisroiicallv leen useo as monev, ano ver 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 lv rle appiopiiare aurloiirv. !oi exam-
ple, in rle cuiienr !nireo Srares “gieen iecrangulai pieces oí
papei” aie nor monev pei se. Tlev onlv lecome monev wlen rlev
aie cur ro exacr size ano piinreo wirl rle coiiecr oesigns lv rle !.S.
Tieasuiv. Tlus rle gieen pieces oí papei appeai ro lecome monev
lv “fiar” (i.e., commano) oí rle !.S. goveinmenr. !owevei, in eco-
nomics rle oefinirion oí monev is a commonlv accepreo meoium
oí exclange. Tle goveinmenr can onlv 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 monev, economicallv speaking.
Credit money occuis wlen a claim on a plvsical oi legal pei-
son (e.g., a coipoiarion oi goveinmenr agencv), íalling oue in rle
íuruie, is irselí useo as a meoiumoí exclange. To oisringuisl cieoir
mency íiom meie cieoir, ir is necessaiv rlar people aie geneiallv
willing ro accepr rle claim in riaoe net lecause rlev wanr ro wair
ano ieceive rle unoeilving pavmenr (ro wlicl rle claim enrirles
rlem), lur lecause rlev expecr ro le alle ro easilv riaoe awav rle
claim irselí íoi orlei gooos. !oi example, suppose a goveinmenr
oiiginallv piomiseo ro ieoeem irs papei nores immeoiarelv upon
oemano íoi commooirv monev (sucl as golo). Bur ouiing a wai,
rle goveinmenr suspenos conveirililirv, so rlar rle papei nores
aie now nor legallv linoing claims on anvrling. !owevei, ií rle
pullic expecrs rlar ar some poinr in rle íuruie, ieoeemalilirv will
le iesroieo, rlen rle nores woulo ciiculare as cieoir monev (nor
fiar monev) lecause rlev 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 viiruallv eveivone is willing ro accepr
:8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
rlem in riaoe, rlev aie a common meoium oí exclange ano lence
monev.
e. Ihe Cemme6|t¡ Meae¡ ef the |ast aa6 ef the |reseat
Some rleoiisrs explain rle value oí monev as oue ro Srare com-
manos. !oi example, “Tle moneraiv unir oí rle !nireo Srares is
rle oollai, lecause rle !.S. goveinmenr las passeo a law.” Bur
rlis is a veiv inaoeouare ieaoing oí lisroiv, lecause goveinmenrs
cannor simplv 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 lv melr-
ing rlem oown ano minring a giearei numlei oí coins wirl less
silvei conrenr pei coin. Bur rle maiker will ieacr lv iaising piices
(ouoreo 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 e/ Mency :o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages ¡ó–¡¬, Mises aigues rlar roken coinage is nor
an inoepenoenr economic concepr, lur iarlei a special
rvpe oí monev sulsrirure. Token coinage was oevelopeo
ro íacilirare small riansacrions. !oi example, in a counriv
using golo as irs commooirv monev, 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 plvsical 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, rlev woulo nonerleless riaoe ar rleii íace value so
long as eveivone lelieveo rlar rle goveinmenr woulo íairl-
íullv exclange one ounce oí plvsical golo íoi 1oo rokens.
Tle impoiranr poinr is nor wlerlei sucl ieoemprion weie
a legal ieouiiemenr, lur meielv 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 commooirv
monev. !n orlei woios, sucl coins aie valueo lecause rlev
acruallv .ensist e/ 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 monev is nor rle same as
a monev sulsrirure lecause rle claims consriruring cieoir
monev aie nor oue immeoiarelv, wleieas rlev musr le íoi
a riue monev sulsrirure. Monev sulsrirures aie valueo rle
same as rle unoeilving monev ro wlicl rlev aie claims: a
:o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
lanknore enrirling rle leaiei ro one ounce oí golo, upon
ieouesr, will lave rle same puiclasing powei as one ounce
oí golo. !owevei, a coipoiare lono piomising rle leaiei
one ounce oí golo in :o veais, ií ir is ro lecome a cieoir
monev ano ciiculare as a common meoium oí exclange,
will le suljecr ro an inoepenoenr valuarion, oepenoing nor
meielv on rle ielialilirv oí rle claimano rle wair involveo,
lur also on rle liouioirv oí rle lono. (See p. ó1.)
..
Cheptcr ¡: Thc íerieus Kinás e/ Mency :1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Banknotes: Papei nores issueo lv lanks, rvpicallv enrirling rle
leaiei ro a specifieo amounr oí rle monev gooo.
Cash (verb): To ieoeem a claim (sucl as a lanknore) lv paving rle
specifieo amounr oí rle monev gooo.
Commodity money: A common meoiumoí exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo íoi nonmoneraiv 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
agencv), nor íalling oue unril a (possillv unceirain) íuruie
oare.
Debase: To oilure rle value oí rle monev, 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 lv rle appiopiiare aurloiirv. !iar
monev is nor “lackeo up” lv anvrling else.
Gold standard: Tle aiiangemenr lv wlicl a narion’s monev (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 pavmenr oí oelrs oenominareo in monev, ar pai value.
:: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Liquid (adjective): Tle alilirv oí leing solo íoi rle íull maiker piice
wirl a veiv sloir seaicl rime. (!oi example, a slaie oí coi-
poiare srock is mucl moie liouio rlan a louse.)
Money in the narrower sense: Tle acrual monev gooo (wlerlei
commooirv, fiar, oi cieoir monev), nor incluoing monev sul-
srirures.
Money in the broader sense: Tle acrual monev gooo (wlerlei
commooirv, fiar, oi cieoir monev), plus monev sulsrirures.
Money substitute: A peiíecrlv secuie ano insranrlv ieoeemalle
claim on monev, wlicl irselí ciiculares as monev (in rle
lioaoei sense) lecause ir íulfills rle íuncrions oí monev.
Paper standard: Tle aiiangemenr lv 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 monev can commano lecause oí rle vaiious piices in rle
maiker.
Token coins: Coins rlar seive as iepiesenrarives oí monev (usuallv
in veiv small oenominarions), even rlougl rlev oo nor con-
rain rle íull weiglr oí meral in rle case oí a commooirv
monev.
..
Cheptcr ¡: Thc íerieus Kinás e/ Mency ::
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is “peculiai” alour rle íacr rlar people mav use
claims on monev, iarlei rlan monev irselí? !ow is rlis
peculiaiirv “explaineo lv ieíeience ro rle special claiac-
reiisrics oí monev”? (p. ¡o)
:. \lar ooes Mises rlink oí rle riearmenr economisrs lao
given ro monev, leíoie lis own conriilurion? (p. ¡1)
:. \lar is rle rask oí economic rleoiv, iegaioing monev?
(p. ¡1)
±. !xplain: “
í
\
]
leieas ir is impossille ro sarisív an inciease
in rle oemano, sav, íoi lieao lv issuing moie lieao-rickers
. . . ir is peiíecrlv possille ro sarisív an incieaseo oemano íoi
monev lv jusr sucl a piocess as rlis.” (p. ¡:)
¡. \oulo Mises le suipiiseo ar rle woilo’s cuiienr moneraiv
svsrem? (p. ó1)
tuav:iv ±
M0Nl\ kN0 Ikl !IkIl
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
!nless ir iesoirs ro ouriiglr socialism, rle Srare musr coníoim ro
rle maiker. !rs acrions in rle maiker aie goveineo lv rle !aws oí
Piice. !n rlis iespecr, rle Srare las moie influence rlan anv orlei
enrirv, lur rlis is oue ro rle Srare’s enoimous luoger.
!n economics, monev is a common meoium oí exclange. Bur
íiom rle legal poinr oí view, monev is a common meoium oí pav-
menr oi oelr serrlemenr. Monev can onlv 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 moneraiv pavmenr
insreao.
Coveinmenr cannor íoice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal svsrem can ceirainlv allow
oelrois ro “sarisív” rleii conriacrual lialiliries lv paving wirl
irems ar a íace value liglei rlan wlar rle cieoirois acruallv lelieve
rlev aie woirl, lur rlis meielv means a pairial iepuoiarion oí rle
oelr.
Òiiginallv rle Srare’s onlv iole in rle moneraiv spleie was
ro supplv iecognizalle coins rlar weie laio ro counreiíeir ano
rlar weie veiv similai in appeaiance, weiglr, ano fineness. Bv pio-
oucing suiralle coins, rle Srare was meielv íaciliraring commeice,
lecause meiclanrs woulon’r neeo clemical resrs ano scales ro eval-
uare rle golo oi silvei rleii cusromeis piesenreo in pavmenr.

:ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Tle Srare’s influence in rle moneraiv 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 moneraiv
spleie rliougl irs alilirv ro suspeno rle immeoiare ieoemprion
oí monev sulsrirures, conveiring rlem inro cieoir monev oi even
fiar monev.
Cheptcr ¡: Mency ená thc Stetc :¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe |es|t|ea ef the !tate |a the Market
Alrlougl ir commanos a laige influence lecause oí irs powei ro rax,
ulrimarelv rle Srare musr coníoim ro rle maiker. !nless ir com-
plerelv alolisles piivare piopeirv ano íoims a socialisr Srare, rle
goveinmenr can onlv successíullv clange maiker piices rliougl
irs own oecisions ro luv ano sell. Tle same is riue oí monev: meie
goveinmenr eoicrs cannor explain rle puiclasing powei oí a com-
mon meoium oí exclange.
z. Ihe |eea| Ceaceet ef Meae¡
!n economics, monev is a common meoiumoí exclange. Bur íiom
rle legal poinr oí view, monev is a common meoium oí pavmenr
oi oelr serrlemenr. !í a conriacr calls íoi one pairv ro pav lack a
loan oí “1oo ounces oí golo, plus ¡ ounces in inreiesr” in one veai,
rle legal svsremmusr speciív wlar rvpes oí gooos aie accepralle ro
sarisív rle conriacr. (!oi example, musr ir le oone in plvsical golo,
oi can a lanknore oi a cleck wiirren on a lank accounr—oenomi-
nareo in golo—sarisív rle oelr? \lar alour roken coins rlar can
le exclangeo íoi golo?) !owevei, monev can onlv 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 moneraiv
pavmenr insreao.
Coveinmenr cannor íoice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal svsrem can ceirainlv allow
oelrois ro “sarisív” rleii conriacrual lialiliries lv paving wirl
irems ar a íace value liglei rlan wlar rle cieoirois acruallv lelieve
:8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
rlev aie woirl, lur rlis meielv means a pairial iepuoiarion oí rle
oelr.
). Ihe |aflaeace ef the !tate ea the Meaetar¡ !¡stem
Òiiginallv rle Srare’s onlv iole in rle moneraiv spleie was ro sup-
plv coins oí rle giearesr possille oegiee oí similaiirv 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 monev, lur was insreao meielv raking wlar thc merlct lao
closen as rle monev—íoi example, golo—ano rlen piooucing
lunks oí rle monev in convenienr slapes. Bv piooucing suiralle
coins, rle Srare was meielv íaciliraring commeice: ií eveivone 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 vellow meral rleii cusromeis piesenreo in
pavmenr.
Tle Srare’s influence in rle moneraiv spleie las giown le-
cause irs size (ielarive ro rle economv) 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 riv ro speno rle oveivalueo meral.
Tle Srare also influences rle moneraiv spleie rliougl irs alil-
irv ro suspeno rle immeoiare ieoemprion oí monev sulsrirures,
conveiring rlem inro cieoir monev oi even fiar monev.
..
Cheptcr ¡: Mency ená thc Stetc :o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
subìects. 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)
..
±o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Bimetallist legislation: !ffoirs lv rle goveinmenr ro esrallisl a
fixeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr ieouiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr pavmenr in silvei ounces ar
a fixeo mulriple oí rle golo piice.
Gresham’s Law: Populailv summaiizeo as “lao monev oiives our
gooo,” rle plenomenon lv wlicl people will lolo monev
rlar is unoeivalueo lv legislarion, ano will speno rle monev
rlar is oveivalueo lv legislarion. !oi example, ií limerallisr
legislarion ieouiies 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 eveivone will riv ro luv wirl silvei, ano
no one will use golo íoi making puiclases. Colo will seem
ro oisappeai, ano onlv 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. ouaireis minreo in rle veai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. ouaireis minreo in rle veai 1o¡o) will le loaioeo lv
people wlo iecognize rle value oí rle silvei.
..
Cheptcr ¡: Mency ená thc Stetc ±1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “\len nores rlar aie appiaiseo commeiciallv
ar onlv lalí rleii íace-value aie pioclaimeo legal renoei,
rlis amounrs íunoamenrallv ro rle same rling as gianring
oelrois legal ielieí íiom lalí oí rleii lialiliries.” (p. ¬1)
:. !xplain: “Srare oeclaiarions oí legal renoei affecr onlv
rlose moneraiv olligarions rlar lave alieaov 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 counriv 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 Ceasamet|ea 6ee6
Tiaoirionallv, 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 oiiecrlv sarisfieo luman oesiies, wleieas pioouc-
rion gooos onlv sarisfieo rlem inoiiecrlv. (!oi example, an apple
miglr le a consumprion gooo ro a lungiv man, wlile an apple
seeo woulo le a piooucrion gooo.) !í we insisr on a rwo-íolo
scleme, rlen monev musr le a piooucrion gooo, since ir is cleailv
nor a consumprion gooo. Yer rlis is piollemaric roo, lecause
monev is veiv oiffeienr íiom orlei rvpes oí piooucrion gooos.
A solurion is ro aoopr a rliee-íolo svsrem, consisring oí con-
sumprion gooos, piooucrion gooos, ano meoia oí exclange. Tlis
makes sense, lecause monev is nor a “commeicial rool” in rle
same wav rlar accounr looks aie. Alrlougl in a ceirain sense
monev “íacilirares commeice” jusr as loars ano iailioaos oo, rlev
oiffei in a ciucial wav: !ncieasing rle supplv oí monev ooes nor
make rle communirv iiclei, wleieas laving moie loars, iailioaos,
ano orlei piooucrion gooos allows íoi rle giearei sarisíacrion oí
luman oesiies. Tlis is wlv monev sloulo le classifieo in a sepa-
iare caregoiv, namelv meoia oí exclange.
±:
±± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
z. Meae¡ as |art ef |r|ºate Cae|ta|
Private capital can le oefineo as rle aggiegare oí rle piooucrs rlar
seive as a means ro rle acouisirion oí gooos. Monev sloulo cleailv
le incluoeo in rlis caregoiv, ano in íacr lisroiicallv an inreiesr-
leaiing sum oí monev was rle srairing poinr oí rle concepr oí
“capiral.”
Òvei rime, rleoiisrs iealizeo rlar monev was “laiien” ano oio
nor oiiecrlv vielo irs “íiuirs” rle wav plvsical seeos oi luman laloi
coulo. To explain wlv people woulo le willing ro pav inreiesr on
monev loans, we musr iecognize rlar monev can le cx.hengcá íoi
orlei, piooucrive gooos. Tlis olseivarion ieiníoices rle oecision
ro classiív monev as a meoium oí exclange, iarlei rlan a pioouc-
rion gooo: rle onlv wav ro salvage rle inclusion oí monev as a pair
oí piivare capiral, is ro áistinguish ir íiom orlei piooucrion gooos
ano iecognize irs special alilirv ro le exclangeo íoi rlem.
). Meae¡ Net a |art ef !ec|a| Cae|ta|
Social (or productive) capital can le oefineo as rle aggiegare oí rle
piooucrs inrenoeo íoi emplovmenr in íuirlei piooucrion. !í we
oenv rlar monev is a piooucrion gooo, rlen olviouslv 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 ìustlfylng 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 e/ 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 monev. (Tle monev iare can oeviare
íiom rle eouililiium íoi 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 acouisirion oí gooos.
Social (productive) capital: Tle aggiegare oí rle piooucrs inrenoeo
íoi emplovmenr in íuirlei piooucrion.
..
Cheptcr ¡: Mency es en L.enemi. Ceeá ±¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar aie rle views oí Rosclei ano Knies wirl iespecr ro
classiíving monev? (p. ¬o)
:. \lar was !elffeiicl’s oljecrion ro rlose (like Knies) wlo
wanreo ro oenv rlar a moneraiv exclange was an acr oí
piooucrion? (pp. ¬o–8o)
:. !xplain: “Monev is olviouslv nor a ‘commeicial rool’ in
rle same sense as accounr looks, exclange lisrs, rle Srock
!xclange, oi rle cieoir svsrem.” (p. 8:)
±. !xplain: “
í
\
]
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 ouanrirv, . . . clanges in rle value oí monev aie
accommooareo in sucl a wav ro rle oemano íoi ir rlar,
oespires inciease oi oecieases in irs ouanrirv, rle economic
posirion oí mankino iemains rle same.” (p. 8¡)
¡. \lar linoeieo rle oevelopmenr oí a scienrific unoeisrano-
ing oí capiral ano inreiesr? (pp. 88–8o)
tuav:iv ó
Ikl lNlM|l! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meae¡ |a the !ec|a||st Cemmaa|t¡
!í a socialisr socierv complerelv alolisles all piopeirv 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 monev.
!owevei, some socialisr visionaiies conceoe rlar even in rleii
ioeal socierv, 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 naruiallv engage
in muruallv leneficial riaoes, ano ulrimarelv woulo íosrei rle
oevelopmenr oí monev.
z. Meae¡ Craaks
Tliouglour rle ages, ieíoimeis lave llameo monev íoi social ills.
(Tle love oí monev is íamouslv oeclaieo ro le rle ioor oí all evil.)
Tle losrilirv ro golo ano silvei is pairiculailv inrense. Yer rlese
ieíoimeis nevei explain rleii íull vision oí a woilo vitheut monev,
íoi ií rlev arrempreo sucl a oesciiprion, rle piollems wirl rleii
sclemes woulo le olvious.
±o
¡o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Òrlei ciirics oo nor call íoi rle alolirion oí monev pei se,
lur meielv íoi an “elasric cieoir svsrem,” wlicl expanos oi con-
riacrs rle monev supplv accoioing ro rle communirv’s “neeo íoi
cuiiencv.” Accoioing ro rlis pairiculai gioup oí money cranks, rle
cuiienr monev ano lanking svsremimposes an airificial scaicirv lv
iesriicring cieoir ano claiging liglei inreiesr iares rlan necessaiv.
..
Cheptcr 6: Thc Lncmics e/ Mency ¡1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Some socialisrs vieweo monev irselí as a “oiirv” piooucr oí
rle maiker economv, ano lelieveo rlar in a puie socialisr
socierv, 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 communirv woulo lave
piopeirv iiglrs in consumprion gooos (ano peilaps pei-
sonal rools oí rle riaoe íoi skilleo airisans erc.). !owevei,
wlar .ennet le alloweo in a socialisr communirv—lesr ir
lecome a svsremoí capiralism—is piivare owneislip in rle
laige-scale means oí piooucrion, sucl as íaimlano, íacro-
iies, iailioaos, erc.
• Mises conceoes rlar a socialisr communirv rlar ieraineo
piivare owneislip in peisonal consumprion gooos, coulo
íosrei rle emeigence oí genuine monev. !owevei, Mises
is net leie ieíeiiing ro rle “laloi ceirificares” envisioneo
lv some socialisr rleoiisrs. !oi example, we coulo imag-
ine rlar socialisr íacroiv ano íaim manageis lano our one
ceirificare íoi eveiv laloi loui (oí suiralle oualirv) 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 manv casual
olseiveis rlink rlar rlis is lasicallv wlar monev is—a claim
on rle “ieal ourpur” oí socierv—sucl a viewis veiv supeifi-
cial. Acrual monev (as opposeo ro a monev sulsrirure) is
¡: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
nor a claim on anvrling: ir is irs own gooo, lur oí couise
ir is valueo lecause oí irs expecreo puiclasing powei. !í a
fiie oesriovs lalí oí rle ciop, rlen rle laloi ceirificares will
necessaiilv enrirle rleii loloeis ro one-lalí as mucl. Bur
wirl one unir oí monev, ir is nor necessaiilv riue rlar irs
exclange value in rle maiker woulo oiop lv exacrlv one-
lalí, ano in anv evenr rle piocesses goveining irs puiclas-
ing powei aie complerelv oiffeienr íiom rlose goveining
rle “ieoemprion powei” oí a laloi ceirificare in a socialisr
communirv.
• \len oealing wirl rle lasr caregoiv oí “monev cianks” on
page o±, Mises explains rlar rle mainsrieam economisrs
oí lis oav coulo nor effecrivelv ieíure rlose wlo claimeo
rlar a massive expansion oí rle monev supplv—in oioei
ro oiive rle inreiesr iare oown ro zeio—woulo liing alour
mareiial alunoance. Alrlougl mosr economisrs ano piacri-
cal lusinessmen slieo awav íiom sucl exrieme pioposals,
rlev weie meielv rle logical exrension oí rle pievailing
economic oocriines conceining monev ano lanking. !r
woulo rake Mises’s own woik, in pairiculai lis oevelop-
menr oí rle circulationcredit theoryof thetradecycle, ro aoe-
ouarelv explooe rlis vaiierv oí moneraiv ciankislness.
..
Cheptcr 6: Thc Lncmics e/ Mency ¡:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Circulation credit theory of the trade cycle: Tle rleoiv oevelopeo lv
Mises (in rle piesenr look) explaining rle loom plase oí
rle lusiness cvcle as oue ro rle airificial expansion oí lank
cieoir, maoe possille lv fiouciaiv meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Money cranks: Veiv naïve wiireis wlo lelieve rlar scaicirv is an
airificial insrirurional consriainr, ano rlar piospeiirv ieouiies
onlv a sufficienr willingness ro cieare moie monev ano/oi
issue moie lank cieoir.
..
¡± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar rwo rienos cause rle emeigence oí inoiiecr exclange
ro lecome ineviralle? (p. o1)
:. \oulo rle isolareo louselolo use monev? \lv oi wlv
nor? (p. o1)
:. Ðo all socialisrs piopose rle complere alolirion oí monev?
(p. o1)
±. !í rle amounr oí “ieal ourpur”—numlei oí apples, TVs,
leair suigeiies, erc.—weie ro íall in lalí, woulo rle pui-
clasing powei oí monev necessaiilv íall in lalí? (p. o:)
¡. Ðoes Mises enooise rle lanking rleoiies oí Tooke ano
!ullairon? (p. o±)
..
vav: ii
Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv ¬
Ikl C0NCl|I 0| Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle main rask oí economic rleoiv is ro explain monev’s e/ic.titc
exclange value, oi wlar is oíren calleo rle pur.hesing pevcr e/
mency. Tlis ieíeis ro rle amounr oí gooos rlar someone can olrain
in rle maikerplace wirl a unir oí monev. Tlis explanarion in ruin
ulrimarelv goes lack ro su/ic.titc valuarions.
\lar sers monev apair íiom all orlei gooos is rlar monev is
useíul (ano lence valualle) ro people en/y lecause oí irs puiclasing
powei. !n irs capacirv as a meoium oí exclange, a unir oí monev is
onlv useíul inasmucl as ir can le useo ro acouiie ethcr gooos ano
seivices.
\len we sav a pairiculai gooo las oljecrive exclange value,
rle reim “oljecrive” is net useo ro mean rlar rlis value inlei-
enrlv iesioes in rle oljecr. All maiker piices aie ulrimarelv oerei-
mineo lv suljecrive luman pieíeiences, ano rleieíoie aie suljecr
ro clange wlenevei people’s valuarions clange. A rvpical gooo’s
“oljecrive” exclange value is srill oereimineo lv 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 enjov oiiving rle vaiious velicles.)
Tle one essenrial oiffeience wirl monev is rlar ir hes ne
suljecrive use-value, wlicl coulo ulrimarelv explain irs oljecrive
¡¬
¡8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
exclange value. !rs en/y value—aue monev—oeiives íiom irs alil-
irv ro exclange íoi orlei gooos in rle maiker. Tlis is wlv applv-
ing mooein suljecrive value rleoiv ro rle explanarion oí oljecrive
monev piices is sucl a riickv affaii. Tlose economisrs oí Mises’s
oav wlo riieo ro explain rle puiclasing powei oí monev laseo
solelv on irs inousriial applicarions, weie complerelv evaoing rle
issue. !n pairiculai, rlev woulo le lelpless ro explain rle puiclas-
ing powei oí fiar monev.
Cheptcr ¬: Thc Cen.cpt e/ thc íe/uc e/ Mency ¡o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. !a||ect|ºe aa6 0||ect|ºe |acters |a the Iheer¡ ef
the Va|ae ef Meae¡
\len ir comes ro monev, rle main rask oí economic rleoiv is
ro explain irs e/ic.titc exclange value, oi wlar is oíren calleo rle
pur.hesing pevcr e/ mency. Tlis ieíeis ro rle amounr oí gooos rlar
someone can olrain in rle maikerplace wirl a unir oí monev. Tlis
is an e/ic.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 monev’s
oljecrive exclange value, rle explanarion irselí ulrimarelv goes
lack ro su/ic.titc valuarions. !oi rle economisr giounoeo in rle
mooein suljecrive value rleoiv (oevelopeo lv Cail Mengei ano
lis íolloweis), e// piices in rle maiker musr le explaineo lv ieíei-
ence ro inoiviouals’ suljecrive valuarions. Tlis iule lolos even íoi
monev.
\lar sers monev apair íiom all orlei gooos is rlar monev is
useíul (ano lence valualle) ro people en/y lecause oí irs puiclasing
powei. !n irs capacirv as a meoium oí exclange, a unir oí monev is
onlv useíul inasmucl as ir can le useo ro acouiie ethcr gooos ano
seivices.
\len ir comes ro explaining rle piice oí, sav, an oiiginal painr-
ing lv Picasso, rle economisr srairs wirl rle íacr rlar some people
place a veiv ligl suljecrive value on loloing sucl airwoik. Tle
economisr las no olligarion ro explain vhy people enjov 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 monev, rle
óo Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
economisr can’r explain irs “piice” (i.e., puiclasing powei) meielv
lv saving rlar people enjov acouiiing ano loloing casl lalances.
Sucl an aigumenr—lv irselí—woulo le ciiculai, lecause rle rce-
sen people wanr ro lolo casl lalances is rlar monev las puiclasing
powei. Tlar is wlv explaining rle “piice” oí monev is a mucl sul-
rlei rask rlan explaining rle piice oí a Picasso.
z. Ihe 0||ect|ºe lxchaaee Va|ae ef Meae¡
Tle oljecrive exclange value oí gooos can le oefineo as “rleii
oljecrive significance in exclange” oi “rleii capacirv in given cii-
cumsrances ro piocuie a specific ouanrirv oí orlei gooos as an
eouivalenr in exclange.” `owaoavs we miglr use rle reim mar-
ket value ro expiess rle same concepr as oljecrive exclange value.
\len we sav a pairiculai gooo las oljecrive exclange value,
rle reim “oljecrive” is net useo ro mean rlar rlis value inleienrlv
iesioes in rle oljecr. (!n orlei woios, we aie nor using rle reim
rle same wav rlar a gooo miglr lave an oljecrive weiglr oi coloi.)
All maiker piices aie ulrimarelv oereimineo lv 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 anv inoivioual can rake ir as a given íacr.
Tle objective exchange value of money ieíeis ro rle possililirv
oí olraining a ceirain ouanrirv oí orlei gooos in exclange íoi rle
monev, wlile rle price of money is rlis acrual ouanrirv oí orlei
gooos. (Tle reims aie nor ioenrical, lur aie veiv 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 íacroiv
Cheptcr ¬: Thc Cen.cpt e/ thc íe/uc e/ Mency ó1
ooesn’r oioei lis emplovees ro pioouce cais rlar le limselí wanrs
ro oiive. Òn rle conriaiv, le insriucrs lis emplovees 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
lv lis peisonal, su/ic.titc valuarions oí rle orlei gooos le will le
alle ro luv (louses, íancv meals, vaclrs, erc.) wirl rle ievenues
íiom rle sale oí lis cais.
!n oioei íoi rle ownei oí rle auromolile íacroiv (ano orlei
pioouceis) ro accuiarelv envision rle riaoeoffs oí oiffeienr pioouc-
rion oecisions, le neeos ro knowrle e/ic.titc exclange value oí rle
vaiious cais le coulo manuíacruie. !r’s nor enougl rlar rle cai pio-
oucei knows rlar le values vaclrs ano sreak oinneis: le also neeos
ro know low mucl monev le can iaise lv selling oiffeienr mooels
oí lis cais, ano low mucl monev le will neeo ro speno ií le wanrs
ro acouiie vaclrs ano sreak oinneis. Tlus mosr piooucrion oeci-
sions involve a complex inreioepenoence on lorl suljecrive ano
oljecrive valuarions.
Tle one essenrial oiffeience wirl monev is rlar ir hes ne sul-
jecrive use-value, wlicl coulo ulrimarelv explain irs oljecrive ex-
clange value. !n conriasr, wlen ir comes ro rle auromoliles,
vaclrs, ano sreak oinneis, rle economisr ulrimarelv coulo explain
rleii ielarive exclange values (i.e., low manv auromoliles woulo
riaoe íoi one vaclr, erc.) lv ieíeience ro inoiviouals’ suljecrive use-
values íiom rlem (i.e., low mucl people likeo oiiving cais, veisus
piloring vaclrs oi earing sreak).
Bur wirl monev, irs en/y value—aue monev—oeiives íiom irs
alilirv ro exclange íoi orlei gooos in rle maiker. Tlis is wlv
applving mooein suljecrive value rleoiv ro rle explanarion oí
oljecrive monev piices is sucl a riickv affaii. Tlose economisrs oí
Mises’s oav wlo riieo ro explain rle puiclasing powei oí monev
laseo solelv on irs inousriial applicarions, weie complerelv evao-
ing rle issue. !n pairiculai, rlev woulo le lelpless ro explain rle
puiclasing powei oí fiar monev.
..
ó: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !n rle leginning oí rlis claprei, Mises spenos rime plac-
ing lis analvsis oí monev wirlin rle íiamewoik oí sul-
jecrive value rleoiv, as ir lao leen oevelopeo lv lis Aus-
riian pieoecessois (norallv Mengei, Bolm-Baweik, ano
\iesei). Some oí rle reiminologv mav appeai ouainr ro
mooein economisrs, even rlose wlo lave sruoieo Ausriian
economics. Bur ro piopeilv explain rle piocess lv wlicl
suljecrive inoivioual valuarions geneiare oljecrive maiker
piices, ir is necessaiv 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 plvsicallv vielo, wlile rle oljec-
rive use-value oí a romaro seeo woulo incluoe rle romaroes
ir coulo plvsicallv vielo. Tlese woulo le empiiical íacrs,
nor suljecr ro opinion. !owevei, a vegeraiian woulo piol-
allv assign a lowei su/ic.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/ic.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.
• Applving rlese conceprs ro monev, Mises explains (pp.
o¬–o8) rlar rleie aie rwo accepralle wavs oí making
an impoiranr poinr. Òne wav is ro claim rlar monev’s
Cheptcr ¬: Thc Cen.cpt e/ thc íe/uc e/ Mency ó:
suljecrive use-value is rle same as irs suljecrive exclange-
value. (Tlar is, rle significance rlar a pairiculai inoivioual
arriilures ro a ouanrirv oí monev, musr le rle same sig-
nificance rlar le oi sle arriilures ro rle gooos íoi wlicl
rle monev can le exclangeo, lecause rle monev can’r le
useo ro sarisív wanrs oiiecrlv.) A oiffeienr wav ro make rle
poinr is ro sav rlar monev hes ne use-value ar all, lecause
anv value ir possesses necessaiilv oeiives íiom irs exclange
value. Mises ooesn’r rake a posirion on wlicl oí rlese alrei-
nare oesciiprions is lerrei: le meielv wanrs ro sriess rle
íunoamenral poinr rlar people consioei monev useíul ano
valualle en/y lecause rlev expecr ro use ir ro acouiie orlei
gooos. (Òí couise Mises is ralking alour monev aue monev.
A lai oí golo, íoi example, can srill possess use-value íoi
irs inousriial oi oinamenral applicarions.)
..
ó± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Exchange value: Tle significance oí a gooo oue ro irs alilirv ro le
riaoeo íoi orlei gooos. (!xclange value can le oualifieo as
eirlei suljecrive oi oljecrive.)
Market value: Svnonvmous wirl rle oljecrive exclange value oí a
gooo, rvpicallv ouoreo in monev reims.
Objective exchange value of money: Tle possililirv oí olraining a
ceirain ouanrirv oí orlei gooos in exclange íoi a unir oí
monev.
Price of money: Tle ouanrirv oí gooos (oi seivices) rlar musr le
given up in exclange ro acouiie a unir oí monev.
Use-value: Tle significance oí a gooo oue ro irs alilirv ro le
oiiecrlv useo lv rle ownei in consumprion oi piooucrion.
(!se-value can le oualifieo as eirlei suljecrive oi oljecrive.)
..
Cheptcr ¬: Thc Cen.cpt e/ thc íe/uc e/ Mency ó¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is rle cenrial elemenr in rle economic piollem oí
monev? (p. o¬)
:. Ðoes rle suljecrive rleoiv oí value applv ro rle case oí
monev, as ro all orlei gooos? (p. o¬)
:. !xplain: “!n rle case oí monev, suljecrive use-value ano
suljecrive exclange value coincioe.” (p. o¬)
±. !xplain: “!r sloulo le olseiveo rlar even oljecrive ex-
clange value is nor ieallv a piopeirv oí rle gooos rlem-
selves, lesroweo on rlem lv naruie. . . .” (p. 1oo)
¡. !í monev (e.g., golo) las an inousriial use as well as a
moneraiv 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 monev oeiives solelv íiom irs puiclasing powei.
Tleieíoie, rooav’s valuarion oí monev is oepenoenr on irs puiclas-
ing powei ycstcráey, wlicl in ruin was influenceo lv monev’s pui-
clasing powei rwo oavs 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 onlv valueo íoi rleii
oiiecr use. Tlis rleoiv oí rle oiigin oí monev is rle onlv one com-
parille wirl a suljecrivisr explanarion.
Tle lisroiical conrinuirv in rle value oí monev oisringuisles ir
íiomall orlei commooiries. People oo nor oeiive rleii urilirv íiom
apples oi oianges laseo on rleii piices, lur people áe evaluare rle
useíulness oí a ouanrirv oí monev laseo on irs puiclasing powei.
Tle piollem wirl manv iival rleoiies oí rle puiclasing
powei oí monev—sucl as a simple ouanrirv rleoiv oi “supplv ano
oemano” explanarion—is rlar rlev lave ro rake rle value oí monev
as given, ano can onlv explain áctietiens íiom rlis sripulareo srair-
ing poinr. Tlev can’r explain rle e/se/utc level oí monev-piices, i.e.,
rlev can’r explain rle acrual exclange iario lerween monev ano
orlei gooos ar a pairiculai rime. Tle suljecrivisr, maiginal-urilirv
ó¬
ó8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
rleoiv oevelopeo lv Mengei ano lis successois .en explain rle
piecise, alsolure monev-piices oí rle maiker rooav.
Tle exclange iario lerween monev ano all orlei gooos—in
orlei woios, rle puiclasing powei oí monev—mav le affecreo
lv clanges in people’s valuarions oí rle monev sioe er rle (orlei)
commooiries sioe oí rle iario.
!n irs ciuoesr íoim, rle ouanrirv rleoiv oí monev is olviouslv
wiong: !r is simplv nor riue rlar, sav, a ooulling in rle ouanrirv
oí monev will leao ro an exacr ooulling oí all piices (ouoreo in
monev).
Mooein value rleoiv musr explain rle oemano ro lolo monev
lv srairing wirl rle suljecrive pieíeiences oí rle inoivioual. Tle
communirv’s oemano ro lolo monev is simplv rle summarion oí
rle inoivioual oemanos. `o inoivioual can make use oí rle popu-
lai “macio” appioacles, wlicl emplov íoimulas involving “roral
volume oí riansacrions” ano “velocirv oí ciicularion.” !conomisrs
rleieíoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei oí monev.
Moneycertificates aie monev sulsrirures rlar aie íullv “coveieo”
lv monev piopei, wlile fiduciary media aie monev sulsrirures rlar
aie issueo alove rle ieoemprion íuno.
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc óo
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. Ikl l|lMlNI 0| C0NI|N0|I\ |N Ikl
08IlCI|Vl lKCkkN6l Vk|0l 0| M0Nl\
¡. Ihe 0eeea6eace ef the !a||ect|ºe Va|aat|ea ef Meae¡ ea
the lx|steace ef 0||ect|ºe lxchaaee Va|ae
!n oioei íoi inoiviouals ro evaluare rle suljecrive value oí monev,
rlev musr fiisr consioei irs useíulness wlicl is oeiiveo solelv íiom
irs puiclasing powei. !n rlis sense, rooav’s valuarion oí monev is
oepenoenr on people’s olseivarions oí irs puiclasing powei ycstcr-
áey. Ano vesreioav’s puiclasing powei, in ruin, was influenceo lv
monev’s puiclasing powei rwo oavs 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 onlv valueo íoi rleii oiiecr use. Ar rlar rime,
gooos sucl as golo ano silvei—wlicl woulo lecome monev, oown
rle ioao—weie valueo exclusivelv íoi rleii inousriial ano oina-
menral puiposes.
z. Ihe Necess|t¡ fer a Va|ae |a6eeea6eat 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 monev, rlev musr lave some lasis íoi
íoiecasring irs íuruie puiclasing powei. Tle onlv wav rlev can
oo rlis, is ií rle monev gooo alieaov las a lisroiv oí oljecrive
exclange value, wlicl rle inoiviouals can consulr.
¬o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Tlis ieasoning slows rle flaw in rle mvrls alour rle ciearion
oí monev leing oue ro a social pacr. Rarlei, Mengei’s rleoiv oí
rle oiigin oí monev—in wlicl rle monev commooiries weie oiig-
inallv useo as oioinaiv commooiries—is rle onlv one comparille
wirl a suljecrivisr explanarion.
). Ihe !|ea|ficaace ef |re
·
lx|st|ae |r|ces |a the 0eterm|aat|ea
ef Market lxchaaee kat|es
Tle lisroiical conrinuirv in rle value oí monev 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 Tuesoav, ir is unlikelv rlar :o apples will
riaoe íoi 1 oiange on \eonesoav. Bur ir is nor riue rlar Tues-
oav’s exclange iario somelowinfluences \eonesoav’s. Rarlei, rle
unoeilving oereiminanrs oí Tuesoav’s piice (sucl as people’s sul-
jecrive pieíeiences íoi rle rwo íiuirs) piolallv will nor clange veiv
mucl lv \eonesoav.
!n conriasr, economic rleoiv áecs neeo ro ielv on Tuesoav’s
puiclasing powei oí monev, in oioei ro explain \eonesoav’s pui-
clasing powei oí monev. People oo nor oeiive rleii urilirv íiom
apples oi oianges laseo on rleii piices, lur people áe evaluare rle
useíulness oí a ouanrirv oí monev laseo on irs puiclasing powei.
e. Ihe kee||ca||||t¡ ef the Mare|aa|·0t|||t¡ Iheer¡ te Meae¡
Tle piollem wirl manv iival rleoiies oí rle puiclasing powei oí
monev—sucl as a simple ouanrirv rleoiv oi “supplv ano oemano”
explanarion—is rlar rlev lave ro rake rle value oí monev as given,
ano can onlv explain áctietiens íiom rlis sripulareo srairing poinr.
!oi example, ir is coiiecr ro sav, “!í a cai oiiginallv las a piice oí
s1,ooo, rlen an inciease in rle srock oí monev will, orlei rlings
eoual, leao ro a new cai piice rlar is liglei rlan s1,ooo.”
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc ¬1
Yer rlis isn’r ieallv a íull explanarion: wlv wasn’r rle cai’s oiig-
inal piice s1o, oi s1oo,ooo? Tle simple “supplv ano oemano” ap-
pioacl—coiiecr as íai as ir goes—lv irselí can’r explain rle e/se/utc
level oí monev-piices, i.e., ir can’r explain rle acrual exclange iario
lerween monev ano orlei gooos ar a pairiculai rime.
Tle suljecrivisr, maiginal-urilirv rleoiv oevelopeo lv Mengei
ano lis successois .en explain rle piecise, alsolure monev-piices
oí rle maiker rooav, jusr as ir can explain rle piecise exclange
iarios lerween apples ano oianges.
Ar fiisr ir appeais rlar monev is a peculiai case rlar cannor
le lanoleo rlis wav, lecause people’s maiginal urilirv oí monev
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 monev lv ieíeience ro
ycstcráey’s puiclasing powei, ano so on. \e can logicallv íollowrle
clain all rle wav lack in rime, unril rle poinr ar wlicl rle monev
commooirv was valueo solelv íoi irs nonmoneraiv uses, i.e., leíoie
ir lecame a meoium oí exclange.
s. “Meaetar¡” aa6 “Neameaetar¡” |aflaeaces kffect|ae
the 0||ect|ºe lxchaaee Va|ae ef Meae¡
Tle pieceoing secrions lave esrallisleo rle erigin oí rle value
oí monev. (`amelv, suljecrive maiginal urilirv analvsis—coupleo
wirl Mengei’s explanarion oí rle oiigin oí monev—can explain
rooav’s alsolure level oí rle puiclasing powei oí monev.) !r is now
accepralle ro íocus on rle laws oi piinciples goveining .hengcs
in rle value oí monev. !conomisrs usuallv srair ar rlis srep, even
rlougl logicallv rlev sloulo lave explaineo rle oiiginal value oí
monev fiisr.
Tle exclange iario lerween rwo gooos can le affecreo lv
clanges in rle valuarion íoi jusr one oí rle gooos. !oi example,
on Tuesoav Jim mav cloose ro oiink sooa ovei cougl meoicine.
¬: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Bur on \eonesoav le mav ieveise lis pieíeiences, ano cloose
rle meoicine ovei rle sooa. Tlis olviouslv neeon’r le oue ro Jim’s
suooen oisrasre íoi sooa.
!n rle same wav, rle exclange iario lerween monev ano all
orlei gooos—in orlei woios, rle puiclasing powei oí monev—
mav le affecreo lv clanges in people’s valuarions oí rle monev
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 olviouslv
wiong: !r is simplv nor riue rlar, sav, a ooulling in rle ouanrirv
oí monev will leao ro an exacr ooulling oí all piices (ouoreo in
monev).
Tle geim oí riurl in rle lisroiical exposirions oí rle ouanrirv
rleoiv is rlar a connecrion exisrs lerween vaiiarions in rle value
oí monev on rle one lano, ano vaiiarions in rle ielarions lerween
rle oemano íoi monev ano rle supplv oí ir on rle orlei. Tliougl-
our lisroiv, wiireis lave noreo rle parreins, lur rle rask íoi rle
mooein economisr is ro expiess rlese riuisms wirl rle rools oí
mooein suljecrive value rleoiv.
). Ihe !teck ef Meae¡ aa6 the 0emaa6 fer Meae¡
Mooein value rleoiv musr explain rle oemano ro lolo monev
lv srairing wirl rle suljecrive pieíeiences oí rle inoivioual. Tle
communirv’s oemano ro lolo monev is simplv rle summarion oí
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc ¬:
rle inoivioual oemanos. `o inoivioual can make use oí rle popu-
lai “macio” appioacles, wlicl emplov íoimulas involving “roral
volume oí riansacrions” ano “velocirv oí ciicularion.” !conomisrs
rleieíoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei oí monev.
!n ceirain cases ir is useíul ro oisringuisl lerween rle inoivio-
ual’s oemano ro lolo monev in rle lioaoei sense veisus monev
in rle naiiowei sense. Tle íoimei is rle inoivioual’s oemano ro
lolo lorl monev ano monev sulsrirures (i.e., peiíecrlv secuie ano
immeoiare claims on monev). Tle larrei is rle inoivioual’s oemano
ro lolo monev piopei.
Moneycertificates aie monev sulsrirures rlar aie íullv “coveieo”
lv monev piopei, wlile fiduciary media aie monev 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 monev ceirificares, wlile 1oo aie fiouciaiv meoia.
(!n commeicial piacrice rle nores aie inoisringuislalle, ano so we
can sav rlar alour o1 peicenr oí a given nore is “coveieo” wlile
rle iemainoei is “unlackeo.”)
ë. Ihe Ceasecaeaces ef aa |acrease |a the 0aaat|t¡ ef Meae¡
Wh||e the 0emaa6 fer Meae¡ kema|as 0achaaee6 er 0ees
Net |acrease te the !ame lxteat
Aciuoe, meclanical veision oí rle ouanrirv rleoiv oí monev lolos
rlar a ooulling oí rle srock oí monev will leao ro a uniíoim oou-
lling oí rle monev piices oí all orlei gooos ano seivices. Tle logic
lelino sucl a view iesrs on rle riue olseivarion rlar anv given
ouanrirv oí monev can peiíoim all rle seivices oí monev íoi rle
communirv, wirl rle appiopiiare “piice level.” !oi example, we
¬± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
can imagine rwo economies sioe-lv-sioe, wlicl aie eoual in all
wavs excepr rlar rle secono communirv las rwice rle amounr oí
monev as rle fiisr. !r is cleai rlar in rle secono communirv, rle
piices oí all gooos ano seivices lave ro le exacrlv ooulle rleii val-
ues in rle fiisr communirv, in oioei ro ienoei rlese economies
eoual in all “ieal” iespecrs.
Yer íiom rlis rlouglr expeiimenr, we .ennet concluoe rlar
ií we sraireo wirl rle fiisr communirv, ano rlen magicallv oou-
lleo eveivone’s loloing oí monev, rlar we woulo eno up wirl
rle secono communirv. !oi one rling, oiffeienr inoiviouals woulo
iespono oiffeienrlv ro rle inciease in rleii loloings oí monev.
!veivone woulo oí couise ievise oownwaio lis oi lei maiginal
urilirv íoi a unir oí monev—lecause rle srock in possession
incieaseo—lur rlese oownwaio movemenrs woulo nor le eoual
íoi all people. Because rle maiginal unir oí monev woulo le less
valualle rlan leíoie rle magical inciease, people woulo now go
our ano luv moie gooos, renoing ro pusl up piices. Bur oiffei-
enr people woulo inciease rleii puiclases in oiffeienr wavs, ano
(in anv iealisric scenaiio) woulo pusl up rle piices oí some gooos
moie rlan orleis.
Anorlei complicarion is rlar in rle ieal woilo, new influxes oí
monev oo nor magicallv augmenr rle casl lalances oí eveivone
in rle communirv piopoirionallv. !nsreao, new monev enreis rle
communirv rliougl incieaseo loloings oí a small gioup oí people
(sucl as rle owneis oí golo mines, oi rle cusromeis wlo loiiow
monev íiom a lank issuing fiouciaiv meoia). Tlus rle new monev
iipples our inro rle economv, as rle fiisr iecipienrs speno rle new
monev, rlen rle secono iecipienrs speno ir, ano so on.
`oloov woulo evei le so íoolisl as ro claim rlar, sav, a oou-
lling oí rle ouanrirv oí sugai woulo leao ro an exacr lalving oí rle
exclange iario oí sugai againsr all orlei gooos ano seivices. Yer
rlar is pieciselv wlar rle ciuoe Cuanrirv Tleoiisrs asseir wlen ir
comes ro monev.
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc ¬¡
e. Cr|t|c|smef !eme kreameats kea|ast the
0aaat|t¡ Iheer¡
Alrlougl in irs ciuoe íoim, rle ouanrirv rleoiv is eiioneous, even
so we can oeíeno ir íiom some invalio oljecrions. !oi example,
some wiireis oljecr rlar rle ouanrirv rleoiv onlv lolos .ctcris
peri/us (i.e., wlen “orlei rlings aie lelo eoual”). Yer rlis is
laiolv a gooo oljecrion againsr rle ouanrirv rleoiv, since a ciiric
coulo sav rle same rling alour eny law oi piinciple in economic
science.
Anorlei oljecrion people lave iaiseo againsr rle ouanrirv rle-
oiv is rlar irs pieoicrions aie in acrual piacrice nullifieo lv rle
lelavioi oí “hoards.” !oi example, rle ciiric oí rle ouanrirv rleoiv
miglr sav rlar a laige influx oí newmonev ven’t lave a renoencv ro
pusl up piices, lecause some people in rle communirv will simplv
expano rleii loloings oí casl. Òn rle orlei lano, sav rlese ciirics,
ií rle oemano ro lolo monev (íoi ieasons oí commeice) sloulo
suooenlv inciease, rlis won’r leao ro a íall in piices (as rle ouan-
rirv rleoiv woulo pieoicr), lecause rle loaios will ielease some oí
rleii casl inro rle communirv ro sarisív rle new oemano.
Tle íunoamenral piollem wirl rlis view is rlar economicallv,
rleie is no oisrincrion lerween rle noimal oemano ro lolo casl
veisus “loaioing.” Ar anv momenr in rime, ctcry unir oí monev in
rle communirv is in someone’s casl lalance: rleie is no sucl rling
as monev “in ciicularion” rlar coulo le conriasreo wirl monev
“sirring iole.”
Tle monev lelo lv a loaioei peiíoims rle same economic
íuncrion as rle monev lelo lv a noimal lusinesspeison: rlev aie
lorl loloing rle monev lecause rlev expecr ro aclieve giearei
sarisíacrions íiom wlar ir can luv in rle íuruie, rlan íiom wlar
ir coulo luv in rle piesenr. Because oí unceirainrv, people oo nor
necessaiilv “eaimaik” eveiv unir oí monev íoi a pairiculai íuruie
puiclase. `onerleless, wlen we analvze vhy people lolo monev
¬ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
ar all, we iealize rlar rleie is no oualirarive oiffeience lerween rle
loaioei ano rle nonloaioei. All loaioing ieallv means, is rlar
someone caiiies casl lalances laigei rlan lis peeis’.
¡e. |arther kee||cat|eas ef the 0aaat|t¡ Iheer¡
Ceneiallv speaking, rle oemano íoi monev 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 onlv a rleoierical cuiiosirv íoi economisrs ro riv ro
explain wlar woulo lappen ií rle oemano íoi monev íell, wlile
rle srock oí monev iemaineo rle same.
!í we weie ro meclanicallv applv rle ouanrirv rleoiv ro sucl
a siruarion, we woulo concluoe rlar piices woulo iise (i.e., rle
puiclasing powei oí monev woulo íall) uniíoimlv, in oiiecr pio-
poirion ro rle oiop in oemano íoi monev. !owevei, a moie
sarisíacroiv explanarion neeos ro rake inro accounr rle suljec-
rive valuarions oí inoiviouals. Rarlei rlan íocusing meielv on
ciuoe aggiegares, ir is lerrei ro analvze rle scenaiio lv sav-
ing rlar wlen rle oemano íoi monev íalls (wlile rle srock oí
ir iemains consranr), inoiviouals oiscovei rlar rlev aie loloing
laigei casl lalances rlan rlev oesiie. To impiove rleii posirion,
rlev seek ro exclange some oí rleii excess casl loloings íoi
orlei gooos oi seivices. !n ooing so, rlev pusl up rle piices oí
rlese irems.
!venruallv, rle íall in monev’s puiclasing powei ieouces rle
“ieal” size oí an inoivioual’s casl lalance unril le is lappv wirl ir. !í
eveivone in rle communirv oecioes le oi sle is loloing “roo mucl
monev,” rle onlv wav ro iesroie eouililiium is íoi piices ro iise.
!í one peison ieouces lis casl lalance lv spenoing, rle sellei nec-
essaiilv incieases lis casl lalance lv rle same amounr. Tle given
srock oí monev is ieaiiangeo among rle people in rle communirv:
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc ¬¬
pei capira casl lalances lave ro iemain rle same. !ven so, rle iise
in piices can sarisív eveivone’s oesiie ro lolo smallei casl lalances,
lecause casl is lelo íoi rle puipose oí acouiiing orlei gooos ano
seivices. People evaluare rle size oí rleii casl loloings in reims oí
irs puiclasing powei, nor ieallv lv low manv unirs oí monev rlev
possess.
Alrlougl lisroiicallv rle oemano íoi monev irselí geneiallv
giows—excepr peilaps íoi financial ciises—rleie aie cases wleie
rle oemano íoi pairiculai linás oí monev mav íall oiamaricallv. A
noralle example is rle oemonerizarion oí silvei. As rlis piecious
meral ceaseo leing useo as a meoium oí exclange, ano lecame
valueo solelv 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|ae”
Tlus íai in rle claprei rle analvsis oí rle oljecrive exclange
value oí monev las onlv ielieo on oereiminanrs rlar coulo lave
jusr as well leen applieo ro eny commooirv, nor jusr rle com-
monlv accepreo meoiumoí exclange (i.e., rle monev commooirv).
!n conriasr, secrion i i i examines possille clanges in rle oljec-
rive exclange value oí monev rlar can onlv applv lecause ir is a
meoium oí exclange. Tle conrexr oí rle oiscussion is rle lavpei-
son’s complainr oí rle “oeainess oí living,” meaning rlar eveiv gen-
eiarion piices seem ro le liglei rlan leíoie.
¬8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
¡z. Waeaer’s Iheer¡: Ihe |aflaeace ef the |ermaaeat
|re6em|aaace ef the !aee|¡ !|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 monev—
lv rle allegeo supeiioi powei oí rle “supplv sioe” oí rle economv.
Tle selleis oí gooos ano seivices srano moie ro gain íiom piice
likes rlan rleii cusromeis srano ro lose, lecause rle piice oí leeí
(sav) affecrs rle livelilooo oí rle lurclei íai moie rlan ir affecrs
rle íoirunes oí rle aveiage louselolo. \agnei’s rleoiv is flaweo,
lowevei, lecause ir cannor easilv 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 Chaaee |a the ke|at|eas 8etweea Natara|
lceaem¡ aa6 Meae¡ lceaem¡
\iesei arremprs ro explain rle peisisrenr iise in piices ovei rime lv
rle giaoual riansíoimarion oí a “`aruial !conomv” inro a “Monev
!conomv.” As moie ano moie people ano iegions aie liouglr
inro rle piacrice oí moneraiv exclange, \iesei aigues rlar cei-
rain rlings rlar weie pieviouslv 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 íieouenr 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-
plv. Tle inregiarion oí rle iuial village inro rle moneraiv nexus
gives no ieason íoi a geneial iise in piices, ir meielv explains wlv
rle gap in piices (lerween rle rown ano village) sloulo le wlirrleo
awav.
Cheptcr S: Thc Dctcrminents e/ thc O/ic.titc Lx.hengc íe/uc ¬o
¡e. Ihe Mechaa|smef the Market as a |erce kffect|ae the
0||ect|ºe lxchaaee Va|ae ef Meae¡
!n oiiecr exclange, ií a porenrial luvei lelieves rlar rle asking
piice oí rle sellei is roo ligl, rle exclange will nor occui. !ow-
evei, wirl rle use oí monev, rleie is anorlei possille ourcome,
rlar seems ro lappen in rle ieal woilo. Tle luvei mav go aleao
ano pav a piice (in monev) rlar le oiiginallv oeemeo “roo ligl,”
lur will compensare lv incieasing rle asking piice íoi rle gooos
rlar hc las ro sell. Tlus wage eaineis miglr acouiesce in liglei
íooo piices, ver oemano pav incieases íiom rleii emploveis. Tle
emploveis, in ruin, miglr agiee, knowing rlar rlev will iaise piices
rlemselves.
`one oí rlis oiscussion ienoeis rle lasic rleoiv oí piice oerei-
minarion invalio. !r meielv unoeiscoies rlar wirl rle special case
oí monev, peculiai siruarions can affecr irs valuarion rlar simplv
cannor occui in rle case oí oiiecr exclange.
|V. lKC0k!0!l!
¡s. Ihe |aflaeace ef the !|te ef the Meaetar¡ 0a|t aa6 |ts
!a|6|º|s|eas ea the 0||ect|ºe lxchaaee Va|ae ef Meae¡
!r is oíren asseireo rlar rle size oí rle moneraiv unir can affecr
irs puiclasing powei, i.e., rle geneial leiglr oí piices. !n iegaio
ro wlolesale piices, rlis is cleailv 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, eveivoav puiclases rlar lave
veiv 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 e/ Mency ená Crcáit
availalle oenominarion oí rle monev. Tle use oí roken coinage
(wlicl can iepiesenr íiacrions oí rle sranoaio moneraiv unir) ano
monev 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 flexililirv, lur even so ir musr le aomirreo rlar rle size oí rle
moneraiv unir ooes lave an influence on piices ouoreo ar rle ierail
level.
¡6. k Methe6e|ee|ca| Cemmeat
!n a ieview oí rle fiisr eoirion oí rle look, Pioíessoi \alrei !orz
oeíenoeo !augllin íiom rle ciirioue leveleo lv 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) lv rle piospecr oí
rleii evenrual ieoemprion. Mises examineo rle oiscounr invesrois
placeo on lonos issueo lv 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 monev, wleieas rle lonos
weie nor. Tleieíoie rle papei guloen weie valueo on accounr oí
rleii use as meoia oí exclange.
!orz oeíenos !augllin lv ieíeiiing ro sraremenrs íiominfluen-
rial figuies rlar rlev riulv oio speculare on rle evenrual ieoemp-
rion oí rle papei guloen. Mises poinrs our rlar rlis enriielv misses
rle poinr oí lis ciirioue: !ven ií ir is aomirreo rlar rle papei
guloen woulo evenruallv le ieoeemalle íoi golo, rlar íacr woulon’r
explain wlv rle nores riaoeo ar a piemium ro lonos issueo lv
rle same goveinmenr. Moie geneiallv, !orz appioacles economic
piollems nor rliougl rleoierical ieasoning, lur lv appeal ro lis-
roiical ciicumsrances, a pioceouie rlar Mises iejecrs on merloo-
ological giounos.
..
Cheptcr S: Thc Dctcrminents e/ thc O/ic.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 subìectlve 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-
ìectlve 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, zooo, pp. :o6–z6).
• The first sectlons of thls chapter lay out Mlses’s famous regression
theorem, whlchsuccessfully applles subìectlvevaluetheory 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 obìec-
tlve purchaslng power of money by reference to subìectlve valu-
atlons, when those subìectlve valuatlons ln turn are completely
..
8: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
dependent on money’s obìectlve 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 obìectlve 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 e/ thc O/ic.titc Lx.hengc íe/uc 8:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei oí monev lv ieíeience ro rle ouan-
rirv oí monev ano rle oemano ro lolo ir. (Tleie aie manv
veisions oí rle ouanrirv rleoiv, wirl rle moie meclanical
ones—wlicl posir rlar a ooulling oí rle monev srock will
leao ro a ooulling oí all piices—leing olviouslv wiong.)
Money certificates: Monev sulsrirures rlar aie íullv lackeo lv
monev (in rle naiiowei sense).
Fiduciary media: Monev sulsrirures issueo ovei ano alove rle
monev (in rle naiiowei sense) lelo in rle ieoemprion íuno.
!iouciaiv meoia aie “unlackeo.”
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeolv counreiacring rle pieoicrions
oí a naïve ouanrirv rleoiv oí monev.
Regression Theorem: Mises’s aigumenr rlar rle cuiienr puiclas-
ing powei oí monev is influenceo lv people’s memoiv oí
vesreioav’s puiclasing powei. Tle causalirv is riaceo lack
in rime, unril rle poinr ar wlicl rle monev gooo was valueo
as a iegulai commooirv in oiiecr exclange.
..
8± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Tle suljecrive value oí monev musr le measuieo
lv rle maiginal urilirv oí rle gooos íoi wlicl rle monev
can le exclangeo.” (p. 1oo)
:. !í all rvpes oí monev musr lave oiiginallv lao a nenmone-
raiv souice oí valuarion, lowcan Mises explain fiar monev?
(pp. 11o–11)
:. !í rle “pasr value oí monev is raken ovei lv rle piesenr,”
ooes rlar mean cuiienr conoirions ano expecrarions lave
no influence on rle value oí monev rooav? (p. 111)
±. !xplain: “!í all rle exclange iarios oí rle pasr weie eiaseo
íiom luman memoiv, rle piocess oí maiker-piice-oerei-
minarion miglr ceirainlv lecome moie oifficulr . . . lur ir
woulo nor lecome impossille.” (p. 11:)
¡. !xplain: “
í
A
]
meclanical rleoiv oí piice-oereiminarion was
aiiiveo ar—a oocriine oí Supplv ano Ðemano. . . . !r is coi-
iecr oi incoiiecr, accoioing ro rle conrenr given ro rle
woios Supplv ano Ðemano.” (pp. 1:8–:o)
tuav:iv o
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
Monev can peiíoim irs seivices íiom viiruallv anv locarion. Colo
sroieo in rle cellais oí rle Bank oí !nglano can le useo as a com-
mon meoium oí exclange anvwleie in rle woilo, rliougl rle use
oí lanknores, clecks, ano clearing systems. !n conriasr, plvsical
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 complerelv oisiegaio rle possille (lur small) influence
oí rle posirion oí monev on irs valuarion, rlen we can oeiive rle
law rlar eveiv economic gooo rlar is ieaov íoi consumprion, las
a suljecrive use-value aue consumprion gooo ar rle place wleie
ir is, ano aue piooucrion gooo ar rlose places ro wlicl ir mav le
rianspoireo íoi consumprion. Tleieíoie, rle monev-piice oí anv
commooirv in anv place musr le rle same as rle monev-piice ar
anv orlei place, once we aojusr íoi rle monev-cosr oí rianspoira-
rion, unless rleie aie insrirurional limirs iesriicring exclange. (!n
rle ieal woilo, rleie aie possille cosrs oí rle rianspoir oí monev,

8ó Stuáy Cuiác te Thc Thcery e/ 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 monev irselí sravs pur.)
z. k||eee6 |eca| 0|ffereaces |a the |archas|ae |ewer ef Meae¡
Ðespire rle aigumenrs pur íoiwaio in rle pievious secrion, manv
people srill cling ro rle lelieí rlar one’s monev “goes íuirlei” in
some iegions compaieo ro orleis. !owevei, rlis eiioneous view
neglecrs rle íacr rlar rle same plvsical irem is a oiffeienr gooo,
economicallv 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 monev-piices cannor leao us ro con-
cluoe rlar rle “value oí monev” is liglei in Boise rlan in Manlar-
ran. Òn rle conriaiv, rle puiclasing powei oí monev will reno
ro le eoualizeo in all iegions wleie ir is useo, ano anv appaienr
oisciepancies aie oue ro oiffeiences on rle commooirv sioe.
). k||eee6 |eca| 0|ffereaces |a the Cest ef ||º|ae
Closelv ielareo ro rle íallacv rlar rle puiclasing powei oí monev
can vaiv 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
plvsical 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, pieciselv lecause people
value rle pioximirv ro rle leacl, rle local niglr liíe, erc. !r is sim-
plv nor riue rlar rle same liíesrvle can le olraineo moie cleaplv 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 oisciepancv.
..
Cheptcr o: Thc Pre//cm in thc O/ic.titc Lx.hengc íe/uc e/ Mency 8¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Mises savs on page 1¬1 rlar rle monev-piice oí a commoo-
irv musr le rle same in all places, oue accounr leing maoe
íoi rle monev-cosr oí rianspoir, ená oisiegaioing “rle
rime raken in riansir.” Tlis cavear is necessaiv lecause rle
rime oimension affecrs rle suljecrive valuarion oí gooos.
!oi an exrieme example, ií ir rakes one veai ro slip a new
compurei ro a colonv on Mais, rle manuíacruiei woulo
insisr on a liglei ierail piice (olrainalle in one veai)
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 immeoiarelv, wlicl is moie valualle rlan
laving ro wair a veai ro ieceive rle same amounr oí monev
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 rleoiericallv ano impoiranr in piacrice. `amelv, íoi
rlose woikeis wlo move ro a iegion ano oo net suljecrivelv
value irs ameniries, rle ligl monev-piices íoi ienr, paik-
ing, íooo, ano so on musr le compensareo lv an appiopii-
are inciease in rleii monev-wages oi salaiies. !oi example,
a lospiral locareo in a iesoir leacl rown mav neeo ro offei
a liglei salaiv ro arriacr (sav) a oualifieo 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”
salaiv in rle íace oí alove-aveiage piices íoi lousing in rle
iesoir rown.
..
88 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Clearing systems: Aiiangemenrs rlar cancel our oi “cleai” iecipio-
cal financial claims, so rlar onlv ner claims neeo le serrleo
rliougl rle acrual riansíei oí monev.
Foreign-exchange rate: Tle exclange iario lerween a oomesric ano
íoieign cuiiencv.
Cable rate: Slang useo lv íoieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
..
Cheptcr o: Thc Pre//cm in thc O/ic.titc Lx.hengc íe/uc e/ Mency 8o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar complemenraiv gooo is necessaiv 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 lving in lono in a cusroms oi excise
waielouse ano gooos oí rle same reclnological species on
wlicl rle ourv oi rax lao alieaov leen paio as lelong-
ing ro rle same species oí gooos in rle economic sense?”
(pp. 1¬:–¬:)
:. !xplain: “!r is laiolv possille ro agiee wirl rlese aigu-
menrs ípur íoiwaio lv \iesei], wlicl smack a lirrle roo
mucl oí rle cosr-oí-piooucrion rleoiv oí value ano aie
ceirainlv nor ro le ieconcileo wirl rle piinciples oí rle
suljecrive rleoiv.” (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 vallevs 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 counriv exclusivelv use a ceirain monev
(sucl as golo) íoi rleii oomesric puiclases, wlile a secono counriv
uses a oiffeienr monev (sucl as silvei) íoi rleii oomesric puiclases,
ano rle rwo counriies aie closelv rieo economicallv rliougl riaoe,
rlen ir is incoiiecr ro sav rlar golo is rle onlv common meoium oí
exclange in rle fiisr counriv, ano silvei rle onlv one in rle secono
counriv. Òn rle conriaiv, lecause meiclanrs íiom one counriv
can onlv riaoe gooos wirl rle orlei counriv’s meiclanrs rliougl
rle use oí rle orlei oomesric monev, ir is cleai rlar lorl monies
aie meoia oí exclange among people in lorl counriies.
z. Ihe !tat|c er Natara| lxchaaee kat|e |etweea 0|ffereat
K|a6s ef Meae¡
\lerlei rwo oiffeienr monies opeiare sioe lv sioe in rle same
counriv unoei a parallel standard, oi wlerlei one monev is useo
o1
o: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
exclusivelv íoi oomesric riaoe in one counriv wlile rle orlei
monev is likewise useo in a secono counriv, rle same piinciple
opeiares ro iegulare rle exclange iario (oi wlar nowaoavs woulo
le calleo rle exchangerate) lerween rle rwo monies. Tle rleoiv oí
purchasing power parity savs rlar rle exclange iario lerween rwo
monies is oereimineo lv rle iespecrive exclange iarios oí eacl
monev 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
ouoreo 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 luving oil wirl one
cuiiencv ano selling ir íoi rle orlei. !oi example, suppose rle
exclange iare weie s1 íoi roo (iarlei rlan rle eouililiium piice oí
s1 íoi r8o). !n rlar case, a Japanese invesroi coulo rake r8,ooo ano
luv a laiiel oí ciuoe oil. Tlen le coulo sell rle oil ro an Ameiican
íoi s1oo. !inallv le coulo go ro rle íoieign exclange maiker ano
riaoe lis s1oo íoi ro,ooo. Tlus rle Japanese invesroi woulo lave
raken aovanrage oí rle exisring piice iarios ro effoirlesslv ruin lis
oiiginal r8,ooo inro ro,ooo. (!is effoirs ro piofir íiomrlis ailiriage
oppoirunirv woulo evenruallv eliminare ir, since le woulo le acr-
ing ro pusl up rle ven-piice oí oil, pusl oown rle oollai-piice oí
oil, ano pusl oown rle ven-piice oí a oollai lill.)
!í we fiisr imagine a unifieo iegion using a single monev, wirl
no insrirurional olsracles ro riaoe among irs inlaliranrs, rlen ir
is cleai rlar all commooiries, incluoing monev, will le oisriilureo
among rle popularion in accoioance wirl maiginal urilirv. !í some
people eno up loloing an alove-aveiage amounr oí (sav) llankers,
ir is lecause rleii oemano íoi rlis gooo is liglei rlan aveiage. Bv
rle same roken, ií some people acouiie laigei casl lalances rlan
orleis, ir is lecause rleii oemano ro lolo monev is laigei. Tleie is
no ouesrion oí a oangeious “riaoe oeficir” rlar coulo cause a “oiain
oí monev” íiom some people ro orleis.
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency e/ Diffcrcnt Kinás o:
Tle same piinciples lolo íoi narions. Tle aggiegare figuies oí
impoirs ano expoirs aie simplv rle summarion oí rle riaoing acriv-
iries lerween rle inoiviouals in eacl counriv. An accumularion oí
monev in one counriv veisus anorlei can onlv le susrainalle ií
rle oemano ro lolo monev incieases in rle fiisr counriv ielarive
ro rle secono. A riaoe oeficir net accompanieo lv sucl a sliír in
rle oemano íoi monev will le ouicklv selí-ieveising, as rle piices
in rle counriv accumularing monev will iise ano rle piices in rle
counriv losing monev will íall.
..
o± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Mises aigues on pages 1¬o–8o rlar even in cases wleie rle
consumeis in rwo oiffeienr counriies use oiffeienr monies
in eveivoav riansacrions, nonerleless ií rle iegions aie
closelv louno lv inreinarional riaoe, rlen “íiom rle eco-
nomic poinr oí view lorl ímonies] musr le iegaioeo as
monev 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 ven oi vice veisa. !n rlar iespecr,
rle ven is a meoium oí exclange rlar is accepreo in riaoe
lv rle Ameiican lusinessman, in aooirion ro all oí rle
Japanese. !owevei, ir is srill nor olvious rlar rlis sloulo
mean rlar rle ven is monev even in rle !nireo Srares,
lecause rle oefinirion oí monev is “a commonlv accepreo
meoium oí exclange.” To le suie, rle ven is commonlv
accepreo emeng Hmcri.ens áeing /usincss vith Tepen, lur
ir is nor commonlv accepreo in rle !nireo Srares pei se.
!owevei, rle impoiranr poinr is nor wlerlei we sav rlar
rle ven is monev in rle !nireo Srares, lur iarlei rlar we
unoeisrano Mises’s poinr rlar inreinarional riaoe ieouiies
lusinesspeople ro accepr rle monies useo in íoieign lanos.
• Òn page 18: Mises wiires, “íClassical polirical economv]
oemonsriareo rlar inreinarional movemenrs oí monev aie
nor conseouences oí rle srare oí riaoe: rlar rlev con-
srirure nor rle effecr, lur rle cause, oí a íavouialle oi
uníavouialle riaoe-lalance.” !e las in mino rle íollow-
ing conriasr in analvsis: Suppose rle !nglisl speno one
million golo ounces impoiring wine íiom !iance, wlile
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency e/ Diffcrcnt Kinás o¡
rle !iencl speno onlv ooo,ooo golo ounces impoiring
sweareis íiom !nglano. An !nglisl meicanrilisr woulo
piolallv lemoan rle íacr rlar lis counrivmen weie
impoiring moie rlan rlev weie expoiring, ano rlar rlis
“uníavoialle riaoe lalance” was unwirringlv losing 1oo,ooo
ounces oí golo ro rle oasraiolv !iencl. !owevei, rle
classical economisrs sucl as !ume, Smirl, ano Ricaioo
coulo poinr our rlar rle !iencl (in rle aggiegare) appai-
enrlv oesiieo ro inciease rleii loloings oí golo, wlile rle
!nglisl appaienrlv oesiieo ro ieouce rleii loloings. !n
rlar case, rle onlv wav ro sarisív rlese sliírs in monev
oemano woulo le íoi rle !iencl ro slip rle !nglisl
1oo,ooo golo ounces woirl oí gooos, íoi wlicl rle !nglisl
woulo nor slip anv (nonmoneraiv) gooos in ieruin.
..
oó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Parallel Standard: Amoneraiv svsremin wlicl rwo oiffeienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as monev unoei a Paiallel Sranoaio.)
Exchange rate: Tle iario ar wlicl one cuiiencv riaoes againsr an-
orlei in rle íoieign-exclange maiker.
Purchasing Power Parity: Tle rleoiv sraring rlar rle exclange
iario lerween rwo monies is oereimineo lv rle iespecrive
exclange iarios oí eacl monev ano orlei gooos ano seivices.
..
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency e/ Diffcrcnt Kinás o¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \len !nglano opeiareo on a golo sranoaio, wlile Cei-
manv opeiareo on a silvei sranoaio, ooes Mises rlink rlar
silvei sloulo lave leen consioeieo as monev even in !ng-
lano? (pp. 1¬o–8o)
:. !ow ooes rle oocriine oí puiclasing powei paiirv 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 pairv oi rle orlei cannor aiise.” (p. 18:)
±. \lar was rle riain oí rlouglr rlar Mises savs “oealr rle
Meicanrilisr Tleoiv irs oearl-llow”? (p. 18:)
¡. !xplain: “
í
!
]
nreinarional movemenrs oí monev, so íai as
rlev aie nor oí a riansienr naruie ano conseouenrlv soon
ienoeieo ineffecrive lv movemenrs in rle conriaiv oiiec-
rion, aie alwavs calleo íoirl lv vaiiarions in rle oemano
íoi monev.” (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 monev.
!owevei, sucl srarisrical reclnioues 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 anv commooirv lv ieíeience
ro low manv unirs oí monev ir rakes ro puiclase one unir oí
rle commooirv, rle opposire appioacl can vielo rle “piice” oí a
unir oí monev in reims oí rle commooirv. !owevei, rlis recl-
nioue vielos as manv “piices” oí monev 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
monev. Tlen, a secono rask is ro ask oí anv perti.u/er commooirv’s
oo
1oo Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
piice clange, low mucl can le arriilureo ro íoices aiising íiom
rle sioe oí monev (in conriasr ro a clange in rle ielarive scaicirv
oí rle gooo wlicl woulo also make irs piice iise).
). Methe6s ef Ca|ca|at|ae |a6ex Nam|ers
`eailv all arremprs ar measuiing rle oljecrive exclange value
oí monev 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
laigelv cancel our. Tlus rle aveiage oi ner clange in rle piices oí
e// rle gooos (as ouoreo in monev) will oemonsriare wlerlei rle
puiclasing powei oí monev las iisen oi íallen. !níoirunarelv, in
piacrice ir is onlv possille ro caiiv our sucl calcularions lv making
eá he. assumprions alour rle ielarive impoirance oí vaiious íac-
rois. !n rle eno, rle economic rleoiisr ooes nor gain mucl íiom
sruoving rle vaiious srarisrics oí piice movemenrs rlar le coulo
nor olrain íiom oeoucrive ieasoning alour rle naruie oí exclange
ano monev.
e. W|eser’s kefiaemeat ef the Methe6s ef Ca|ca|at|ae
|a6ex Nam|ers
\iesei oeviseo rle mosr caieíul ano sarisíacroiv appioacl ro mea-
suiing rle oljecrive exclange value oí monev, wirl a reclnioue
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 rvpes oí income people coulo
eain lecome incommensuialle, iolling \iesei’s reclnioue oí irs
oesiieo piecision.
Cheptcr 11: Thc Pre//cm e/ Mcesuring thc O/ic.titc Lx.hengc íe/uc e/ Mency 1o1
s. Ihe |ract|ca| 0t|||t¡ ef |a6ex Nam|ers
Tle ciiricisms leveleo againsr vaiious reclnioues íoi calcularing
inoex numleis ieíei ro rle piollems oí economic rleoiv. !n
piacrical use íoi goveinmenr policv, rlese reclnioues piovioe a
iougl guioe ro clanges in rle puiclasing powei oí monev.
..
1o: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn page 18o Mises wiires, “!nvaiialilirv in iespecr oí rle
piopeirv ro le measuieo . . . is a sinc aue 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 riv ro
measuie clanges in rle oljecrive exclange value oí monev
(i.e., in rle puiclasing powei oí monev), rlev iun inro rle
piollem rlar rleie erc ne sucl invaiialle lenclmaiks. !í
rle exclange iario lerween monev ano anv orlei commoo-
irv clanges, ir is nor cleai wlerlei rle clange oiiginares
íiom rle sioe oí monev oi rle commooirv.
• Some numeiical examples mav claiiív Mises’s olseivarions
on inoex numleis (pp. 188–oo). !í rle piice oí oil incieases
íiom soo ro s1oo, wlile rle piice oí a relevision íalls íiom
s1oo ro soo, ir is possille rlar rlese clanges lave norling ro
oo wirl rle puiclasing powei oí monev, ano meielv ieflecr
a sliír in oemano awav íiom relevisions ano inro oil. Òn
rle orlei lano, ií e// piices (ouoreo in monev) in rle com-
munirv incieaseo exacrlv lv 1o peicenr in one veai, rlen
ir woulo le cleai rlar rle puiclasing powei oí monev lao
íallen ano was rle oiivei oí rle piice incieases. Bur in rle
ieal woilo, rlings aie nevei so cleai-cur. Tvpicallv some
piices iise wlile orleis íall, ano rle piice movemenrs aie
nor in rle same peicenrages acioss commooiries. Tleie
is no nonailiriaiv wav 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 monev.
..
Cheptcr 11: Thc Pre//cm e/ Mcesuring thc O/ic.titc Lx.hengc íe/uc e/ Mency 1o:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Ònlv lv lerring íall moisels oí srarisrics is ir pos-
sille íoi rle economic rleoiisr ro mainrain lis piesrige in
rle íace oí ouesrions oí rlis soir.” (p. 188)
:. !xplain: “!e wlo caies ro go ro rle rioulle oí oemonsriar-
ing rle uselessness oí inoex numleis íoi moneraiv rleoiv
ano rle conciere rasks oí moneraiv policv will le alle ro
selecr a gooo piopoirion oí lis weapons íiom rle wiirings
oí rle veiv men wlo invenreo rlem.” (p. 188)
:. \lv aie inoex numleis nor veiv impoiranr íoi rle “exren-
sion oí rle rleoiv oí rle naruie ano value oí monev”?
(pp. 18o–oo)
±. !ven ií we gianr íoi rle sake oí aigumenr rlar a loaí oí
lieao possesses a consranr urilirv in rle oljecrive sense oí
íooo value, wlv is rlis appioacl unlelpíul wlen ir comes
ro rle use oí inoex numleis in moneraiv rleoiv? (p. 1o:)
¡. Ðoes Mises rlink rlar inoex numleis aie complerelv use-
less? (p. 1o±)
tuav:iv 1:
Ikl !0C|k| C0N!l00lNCl!
0| Vkk|kI|0N! |N Ikl 08IlCI|Vl
lKCkkN6l Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe lxchaaee ef |reseat 6ee6s fer |atare 6ee6s
People oíren exclange piesenr gooos íoi íuruie gooos, íoi example
lv lenoing monev rooav (a piesenr gooo) in exclange íoi a piomise
oí iepavmenr oí íuruie piincipal plus inreiesr, oi lv agieeing rooav
ro exclange gooos againsr monev in rle íuruie. Alrlougl lusiness-
people rake giear caurion iegaioing clanges in rle piices oí perti.-
u/er commooiries, rlev rvpicallv oo nor rake inro accounr rle pos-
sille íall in rle oljecrive value oí monev irselí. To rle exrenr rlar
people áe piorecr rlemselves in conriacrs íiom possille clanges
in rle value oí a cuiiencv, ir is onlv a papei cuiiencv rle value
oí wlicl miglr íall ielarive ro a cuiiencv lackeo lv golo. !aiolv
anvone (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 monev coulo le anric-
ipareo, rlen rleii impacr coulo le offser lv alreiing rle reims oí
cieoir riansacrions. !í lorl lenoeis ano loiioweis expecr a weakei
cuiiencv in rle íuruie (i.e., iising piices oí mosr gooos ano sei-
vices ouoreo in rle cuiiencv), rlen lenoeis will insisr on claiging a
1o¡
1oó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
liglei inreiesr iare ano loiioweis will le willing ro pav ir, lecause
loans will le iepaio in weakei cuiiencv.
z. lceaem|c Ca|ca|at|ea aa6 kcceaataac¡
Accounrancv is impeiíecr in seveial iespecrs. !oi example, ir ielies
on suljecrive esrimares oí unceirain íacrois, sucl as rle value oí
invenroiv (wlicl is oepenoenr on íuruie oemano) ano rle likeli-
looo oí oeíaulr lv rle issueis oí lonos. Yer anorlei majoi flaw
is rlar accounranrs use moneraiv figuies as ií rlev weie akin ro
measuies oí lengrl ano weiglr. Bur since rle puiclasing powei oí
monev irselí can clange, accounrancv is analogous ro an aiclirecr
oesigning lluepiinrs in a woilo wleie iuleis lave vaiialle lengrls.
Moneraiv oepieciarion can cause lusinesspeople ro oveiesrimare
rleii piofirs ano unwirringlv engage in capital consumption.
). !ec|a| Ceasecaeaces ef Var|at|eas |a the Va|ae ef Meae¡
Whea 0a|¡ 0ae K|a6 ef Meae¡ |s lme|e¡e6
!í rle ouanrirv oí a commooirv sucl as coal is suooenlv ano unex-
pecreolv 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 communirv as a wlole, lecause rle giearei ouanrirv
oí coal can vielo moie gooos ano seivices.
Tlings aie oiffeienr wirl rle monev commooirv. !nsoíai as irs
menctery seivices aie conceineo, aooirional ouanriries coníei no
ner lenefirs on rle communirv. \len new ouanriries oí monev
enrei rle economv (íioma newgolo mine, íoi example), ir spieaos
unevenlv rliouglour rle svsrem. Tle clieí leneficiaiies aie rle
Cheptcr 1:: Se.ie/ Censcaucn.cs in thc O/ic.titc Lx.hengc íe/uc e/ Mency 1o¬
oiiginal owneis, rlen rlose upon wlom rlev fiisr speno rle new
monev, ano so on. Tle loseis aie rlose wlose incomes (measuieo
in monev) oo nor iise even as rlev see piices going up in rle rlings
rlar rlev luv. \ealrl is ieoisriilureo íiom some gioups ro orleis,
lur rle communirv as a wlole is nor maoe iiclei lv rle influx oí
new monev (excepr possillv inoiiecrlv ií rle leneficiaiies oí rle
inflarion make moie piooucrive use oí rleii ieoisriilureo wealrl
rlan rle íoimei owneis).
e. Ihe Ceasecaeaces ef Var|at|eas |a the lxchaaee kat|e
8etweea Iwe K|a6s ef Meae¡
Tle uneven inciease in piices oue ro an influx oí new monev
(eirlei íiom golo oiscoveiies oi íiom rle issuance oí moie papei
monev ano fiouciaiv meoia) can leao ro ieoisriilurion even among
gioups using oiffeienr cuiiencies. !oi a mooein example, suppose
iniriallv rlar one !.S. oollai riaoes íoi one euio, ano rlar rle piice
oí a luslel oí wlear iniriallv is s¡ ano also c¡. Tlen rle !eoeial
Reseive piomises ro slaiplv inciease rle ouanrirv 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
onlv 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 ouicklv aojusr unril lalance lao leen iesroieo,
wirl !.S. wlear selling íoi (sav) s8 ano !uiopean wlear selling
íoi c±. Bur even aírei rlis ouick aojusrmenr, rleie woulo le a lasr-
ing aovanrage given ro Ameiican wlear expoireis, lecause rlev
coulo sell wlear íoi s8 insreao oí s¡, even rlougl rleii expenses
1o8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
(on laloi, riacrois, erc.) lao nor ver iisen piopoirionallv. !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 monev incomes sraveo rle
same. Two laige gioups oí loseis woulo le !.S. consumeis ano
!uiopean wlear íaimeis. Ònlv aírei all !.S. oomesric piices lao
aojusreo ro rle new ouanrirv oí oollais woulo rle ieoisriilurion
cease.
..
Cheptcr 1:: Se.ie/ Censcaucn.cs in thc O/ic.titc Lx.hengc íe/uc e/ Mency 1oo
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages 1o¡–oó, Mises wiires, “\len anvloov luvs (oi
sells) coin, corron, oi sugai íuruies . . . le is well awaie
oí rle iisks rlar aie involveo in rle riansacrion. !e will
caieíullv weigl rle clances oí íuruie vaiiarions in piices,
ano oíren rake sreps, lv 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 monev ovei rime.
!owevei, Mises’s oesciiprion is oifficulr ro explain ro a
novice, lecause noimallv 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 alilirv ro make lis moirgage pavmenrs ano pav orlei
expenses oepenos ciiricallv on rle piice oí wlear, rle
íaimei mav wanr ro “lock in” rle piice lv selling íuruies
conriacrs in wlear. Òn rle orlei sioe oí rle riansacrion, a
laige opeiarion rlar makes lieao mav 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 glaolv /uy rle íuruies conriacrs issueo lv rle
íaimei. Tlis is a muruallv leneficial aiiangemenr in wlicl
no monev clanges lanos in rle piesenr, lur rle rwo pairies
rooav lock in rle piice ar wlicl rlev will exclange wlear
íoi monev in rle íuruie. (Teclnicallv we lave oesciileo
a forward contract, wlicl is economicallv veiv similai ro a
íuruies conriacr.) Tle use oí íuruies conriacrs ano orlei
11o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
oeiivarives can allow maiker pairicipanrs ro leoge awav
rleii exposuie ro pairiculai piice swings, wleie rlev 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 cuiiencv can
leao ro capiral consumprion. !oi a simple example, sup-
pose a man spenos s1oo,ooo on a macline rlar lasrs íoi ren
veais. !í piices aie sralle (ano oisiegaioing inreiesr), rle
man neeos ro eain ar leasr s1o,ooo eacl veai 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 oiiginallv anrici-
pareo ovei rle veais íiomrle sale oí lis gooos, aírei serring
asioe s1o,ooo eacl veai rle man miglr speno rle iemain-
ing “piofir” on íancv oinneis ano vacarion ciuises. !ow-
evei, aírei ren veais (wirl s1oo,ooo in lano, oisiegaioing
inreiesr) rle man mav oiscovei rlar lecause oí rle íall
in rle puiclasing powei oí monev, a new macline las a
piice oí s:oo,ooo. Tlus rle man unwirringlv consumeo
lalí oí lis capiral ovei rle oecaoe: le sraireo wirl one new
macline ano enoeo up wirl rle means ro luv onlv lalí oí a
new macline. Tle man iealizes rlar lis íancv oinneis ano
ciuises weie íunoeo net our oí piofirs lur lv earing awav
ar lis lusiness assers.
..
Cheptcr 1:: Se.ie/ Censcaucn.cs in thc O/ic.titc Lx.hengc íe/uc e/ 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 oeliveiv oare). As conoirions clange ano alrei rle
íuruies piice peiraining ro rle oeliveiv oare, rle exclange
will cieoir oi oelir rle accounrs oí rle luvei ano sellei oí
rle oiiginal íuruies conriacr on a oailv lasis ro ieflecr rle
clange. (!í rle íuruies piice goes up, rle luvei gains ano rle
sellei loses, erc.) Tlese oailv episooes oí maiking-ro-maiker
iesroie rle maiker value oí rle íuruies conriacr irselí ro zeio.
!pon oeliveiv, rle sellei oí rle íuruies conriacr oeliveis rle
gooo, wlile rle luvei pavs rle cuiienr spor piice íoi rlar
oare, net rle íuruies piice as oiiginallv specifieo.
Forward contract: Similai ro a íuruies conriacr, rlougl a íoiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oailv
maiking-ro-maiker. Òn rle oeliveiv oare, rle luvei pavs rle
íoiwaio piice as oiiginallv 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 oeliveiv oare) ro move alove oi lelow rle oiiginallv
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 e/ Mency ená Crcáit
!oi example, someone wlo lelieves rlar Srock XYZwill our-
peiíoim mosr orlei srocks miglr “go long” lv 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 monev, so long
as Srock XYZ oiops lv a smallei amounr rlan mosr orlei
srocks.
Aleatory: Ðepenoenr on clance, luck, oi an unceirain ourcome.
..
Cheptcr 1:: Se.ie/ Censcaucn.cs in thc O/ic.titc Lx.hengc íe/uc e/ Mency 11:
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Study Questions
1. Relare rle íollowing commenr ro Mises’s eailiei oiscussion
(p. ó1) oí rle lvporlerical possililirv oí fiar monev: “!eno-
eis ano loiioweis aie nor in rle lalir oí allowing íoi pos-
sille íuruie flucruarions in rle oljecrive exclange value oí
monev.” (p. 1o¡)
:. !í rle puiclasing powei oí monev uncxpc.tcá/y íalls, wlo is
luir—cieoirois oi oelrois? (p. :oo)
:. \lar is necessaiv ro eliminare rle unoesiialle conse-
ouences oí “unlimireo inflarionaiv policv”? (p. :o:)
±. * Mises wiires, “!í rle oljecrive exclange value oí all rle
srocks oí monev in rle woilo coulo le insranraneouslv
ano in eoual piopoirion incieaseo oi oecieaseo, íano] ií all
ar once rle monev-piices oí all gooos ano seivices coulo
iise oi íall uniíoimlv, rle ielarive wealrl oí inoivioual eco-
nomic agenrs woulo nor le affecreo” (p. :o¬). Ðoes Mises’s
aigumenr assume rlar eveivone lolos rle same íiacrion
oí lis oi wealrl in rle íoim oí casl lalances, oi ooes ir
also woik ií some people lolo (sav) laige amounrs oí ieal
esrare, wlile orleis lolo mosrlv casl? (Keep in mino rlar
íoi rlis aigumenr Mises las assumeo awav 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 alieaov was
enougl íoi all irs moneraiv riansacrions.” (p. :11)
*
Cuesrions wirl an asreiisk signiív rle ouesrion is a pairiculailv oifficulr one.
tuav:iv 1:
M0NlIkk\ |0||C\
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Summary
Òiiginallv, cirizens juogeo rle success oí moneraiv policv lv 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 monev. Tle clieí insriu-
menr rliougl wlicl rle Srare caiiies our moneraiv policv is irs
sriong influence on rle liná oí monev useo lv rle cirizeniv.
Inflationism is rlar moneraiv policv rlar seeks ro inciease rle
ouanrirv oí monev. Naïve inflationism lelieves rlar monev con-
srirures wealrl, ano rlar ciearing moie monev will ruin pooi
inro iicl. A secono gioup oí inflarionisrs unoeisranos rlar piinr-
ing moie monev will cause piices ro iise, lur cnáerscs rle policv
lecause rlev wanr ro lelp oelrois oi aclieve some orlei goal. A
rliio gioup oí inflarionisrs unoeisranos rlar rle policv in geneial
will wieak economic lavoc, lur rlev suppoir ir roo lecause rlev
lelieve some essenrial goveinmenr piogiams somerimes musr le
paio íoi rliougl an “inflation tax.” !conomics can sav, wirlour
making anv value juogmenrs, rlar inflarionism is a veiv pooi pol-
icv íoi aclieving irs srareo oljecrives.
Restrictionism oi deflationism is policv rlar aims ar iaising rle
oljecrive exclange value oí monev. !r is unpopulai íoi vaiious iea-
sons.
Because neirlei inflarionism noi oeflarionism is capalle oí
aclieving irs srareo oljecrives, rle onlv sensille moneraiv policv is
11¡
11ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
one rlar aims ar eliminaring all goveinmenr inreiíeience wirl rle
puiclasing powei oí monev. !n piacrice, rlis means a iigio aolei-
ence ro a commooirv sranoaio, wlicl in mooein rimes means
eirlei rle golo oi silvei sranoaio.
!n reclnical economic rleoiv, rle onlv coleienr oefinirion íoi
inflation is an inciease in rle ouanrirv oí monev (in rle lioaoei
sense oí rle reim) rlar is nor offser lv a coiiesponoing inciease
in rle oemano íoi monev (in rle lioaoei sense oí rle reim), wirl
rle necessaiv iesulr leing a íall in rle puiclasing powei oí monev.
Deflation is rle opposire, namelv a ieoucrion in rle ouanrirv oí
monev rlar is nor offser lv a íall in rle oemano íoi ir, sucl rlar
piices reno ro íall. Tle economisr wlo wisles ro influence pullic
policv ano aveir oisasrei sloulon’r lecruie orleis on rleii sloppv
use oí reiminologv, 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
Òiiginallv, cirizens juogeo rle success oí moneraiv policv lv rle
sounoness oí rle coinage ir mainraineo in ciicularion. !í ano wlen
goveinmenrs violareo rlar riusr lv oelasing rle coinage, ir was íoi
fiscal (i.e., luogeraiv) enos: rle aurloiiries neeoeo moie monev
ano so ruineo ro inflarion.
!n mooein rimes, lowevei, goveinmenrs use moneraiv pol-
icv ro aclieve orlei socio-polirical aims. Alrlougl pairiculai íac-
rions mav íavoi one moneraiv policv veisus anorlei lecause oí rle
specific aovanrages rlev expecr ro oeiive—íoi example, rle owneis
oí golo mines íavoiing a ieruin ro rle golo sranoaio—in geneial
monetary policy nowaoavs ieíeis ro goveinmenr (oi cenrial lank)
effoirs ro alrei rle puiclasing powei oí monev.
z. Ihe |astrameats ef Meaetar¡ |e||c¡
Tle clieí insriumenr rliougl wlicl rle Srare caiiies our mone-
raiv policv is irs sriong influence on rle liná oí monev useo lv rle
cirizeniv. As conriollei oí rle minr ano sole issuei oí monev sul-
srirures, rle mooein Srare las wioe oiscierion in rlis “cloice” lv
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 geneiallv, ií rle Srare oprs íoi a cieoir oi fiar monev,
rlen rle Srare las rle íuirlei oprion oí alreiing rle ouanrirv oí
monev ar will, ro aclieve irs oljecrives iegaioing rle puiclasing
powei oí monev.
118 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
). |aflat|ea|sm
Inflationism is rlar moneraiv policv rlar seeks ro inciease rle ouan-
rirv oí monev. Naïve inflationism lelieves rlar monev consrirures
wealrl, ano rlar ciearing moie monev will ruin pooi inro iicl.
A secono gioup oí inflarionisrs unoeisranos rlar piinring moie
monev will cause piices ro iise (an elemenraiv íacr rlar rle fiisr
gioup íails ro see). Yer even so rlis secono gioup cnáerscs rle pol-
icv, lecause rlev wanr ro lelp oelrois, oi aclieve some orlei goal,
lv iaising piices. !inallv, a rliio gioup oí inflarionisrs unoeisranos
rlar rle policv in geneial will wieak economic lavoc, lur rlev
suppoir ir roo lecause rlev lelieve some goveinmenr piogiams
(sucl as oeíense íiom íoieign invaoeis) aie alsolurelv essenrial,
ano somerimes musr le paio íoi rliougl an “inflation tax.”
Tlis rliio oeíense oí inflarion unoeiscoies rle anri-oemociaric
naruie oí rle policv. !rs pioponenrs canoiolv aomir rlar rle pullic
woulo nevei suppoir ceirain piogiams (sucl as majoi wais) ií rlev
weie íoiceo ro explicirlv leai rle íull financial luioen rliougl
raxarion oi goveinmenr oeficirs financeo lv genuine savings. Bur
wlen rle piogiams aie íunoeo (pairiallv) 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-
iencv specularois, nor goveinmenr spenoing.
!ionicallv, ií rle pullic anricipares a slaip /uturc oecline in rle
puiclasing powei oí monev lecause oí an influx oí new nores
(piinreo lv rle goveinmenr), rlen piices in rle prcscnt can iise
in expecrarion. Yer unril rle new nores plvsicallv exisr, rleie mav
appeai a sloirage oí nores. Tlus rle pullic ano acaoemics mav
clamoi íoi moie inflarion, in oioei ro sarisív rle appaienr “neeos
oí commeice.” Yer ir is inflarionism irselí rlar las causeo rle piol-
lem, ano íuirlei lours will onlv exaceilare rle siruarion.
!conomic science cannor juoge rle policv oljecrives oí infla-
rionism: ir cannor sav wlerlei ir is piopei ro (sav) lelp oelrois
oi expoireis ar rle expense oí orleis. Bur wlar economics .en
Cheptcr 1¡: Menctery Pe/i.y 11o
sav, wirlour making anv value juogmenrs, is rlar inflarionism is
a veiv pooi policv íoi aclieving irs srareo oljecrives. !acl oí
irs allegeo goals (lelping oelrois, lelping expoireis, erc.) can le
aclieveo mucl moie oiiecrlv lv orlei inreivenrions lesioes a gen-
eial oelasemenr oí rle moneraiv unir. !n rlis sense economics can
ciiricize inflarionism.
e. kestr|ct|ea|smer 0eflat|ea|sm
Restrictionismoi deflationismis policv rlar aims ar iaising rle oljec-
rive exclange value oí monev. !r is unpopulai íoi vaiious ieasons.
!iisr, goveinmenrs oo nor lenefir íiom ir lecause rlev musr sac-
iifice porenrial spenoing in oioei ro (sav) ieriie some oí rle nores
collecreo rliougl raxarion. Secono, a narion wirl an appieciaring
cuiiencv woulo see a “oereiioiaring” riaoe lalance in rle eves oí
rle pullic, wlicl is also unpopulai. !inallv, rle piimaiv lenefi-
ciaiies oí oeflarionism aie cieoirois, wlo geneiallv speaking aie a
small ano unpopulai gioup.
Tle onlv rime oeflarionism is poliricallv vialle occuis e/tcr a
peiioo oí inflarionism, eirlei íoi marreis oí piesrige oi ro assuie
inreinarional cieoirois ro conrinue using a ceirain counriv’s finan-
cial insrirurions. Yer even leie, a policv oí oeflarionism ooes nor
simplv ieveise rle laims oí rle piioi inflarion, lur insreao causes
manv new laims oí irs own. !oi example, manv oí rle cieoirois
wlo will le lelpeo lv 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.
s. |aºar|a||||t¡ ef the 0||ect|ºe lxchaaee Va|ae ef Meae¡ as
the k|mef Meaetar¡ |e||c¡
!í neirlei inflarionism noi oeflarionism is capalle oí aclieving irs
srareo oljecrives, rle onlv sensille moneraiv policv is one rlar
1:o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
aims ar eliminaring all goveinmenr inreiíeience wirl rle puiclas-
ing powei oí monev. !n piacrice, rlis means a iigio aoleience ro
a commooirv 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
monev musr ulrimarelv 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 cuiiencv, ano rlis is one
oí rle sriongesr aigumenrs egeinst sucl manipularion in rle fiisr
place.
). lxcarsas: Ihe Ceaceets |aflat|ea aa6 0eflat|ea
!n reclnical economic rleoiv, rle onlv coleienr oefinirion íoi
inflation is an inciease in rle ouanrirv oí monev (in rle lioaoei
sense oí rle reim) rlar is nor offser lv a coiiesponoing inciease
in rle oemano íoi monev (in rle lioaoei sense oí rle reim), wirl
rle necessaiv iesulr leing a íall in rle puiclasing powei oí monev.
Deflation is rle opposire, namelv a ieoucrion in rle ouanrirv oí
monev rlar is nor offser lv 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 policv ano aveir ois-
asrei sloulon’r lecruie orleis on rleii sloppv use oí reiminologv,
lur insreao sloulo expose rle eiiois oí infletienism.
..
Cheptcr 1¡: Menctery Pe/i.y 1:1
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Technical Notes
• Òn page :1o Mises wiires, “!í a counriv las a merallic sran-
oaio, rlen rle en/y measuie oí cuiiencv policv rlar ir can
caiiv our lv irselí is ro go ovei ro anorlei kino oí monev.”
\lar Mises las in mino—ano rlis is loine our lv rle
impoiranr pliase “lv 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 cuiiencv 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 (ouoreo in oollais) ro iise íasrei
rlan rlev oio (ouoreo 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) simplv 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 oppoirunirv 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 inflarionaiv parl. Tlus a meral-
lic sranoaio keeps slaip limirs on rle inflarionaiv policies
oí anv single counriv.
1:: Stuáy Cuiác te Thc Thcery e/ 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 monev las occuiieo íasrei rlan rle
inciease in irs ouanrirv.” Òn rle íollowing page le explains
rlar rle value oí monev is influenceo lv lorl supplv ená
oemano. !oi a mooein example, suppose rlar rle Claii-
man oí rle !eoeial Reseive announceo rlar le woulo cause
rle ouanrirv oí !.S. oollais ro iise lv a íacroi oí 1,ooo in
rle couise oí a week. !ven ignoiing rle srep-lv-srep pio-
cess oí inflarion, rle eno iesulr woulo net simplv le a gen-
eial 1,ooo-íolo iise in piices. !nsreao, piices (ouoreo in !.S.
oollais) woulo iise lv mucl merc rlan rlar, lecause Amei-
icans woulo no longei wanr ro lolo oollais. Tlev woulo
no longei view rle oollai as a saíe cuiiencv, ano woulo
seek ro ieplace rleii oollai loloings wirl eirlei orlei cui-
iencies oi peilaps rle piecious merals. !n oioei ro iesroie
eouililiium, rlen, piices woulo lave ro iise nor meielv on
accounr oí rle exria ouanrirv 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 monev.
Inflationism: Moneraiv policv rlar seeks ro inciease rle ouanrirv
oí monev.
Naïve inflationism: !nflarionism suppoireo lv rle lelieí rlar
monev consrirures wealrl.
Inflation tax: Tle ieoisriilurion oí wealrl íiom rle cirizeniv ro
rle goveinmenr (oi irs oesignareo leneficiaiies) rliougl
inflarion.
Restrictionism/Deflationism: Moneraiv policv rlar aims ar iaising
rle oljecrive exclange value oí monev.
Inflation: An inciease in rle ouanrirv oí monev (in rle lioaoei
sense oí rle reim) rlar is nor offser lv a coiiesponoing
inciease in rle oemano íoi monev (in rle lioaoei sense oí
rle reim), wirl rle necessaiv iesulr leing a íall in rle pui-
clasing powei oí monev. (`ore rlar rlis is a reclnical eco-
nomic oefinirion, nor necessaiilv laving rle connorarions oí
“inflarion” in populai oiscussions.)
Deflation: A ieoucrion in rle ouanrirv oí monev rlar is nor offser
lv a íall in rle oemano íoi ir, sucl rlar piices reno ro íall.
(`ore rlar rlis is a reclnical economic oefinirion, nor neces-
saiilv laving rle connorarions oí “oeflarion” in populai ois-
cussions.)
..
1:± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar unflarreiing possililirv ooes Mises suggesr iegaio-
ing Ben !ianklin’s suppoir oí papei monev eailv in lis
caieei? (p. :1¬)
:. \lv ooes “naïve inflarionism” iecommeno an inciease in
rle ouanrirv oí monev? (pp. :1o–:o)
:. !s ir possille íoi someone ro suppoir inflarionism, even
ií le unoeisranos rlar ir will lave giave economic conse-
ouences? (pp. ::1–::)
±. !xplain: “
í
!
]
nflarion lecomes rle mosr impoiranr psv-
clological iesouice oí anv economic policv wlose conse-
ouences lave ro le concealeo: ano so in rlis sense ir can le
calleo an insriumenr oí unpepu/er, i.e., oí anri-oemociaric,
policv, since lv misleaoing pullic opinion ir makes possi-
lle rle conrinueo exisrence oí a svsremoí goveinmenr rlar
woulo lave no lope oí rle consenr oí rle people ií rle cii-
cumsrances weie cleailv laio leíoie rlem.” (pp. :::–:±)
¡. \oulo Mises lave leen suipiiseo lv rle secono lalí oí
rle rwenrierl cenruiv, since le wiires, “!n rle long iun,
a monev wlicl conrinuallv íell in value woulo lave no
commeicial urilirv. !r coulo nor le useo as a sranoaio oí
oeíeiieo pavmenrs” (p. ::¬)?
tuav:iv 1±
Ikl M0NlIkk\ |0||C\ 0| lIkI|!M
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Étatism as a rleoiv is rle oocriine oí rle omniporence oí rle Srare.
As a policv, érarism is rle arrempr ro iegulare all social ano eco-
nomic affaiis lv aurloiirarive commanomenr ano piolilirion.
Tle érarisr views monev as a ciearuie oí rle Srare, ano lence
(eiioneouslv) lelieves rlar a poweiíul ano iicl Srare sloulo lave a
coiiesponoinglv “gooo” monev. Bur lisroiv is íull oí cases wleie
even rle vicrois in a wai saw rle collapse oí rleii cuiiencv, oi
wleie a wealrlv counriv lao a veiv weak cuiiencv.
Òíren rle aurloiiries will riv ro mirigare rle conseouences oí
inflarionismlv 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 ouesrion. Tle
aurloiiries musr rlen eirlei alanoon rleii policv oi inreivene íui-
rlei srill, conriolling moie piices ano possillv compelling people
ro woik againsr rleii will.
A populai view lolos rlar a counriv expeiiencing a debit bal-
ance of payments cannor sralilize rle value oí irs monev, unril rle
unoeilving oeíecrs aie iecrifieo. !owevei, ií a counriv uses puielv
merallic monev, rlen a oelir lalance oí pavmenrs will evenruallv
ieveise irselí auromaricallv, lecause rle ourflow oí meral will leao
ro íalling oomesric piices. !oi counriies on cieoir oi fiar monev, a
similai piinciple lolos. A oelir lalance oí pavmenrs pei se cannor
1:¡
1:ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
unilareiallv cause a narion’s cuiiencv ro oepieciare, lecause rle
oelir lalance irselí is causeo lv inflarion. `o marrei rle íoieign
riaoe siruarion, a counriv can alwavs cloose souno monev.
!í rle goveinmenr wisles ro avoio laving irs cuiiencv “arrackeo”
lv specularois, ir neeo onlv alanoon inflarionisr policies.
Cheptcr 1¡: Thc Menctery Pe/i.y e/ Ltetism 1:¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Meaetar¡ Iheer¡ ef ltat|sm
Étatism as a rleoiv is rle oocriine oí rle omniporence oí rle
Srare. As a policv, érarism is rle arrempr ro iegulare all social
ano economic affaiis lv aurloiirarive commanomenr ano pioli-
lirion. Alrlougl rle ourwaio appeaiances oí piivare piopeirv ano
enriepieneuislip mav le leír inracr, in piacrice érarism can onlv
le iealizeo as Srare Socialism. Because sociologv ano economics
oerail rle limirs on wlar sleei miglr can aclieve in arrempring ro
ieoesign luman socierv, érarisrs seek ro oiscieoir rlese fielos.
z. Nat|eaa| |rest|ee aa6 the kate ef lxchaaee
Tle érarisr views monev as a ciearuie oí rle Srare, ano lence (eiio-
neouslv) lelieves rlar a poweiíul ano iicl Srare sloulo lave a coi-
iesponoinglv “gooo” monev (i.e., monev wirl a ligl exclange
iare). Bur lisroiv is íull oí cases wleie even rle vicrois in a wai
saw rle collapse oí rleii cuiiencv, oi wleie a wealrlv counriv lao
a veiv weak cuiiencv.
). Ihe keea|at|ea ef |r|ces |¡ kather|tat|ºe 0ecree
Òíren rle aurloiiries will riv ro mirigare rle conseouences oí infla-
rionism lv imposing piice conriols, in wlicl people aie punisleo
lv fines oi piison senrences íoi asking (oi even paving) 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 ouesrion. Tlis ourcome is rle
1:8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
opposire oí wlar rle aurloiiries inrenoeo: rlev 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 policv oi inreivene íuirlei srill,
conriolling moie piices ano possillv compelling people ro woik
againsr rleii will.
e. Ihe 8a|aace
·
ef
·
|a¡meats Iheer¡ as a 8as|s ef
Carreac¡ |e||c¡
A populai view lolos rlar a counriv expeiiencing a debit balance of
payments cannor sralilize rle value oí irs monev, unril rle unoei-
lving oeíecrs aie iecrifieo. !owevei, rle classical economisrs ano
larei rle Cuiiencv Sclool oemonsriareo rle flaws in rlis view. !í
a counriv uses puielv merallic monev, rlen a oelir lalance oí pav-
menrs will evenruallv ieveise irselí auromaricallv, lecause rle our-
flow oí meral (sucl as golo) will leao ro íalling oomesric piices.
!venruallv, iesioenrs will pieíei ro luv íiom oomesric pioouceis
iarlei rlan íoieigneis, ano íoieign puiclaseis will pieíei ro luv
moie cleaplv íiom rlem as well. Tlus rle oelir lalance will ruin
inro a credit balance of payments, ano rle moneraiv meral will reno
ro flow lack inro rle counriv rlar oiiginallv expeiienceo rle oiain.
!oi counriies on cieoir oi fiar monev, a similai piinciple lolos.
A oelir lalance oí pavmenrs pei se cannor unilareiallv cause a
narion’s cuiiencv ro oepieciare, lecause rle oelir lalance irselí is
causeo lv inflarion. `o marrei rle íoieign riaoe siruarion, a coun-
riv can alwavs cloose souno monev.
s. Ihe !aeeress|ea ef !eeca|at|ea
\len inflarionisr policies leao ro a oepieciarion oí a counriv’s
monev againsr orlei cuiiencies, goveinmenr officials will oíren
oenounce íoieign specularois íoi “arracking rle cuiiencv.” Yer
Cheptcr 1¡: Thc Menctery Pe/i.y e/ Ltetism 1:o
in geneial, specularois cannor alrei rle aveiage piice oí a gooo
(incluoing monev), rlev simplv smoorl our rle ups ano oowns.
Tle specularoi riies ro luv low ano sell ligl (oi vice veisa). Bv
luving unoeivalueo cuiiencies, rle specularoi pusles up rle piice
rowaio irs long-iun level, ano lv selling oveivalueo cuiiencies,
rle specularoi pusles rlem oown rowaio rle “coiiecr” level. !í
rle goveinmenr wisles ro avoio laving irs cuiiencv “arrackeo” lv
specularois, ir neeo onlv alanoon inflarionisr policies.
..
1:o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
• On pages za6–a8, 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 :o<o he would dellver a speech entltled, “Mlddle of the Poad
Pollcy Leads to Soclallsm.”
• On pages zao–<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 e/ 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 lv aurloiirarive commanomenr ano piolilirion.
Mixed economy: An economv 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 exrensivelv iegulares rleii use oí rlis piopeirv,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Debit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriv collecrivelv speno moie on íoieign gooos
ano assers rlan vice veisa. !r is serrleo lv an ourflowoí monev
íiom rle counriv.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriv collecrivelv speno less on íoieign gooos ano
assers rlan vice veisa. !r is serrleo lv an inflow oí monev ro
rle counriv.
Shortages: A sloiríall in rle ouanrirv 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.
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1:: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
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Study Questions
1. \lv ooes economic science pose a rliear ro érarism?
(p. :±:)
:. Aírei a piice ceiling is imposeo, wlar lappens once rle
srocks oí gooos rlar weie alieaov on rle slelves lave leen
solo off? (p. :±¬)
:. !xplain: “!í rle iegularion oí piices lao leen successíul, ir
woulo lave paialvzeo rle wlole economic oiganism. Tle
onlv 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-
vsis oí rle effoirs oí rlose wlo ouglr ro lave execureo
rlem.” (p. :±8)
±. !xplain: “Piice flucruarions aie ieouceo lv specularion,
nor aggiavareo, as rle populai legeno las ir.” (p. :¡:)
¡. !xplain: “Tle flucruarions oí rle íoieign-exclange iare
aie nor oereimineo solelv lv leais selling lur jusr as mucl
lv lulls luving.” (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 monev: a capitalist
lenos our lis oi lei own monev. Tle lusiness oí lanking íalls
inro rwo oisrincr caregoiies: (1) rle negoriarion oí cieoir rliougl
rle loan oí orlei people’s monev ano (:) rle gianring oí cieoir
rliougl rle issue oí fiouciaiv 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 pairv las rle lenefir oí olraining a gooo
in rle piesenr wlile rle orlei pairv las rle oisaovanrage oí pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairv las
rle lenefir oí olraining a gooo in rle piesenr wlile rle orlei pairv
ooes net suffei anv coiiesponoing oisaovanrage. !oans oí rle fiisr
rvpe (in wlicl rle lenoei acruallv ienounces rle use oí lis monev)
involve commodity credit wlile loans oí rle secono rvpe (in wlicl
rle lank issues fiouciaiv meoia) involve circulation credit.
Tle ciucial íearuie in loans oí fiouciaiv meoia is rlar rle oiigi-
nal oeposiroi is net engageo in a cieoir riansacrion. !e ierains rle
íull use oí lis monev, even as rle lank lenos ir ro someone else.
1:¡
1:ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Tlis piocess incieases rle roral amounr oí monev in rle lioaoei
sense.
Ònlv lv iecognizing rle íunoamenral oisrincrion lerween
nores ano current accounts rlar aie eirlei (e) lackeo veisus (/) un-
lackeo lv monev, can rle economisr lope ro unoeisrano rle
lioaoei iole rlar fiouciaiv meoia plav in economic cvcles.
Cheptcr 1¡: Thc Busincss e/ Benling 1:¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. I¡ees ef 8aak|ae kct|º|t¡
A banker is one wlo lenos our orlei people’s monev: a capitalist
lenos our lis oi lei own monev. Tle lusiness oí lanking íalls
inro rwo oisrincr caregoiies: (1) rle negoriarion oí cieoir rliougl
rle loan oí orlei people’s monev ano (:) rle gianring oí cieoir
rliougl rle issue oí fiouciaiv meoia. (Recall rlar fiouciaiv meoia
aie nores ano lank lalances—claims on monev—rlar aie nor acru-
allv coveieo lv monev in ieseive.)
z. Ihe 8aaks as Neeet|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 acrivirv, piuoenr lanks will olev rle golden rule lv wlicl
rleii lialiliries will nor maruie eailiei rlan rleii assers. !n orlei
woios, rle lanks sloulo net “loiiow sloir ro leno long,” ií rlev
wanr ro avoio rle iisk oí insolvencv. !ollowing rle goloen iule, lv
marcling rle maruiiries oí assers ano lialiliries, will nor eliminare
all iisks oí couise, lecause anv 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 pairv las rle lenefir oí olraining a gooo
1:8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
in rle piesenr wlile rle orlei pairv las rle oisaovanrage oí pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairv las
rle lenefir oí olraining a gooo in rle piesenr wlile rle orlei pairv
ooes net suffei anv coiiesponoing oisaovanrage. Tlis secono class
oí cieoir riansacrions is possille wlen a cieoiroi issues fiouciaiv
meoia: rlis peison lenos wirlour ieallv giving anvrling up. !oans
oí rle fiisr rvpe (in wlicl rle lenoei acruallv ienounces rle use oí
lis monev) involve commoditycredit wlile loans oí fiouciaiv meoia
involve circulation credit.
!oi all gooos, an alsolurelv secuie ano immeoiarelv ieoeem-
alle claim will inleiir rle maiker value oí rle gooo irselí. !ow-
evei, wlar makes fiouciaiv meoia special is rlar rlev can inácfinitc/y
íuncrion as monev sulsrirures, since (unlike all orlei gooos)
noloov evei is rle final “consumei” oí monev piopei. Tleieíoie,
claims ro ir can ciiculare in rle communirv wirlour evei leing
ieoeemeo, wlicl allows rle lanks ro issue fiouciaiv meoia in rle
fiisr place.
e. 0eees|ts as the 0r|e|a ef C|rca|at|ea Cre6|t
Tle issue oí fiouciaiv meoia is inrimarelv connecreo wirl rle oe-
posir svsrem. A cusromei will oeposir acrual monev wirl rle lank,
wlicl rlen is rle lasis upon wlicl fiouciaiv meoia (i.e., unlackeo
claims ro monev) aie issueo. Tle ciucial íearuie in rlese opeia-
rions is rlar economicallv speaking, rle oiiginal oeposiroi is net
engageo in a cieoir riansacrion. !e is nor lenoing rle lank lis
monev, lur is meielv oeposiring ir, lecause le srill ierains rle íull
economic use oí lis monev in rle piesenr. Tleieíoie lv gianr-
ing new loans en tep oí sucl oeposirs, rle lanks inciease rle
roral amounr oí monev in rle lioaoei sense. Tlev aie nor meie
cieoir inreimeoiaiies, lur insreao aie gianring rle economic use
oí monev ro a new gioup, wirlour raking ir awav íiom rle oiiginal
gioup.
Cheptcr 1¡: Thc Busincss e/ Benling 1:o
s. Ihe 6raat|ae ef C|rca|at|ea Cre6|t
Tle specific merloo oí issuance oí fiouciaiv meoia is iiielevanr
íoi irs effecrs on rle value oí monev. Tle lank miglr (1) lireiallv
leno our rle oiiginal oeposiroi’s monev (wlile rle oiiginal oepos-
iroi srill lelieves le las íull ano immeoiare claim ro ir), (:) issue
orlei lank clienrs lanknores wlicl mav le ieoeemeo wirl rle
oeposiroi’s monev, oi (:) gianr newloans in rle íoimoí clecklook
accounrs, wirl rle oeposiroi’s monev seiving as pair oí rle ieseives
lelino rle new loan. íxo:i: A íull oesciiprion oí rle accounr-
ing oí íiacrional-ieseive lanking is availalle in rle lecruie, “Tle
Tleoiv 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 communirv’s oemano íoi cieoir. Bur ií rle
communirv riies ro loiiow moie, peilaps lv 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 iniriallv) goes oown.
6. ||6ac|ar¡ Me6|a aa6 the Natare ef |a6|rect lxchaaee
Ònlv lv iecognizing rle íunoamenral oisrincrion lerween nores
ano current accounts rlar aie eirlei (e) lackeo veisus (/) unlackeo
lv monev, can rle economisr lope ro unoeisrano rle lioaoei iole
rlar fiouciaiv meoia plav in economic cvcles. Òn rle orlei lano, ir
is also a misrake ro oenv fiouciaiv meoia’s alilirv ro íacilirare inoi-
iecr exclanges. \len someone sells a commooirv íoi a lanknore,
ano rlen uses rle lanknore ro puiclase anorlei commooirv, rlis is
an inoiiecr exclange jusr as suielv as ií rle peison lao useo monev
piopei.
..
1±o Stuáy Cuiác te Thc Thcery e/ 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
z6a–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 e/ Benling 1±1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Banker: A peison wlo lenos our orlei people’s monev.
Capitalist: A peison wlo lenos our lis oi lei own monev.
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 alilirv
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 pav irs own cieoirois wlile
irs assers aie nor ver oue.
Commodity Credit: A loan gianreo rliougl rle ienunciarion oí rle
use oí piesenr gooos lv rle lenoei. Commooirv cieoir mav
involve monev ceirificares lur nor fiouciaiv meoia.
Circulation Credit: A loan gianreo even rlougl rle lenoei ooes net
saciifice rle use oí piesenr gooos. Ciicularion cieoir involves
rle use oí fiouciaiv meoia.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairv ro a pav a fixeo sum oí monev ro anorlei pairv ar
a specifieo íuruie oare oi upon oemano. A lill oí exclange
is geneiallv riansíeialle rliougl enooisemenr.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle alilirv ro wiire oiaírs oi wirloiawmonev upon
1±: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
oemano. (Tooav a sranoaio “clecking accounr” woulo le an
example.)
Loan banking: Banking rliougl rle use oí commooirv 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 monev 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 monev ro le pair
oí rleii casl lalances, even rlougl mucl oí ir las leen lenr
our ro orleis.
..
Cheptcr 1¡: Thc Busincss e/ Benling 1±:
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Study Questions
1. Ðoes Mises iealize rlar mooein lanks peiíoimorlei opei-
arions lesioes rle rwo rvpes 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 anv rime rle oeliveiv oí a loaí oí lieao. !r is
orleiwise wirl monev.” (p. :ó¬)
:. \lv ooes Mises sav rlar fiouciaiv meoia “can rleieíoie le
cieareo onlv lv lanks ano lankeis”? (p. :óo)
±. !ow ooes rle issue oí fiouciaiv meoia affecr rle oljecrive
exclange value oí monev? (p. :ó8)
¡. !xplain: “íCieoir ciicularion] loans aie gianreo our oí a
íuno thet áiá net cxist /c/erc 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|ae ||6ac|ar¡ Me6|a
!iouciaiv meoia mav le issueo lv lanks oi lv non-lanks (pii-
maiilv rle goveinmenr). Banks can issue fiouciaiv meoia eirlei
rliougl lanknores oi lv gianring oeposirs in a cuiienr accounr
(i.e., a mooein-oav clecking accounr). Banks riear rleii oursrano-
ing fiouciaiv meoia as lialiliries on rleii lalance sleers, ano musr
loan oi oiiecrlv invesr rlem wiselv.
Coveinmenrs mav also issue fiouciaiv 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 suielv as rax ievenue.
z. ||6ac|ar¡ Me6|a aa6 the C|ear|ae !¡stem
Tle use oí fiouciaiv meoia can ieouce rle oemano íoi monev 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 e/ Mency ená Crcáit
wiire clecks oi use oelir caios (wleie rlese oeposirs aie pairlv
fiouciaiv meoia, lecause rlev aie nor íullv lackeo up lv casl in
rle vaulr).
!owevei, an enriielv oiffeienr plenomenon is rle ieoucrion
in rle oemano íoi monev in rle lioaoei sense—incluoing monev
piopei ano even monev sulsrirures (incluoing fiouciaiv meoia)—
liouglr alour lv rle oevelopmenr oí credit ano rle cleaiing svs-
rem. !í one pairv ro a riansacrion is willing ro oeíei ieceiving pav-
menr, le las rlus gianreo cieoir. !í rle orlei pairv larei oeliveis
gooos oi peiíoims seivices sucl rlar rle oiiginal oelr is pairiallv
oi íullv offser, onlv rle oiffeience neeos ro le serrleo lv acrual
monev oi monev sulsrirures. As moie sucl riansacrions aie incoi-
poiareo inro sucl aiiangemenrs, rle communirv’s oemano íoi
monev in rle lioaoei sense íalls lelow wlar ir orleiwise woulo
lave leen.
). ||6ac|ar¡ Me6|a |a 0emest|c Ira6e
So long as a counriv las a sralle legal íiamewoik rlar peimirs rle
luiloing oí riusr in issueis, rle use oí cleaiing opeiarions ano fiou-
ciaiv meoia can giow ro oominare riansacrions ano almosr com-
plerelv oisplace rle use oí monev in rle naiiowei sense.
e. ||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 monev was oí pairiculai
lenefir in inreinarional riaoe, lecause oí rle longei oisrances ano
rime involveo. !owevei, fiouciaiv meoia rlemselves aie srill lim-
ireo lv 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 e/ Fiáu.iery Mcáie 1±¬
rle claim on rle !iencl meiclanr woulo nor ciiculare íiom lano
ro lano in rle same wav rlar a lanknore in rle !nireo Srares (oi in
!iance) coulo. Ònlv wirl rle oevelopmenr oí a woilo lank, wirl
clienrele oiawn íiom eveiv counriv, coulo fiouciaiv meoia rian-
sceno narional lounoaiies.
..
1±8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn page :¬8 Mises wiires, “íBank fiouciaiv meoia] aie
enreieo as lialiliries, ano rle issuing loov 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 lv a coiiesponoing inciease on rle cieoir sioe
ií rle wlole riansacrion is nor ro figuie as a loss. Tlis
wav oí oealing wirl fiouciaiv meoia makes ir necessaiv
íoi rle issuing loov ro iegaio rlem as pair oí irs riao-
ing capiral ano nevei ro speno rlem on consumprion lur
alwavs 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 monev our
oí rlin aii,” rlev can’r simplv open up a new accounr íoi
s1oo,ooo ano rlen wiire clecks ro luv rlemselves spoirs
cais ano oesignei clorles. Tle ieason is rlar rle mei-
clanrs in rle communirv woulo rlen lave s1oo,ooo in
claims on rle acrual casl ieseives oí rle lank, ano ulri-
marelv rle lank’s vaulr woulo iun our oí rle genuine
monev. \lar íiacrional lankeis oo insreao is /een our rle
s1oo,ooo ro a piooucrive lusiness ar (sav) ¡ peicenr inreiesr.
\len rle s1o¡,ooo is iepaio in a veai, rle s1oo,ooo rlar
was iniriallv cieareo can le “oesrioveo” (rliougl look-
keeping) ano rle s¡,ooo in inreiesr income can le saíelv
spenr wirlour oiaining rle lank’s casl ieseives. Tlus
íiacrional-ieseive lankeis cieare monev our oí rlin aii
net ro oiiecrlv speno ir—wlicl woulo le incieoillv ieck-
less ano sloir-liveo—lur insreao ro cern intcrcst in.emc
íiom ir.
Cheptcr 16: Thc Lte/utien e/ Fiáu.iery Mcáie 1±o
• Òn page :o1 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 rleoiv explooes rle veiv
norion oí monev as a measuie, since value is nor an oljec-
rive piopeirv 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 iaielv useo acrual golo wlen luving gooos ano seivices.
!nsreao, rlev emploveo ./eims ro golo. Bur rlis is pieciselv
wlar lappeneo in !noia, wlicl ieraineo silvei coins in cii-
cularion rlar coulo le ieoeemeo íoi rle official monev,
golo, ar a ceirain exclange iare.
..
1¡o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Convertible Treasury notes: Papei nores issueo lv rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in monev upon oemano.
Seigniorage: Tle oiffeience lerween rle maiker value oí monev
ano rle cosr ro pioouce ir.
Credit: Tle alilirv ro ieceive piesenr gooos in exclange íoi rle
piomise oí oeliveiing (rvpicallv a giearei numlei oí ) íuruie
gooos.
..
Cheptcr 16: Thc Lte/utien e/ Fiáu.iery Mcáie 1¡1
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Study Questions
1. !xplain: “To complere ía] riansacrion . . . lv íull oi pairial
cancellarion oí counrei-claims offeis impoiranr aovanrages
in compaiison wirl oiiecr exclange: all rle íieeoom con-
necreo wirl rle use oí monev is comlineo wirl rle recl-
nical simplicirv rlar claiacreiizes oiiecr exclange riansac-
rions.” (p. :8:)
:. \lar ooes Mises rlink is rle impoirance oí cieoir íoi rle
moneraiv svsrem? (p. :8:)
:. !xplain: “Monev in rlese cases íoí inreinarional cleaiing
opeiarions] is srill a meoium oí exclange, lur irs emplov-
menr in rlis capacirv is inoepenoenr oí irs plvsical exis-
rence. !se is maoe oí monev, lur nor physi.e/ use oí acru-
allv exisring monev oi monev sulsrirures. Monev wlicl
is nor piesenr peiíoims an economic íuncrion: ir las irs
effecr solelv lv ieason oí rle possililirv oí irs leing e//c ro
le piesenr.” (p. :8:)
±. Ðoes Mises classiív lills oí exclange as fiouciaiv meoia?
(pp. :8¡–8ó)
¡. !í a lvporlerical woilo lank lao oeposirs ano nores rlar
weie lackeo up 1oo peicenr lv monev on ieseive, coulo ir
economize on monev pavmenrs? (p. :o±)
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 communirv, rlen íiom a social poinr oí view rle laloi
ano orlei iesouices lave leen wasreo. Tle ouanrirv oí “ieal our-
pur” (pounos oí sreak, laiiels oí ciuoe oil, erc.) pioouceo pei pei-
son ooesn’r iise, lur meielv rle pri.cs oí rlese irems ouoreo in golo
oi silvei.
Tle oevelopmenr oí fiouciaiv meoia kepr rle oljecrive ex-
clange value oí monev lowei rlan ir orleiwise woulo lave leen,
ano rleielv avoioeo a laige oiveision oí iesouices inro mining
moie oí rle piecious merals íoi casl loloings.
Some wiireis aigue rlar rle pavmenr svsrem in an aovanceo
maiker economv is “elasric” ano iesponos ro rle “neeos oí com-
meice,” iarlei rlan rle acrual srock oí monev in rle naiiowei
sense. Alrlougl rle exrension oí rle cleaiing svsrem áecs ieouce
rle oemano íoi monev in rle lioaoei sense, rleie is no ieason rlar
irs oevelopmenr sloulo le ielareo ro rle oemano íoi monev. !r is
an inoepenoenr plenomenon rlar mav eirlei sriengrlen oi coun-
reilalance clanges in rle oemano íoi monev oiiginaring íiom
orlei causes.
Manv wiireis (sucl as rlose oí rle Banking School) aigue rlar
rle lanks oo nor lave rle powei ro inoepenoenrlv inciease rle
1¡:
1¡± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
ouanrirv oí fiouciaiv 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 monev rle lanks’ cusromeis
wisl ro loiiow, wirlour speciíving a iare oí inreiesr. !í rle lanks
wanr ro issue fiouciaiv meoia, rlev musr lowei rle maiker iare
lelow rle natural rate of interest.
Businesses seek loans íiom rle lanks lecause rlev oesiie cap-
iral: rlev simplv wanr capiral in thc /erm e/ mency, so rlar rlev
can convenienrlv acouiie rle plvsical capiral gooos rlar rlev ulri-
marelv oesiie íoi rleii opeiarions. Òí couise, rle meie issuance oí
fiouciaiv meoia ooes nor inciease rle amounr oí riacrois, íeirilizei,
oi powei rools. Tle onlv wav rle lanks can piovioe rlese gooos
ro rleii clienrs is rliougl ieoisriilurion oí puiclasing powei awav
íiom memleis oí rle communirv wlo oo nor ieceive rle influx oí
rle newlv cieareo monev.
Cheptcr 1¬: Fiáu.iery Mcáie ená thc Dcmená /er Mency 1¡¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe |aflaeace ef ||6ac|ar¡ Me6|a ea the 0emaa6 fer Meae¡
|a the Narrewer !ease
!n one sense, rle emplovmenr oí rle piecious merals (oi anv orlei
useíul commooirv) ro enlaige rle srock oí monev 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 jeweliv), lur insreao incieases rle
casl lalances oí people in rle communirv, rlen íioma social poinr
oí view rle laloi ano orlei iesouices lave leen wasreo. !ncieas-
ing rle ouanrirv oí monev mav ieoisriilure exisring wealrl ro make
some inoiviouals iiclei, lur onlv ar rle expense oí making orleis
(wlo aie lasr ro ieceive rle newmonev) pooiei. Tle communirv as
a wlole ooesn’r aclieve a liglei sranoaio oí living, simplv lecause
people lolo moie golo oi silvei in rleii casl lalances. Tle ouan-
rirv oí “ieal ourpur” (pounos oí sreak, laiiels oí ciuoe oil, erc.)
pioouceo pei peison ooesn’r iise, lur meielv rle pri.cs oí rlese
irems ouoreo in golo oi silvei.
Tle oevelopmenr oí fiouciaiv meoia ieouces rle oemano ro
lolo monev in rle naiiowei sense. !n a communirv using golo
as commooirv monev, a peison wlo lolos (aiiriglr ano insranrlv
ieoeemalle) claims ro golo, wlicl aie accepreo in commeice lv
eveivone in rle communirv, ooesn’r neeo ro caiiv as mucl e.tue/
golo on a oav-ro-oav lasis. !n rlis sense rle wioespieao use oí fiou-
ciaiv 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 jeweliv oi inousriial applicarions.
\eie ir nor íoi rle simulraneous oevelopmenr oí fiouciaiv
meoia, rle inrensificarion oí rle oivision oí laloi as rle woilo
1¡ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
lecame one gianr inregiareo maiker woulo lave leo ro a slaip
inciease in rle oljecrive exclange value oí monev. !n orlei woios,
as moie people aiouno rle woilo lecame pair oí rle glolal maiker
wlicl useo golo as rle inreinarional monev, moie people woulo
lave riieo ro olrain golo as pair oí rleii casl loloings. !í acrual
golo lao ro sarisív rlis luge giowrl in oemano, piices (ouoreo in
golo) woulo lave íallen ano rle owneis oí golo mines woulo lave
inrensifieo rleii exriacrion effoirs. Bur rle simulraneous oevelop-
menr oí fiouciaiv meoia counreilalanceo rlis renoencv, 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 monev aie ouire pie-
oicralle. An inciease in popularion ano rle spieao oí rle monev
economv inciease rle oemano íoi monev. Tle oemano íoi monev
clanges ouiing loom ano lusr peiioos. Ano even in a rvpical veai,
rleie aie cvclical parreins laseo on agiiculruie ano rle pavmenr
oí woikeis.
). Ihe l|ast|c|t¡ ef the !¡stemef kec|ereca| Caace||at|ea
Some wiireis aigue rlar rle pavmenr svsrem in an aovanceo mai-
ker economv is “elasric” ano iesponos ro rle “neeos oí commeice,”
iarlei rlan rle acrual srock oí monev in rle naiiowei sense. Tle
ouanrirv oí monev is saio ro lave lirrle influence on rle oljecrive
exclange value oí monev, lecause (sav) an inciease in rle oemano
íoi monev will auromaricallv le counreilalanceo lv orlei íoices.
Tlese claims aie oíren oifficulr ro evaluare lecause rlev íail ro
make rle ciucial oisrincrion lerween rle exrension oí rle cleaiing
Cheptcr 1¬: Fiáu.iery Mcáie ená thc Dcmená /er Mency 1¡¬
svsrem, veisus rle incieaseo use oí fiouciaiv meoia. Alrlougl rle
exrension oí rle cleaiing svsremáecs ieouce rle oemano íoi monev
in rle lioaoei sense, rleie is no ieason rlar irs oevelopmenr sloulo
le ielareo ro rle oemano íoi monev. !r is an inoepenoenr ple-
nomenon rlar mav eirlei sriengrlen oi counreilalance clanges
in rle oemano íoi monev oiiginaring íiom orlei causes.
e. Ihe l|ast|c|t¡ ef a Cre6|t C|rca|at|ea 8ase6 ea 8|||s,
lseec|a||¡ ea Cemme6|t¡ 8|||s
Manv wiireis (sucl as rlose oí rle Banking School) aigue rlar rle
lanks oo nor lave rle powei ro inoepenoenrlv inciease rle ouan-
rirv oí fiouciaiv meoia. !í lusiness neeos ieouiie moie riansacrions,
rlen somelow oi orlei, lusiness will ger ir—eirlei íiom lanks
issuing moie fiouciaiv meoia, oi íiom lusinesses oeveloping recl-
nioues ro economize on rle use oí monev. Òn rle orlei lano (so
rle aigumenr conrinues), ií rle lanks riv ro issue moie fiouciaiv
meoia rlan rle lusiness communirv 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 monev rle lanks’ cusromeis wisl ro loiiow, wirlour
speciíving a iare oí inreiesr. !í rle lanks wanr ro issue fiouciaiv
meoia, rlev musr lowei rle maiker iare lelow rle natural rate of
interest.
s. Ihe !|ea|ficaace ef the lxc|as|ºe lme|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 ieouiiemenrs on rle cover rlar lanks coulo accepr wlen
1¡8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
issuing newloans in excess oí rleii golo oeposirs. Tle ieouiiemenr
was significanr net lecause ir somelowrieo rle expansion oí cieoir
ro rle oesiie oí rle communirv íoi moie monev. Rarlei, ir was
significanr lecause ir placeo an olsracle in rle issuance oí fiouciaiv
meoia, keeping rle ouanrirv oí monev 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 keca|s|t|eae6
Businesses seek loans íiom rle lanks lecause rlev oesiie capiral:
rlev simplv wanr capiral in thc /erm e/ mency, so rlar rlev can con-
venienrlv acouiie rle plvsical capiral gooos rlar rlev ulrimarelv
oesiie íoi rleii opeiarions. Òí couise, rle meie issuance oí fiou-
ciaiv meoia ooes nor inciease rle amounr oí riacrois, íeirilizei, oi
powei rools. Tle onlv wav rle lanks can piovioe rlese gooos ro
rleii clienrs is rliougl ieoisriilurion oí puiclasing powei awav
íiom memleis oí rle communirv wlo oo nor ieceive rle influx oí
rle newlv cieareo monev.
). Ihe |aflaeace ef ||6ac|ar¡ Me6|a ea ||actaat|eas |a the
0||ect|ºe lxchaaee Va|ae ef Meae¡
As wirl rle exrension oí cleaiing opeiarions, rleie is no ieason
rlar rle expansion oi conriacrion oí fiouciaiv meoia sloulo mii-
ioi clanges in rle oemano ro lolo monev: rleie is no “auromaric”
meclanism lv wlicl rle oljecrive exclange value oí monev is sra-
lilizeo. Tlus rle insiglrs oí rle ouanrirv rleoiv aie uplelo.
..
Cheptcr 1¬: Fiáu.iery Mcáie ená thc Dcmená /er Mency 1¡o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• An example will claiiív rle reiminologv 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 pav monev
íoi rlem larei (peilaps ar rle eno oí rle monrl). Tle
lairenoei agiees, saving rle man can lave up ro s1oo in
oiinks wirlour laving ro pav íoi rlem upíionr. Bv ooing
so, rle lairenoei las exrenoeo .rcáit ro rle man. !ow-
evei, rle ouanrirv oí mency in rle man’s possession lasn’r
incieaseo, lecause rle man ooesn’r lave anv riansíeiialle
claim (issueo lv rle lairenoei) rlar orleis in rle commu-
nirv 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
monev, oi nores issueo lv rle lank, rlese woulo all le
classifieo as monev in rle lioaoei sense. Tle man coulo
use rlem ro luv anvrling le wanreo, incluoing oiinks ar
rle lai. !inallv, ro see rle limireo iole oí cleaiing svsrems,
ieveir ro rle oiiginal assumprion, wleie rle man’s cieoir
consisrs oí a “ral” issueo lv rle lairenoei wirl a limir oí
s1oo. !í rle man wanreo ro use rlis cieoir net ro luv alco-
lolic oiinks, lur iarlei ro luv (sav) a paii oí sloes, le
woulo lave ro fino a sloe sellei wlo also wanreo ro luv
oiinks íiom rle pairiculai lai in ouesrion. Tlen ir miglr
le possille ro aiiange a oeal wleielv rle man acouiies
1óo Stuáy Cuiác te Thc Thcery e/ 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:
lv saving, “
í
A
]
ll oí rlis is riue onlv unoei rle assump-
rion rlar all lanks issue fiouciaiv meoia accoioing ro uni-
íoim piinciples, oi rlar rleie is onlv one lank rlar issues
fiouciaiv meoia.” !n rle secrion, Mises lao ciiricizeo rle
wiireis oí rle Banking Sclool wlo aigueo rlar rle lanks
coulon’r ger rle communirv ro accepr exria issues oí fiou-
ciaiv meoia, ií rle communirv oion’r wanr ro lolo rlem.
Mises oljecreo rlar rle oemano íoi rle aooirional loans
coulo le influenceo lv rle iare oí inreiesr rle lanks
claigeo, ano lence rle Banking Sclool’s views weie mis-
raken. So long as rlev aie willing ro sufficienrlv lowei rle
iare oí inreiesr lelow rle naruial iare, rle lanks can con-
vince rle communirv ro accepr anv amounr oí new fiou-
ciaiv meoia. !owevei, Mises ooes net mean rlar an inoi-
vioual lank las no clecks on irs issue. !í anv single lank
unilareiallv loweis irs inreiesr iare ano issues moie fiou-
ciaiv meoia (compaieo ro rle policies oí irs comperirois),
rlen evenruallv 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 newlv issueo nores wirl rleii
own lanks (wlicl aie comperirois), rlese nores will le
piesenreo íoi ieoemprion in monev in rle naiiowei sense.
Tlus rle lone lank engageo in an expansionaiv policv will
soon see irs ieseives oí monev piopei owinole, ano will
lave ro alanoon irs expeiimenr. Yer rlis meclanism is nor
wlar rle Banking Sclool rleoiisrs lao in mino wlen rlev
saio lanks coulon’r issue moie nores rlan rle neeos oí rle
communirv waiianreo.
..
Cheptcr 1¬: Fiáu.iery Mcáie ená thc Dcmená /er Mency 1ó1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Banking School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks weie incapalle oí inoepenoenrlv alreiing rle iare
oí inreiesr oi rle puiclasing powei oí monev, lecause rle
maiker woulo use cleaiing opeiarions, lills oí exclange, ano
orlei reclnioues 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 Cuiiencv Sclool
rlouglr rle suppiession oí rle issue oí fiouciaiv meoia in
rle íoim oí lanknores (wlicl was cooifieo in Peel’s Acr)
woulo solve rle piollem, lecause irs memleis eiioneouslv
excluoeo oemano (oi cuiienr accounr) oeposirs íiom rleii
analvsis.
(Wicksellian) natural rate of interest: Ðevelopeo lv economisr Knur
\icksell, rle lvporlerical iare oí inreiesr rlar woulo occui
ií gooos weie riaoeo oiiecrlv againsr eacl orlei wirlour rle
use oí monev.
Peel’s Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei oí issuing new nores awav íiom piivare
lanks ano vesreo ir complerelv wirl rle Bank oí !nglano,
wlicl irselí was ieouiieo ro mainrain 1oo peicenr merallic
lacking íoi anv new nores rlar ir issueo. !owevei, rle Acr
ciuciallv oio net impose sucl a iesriicrion on rle exrension
oí oeposirs, meaning rlar piivare lanks coulo cieare moie
1ó: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
fiouciaiv meoia lv gianring loans (nor lackeo lv golo) ro
rleii cusromeis.
Cover (of note issue): Assers lacking rle issue oí new lanknores.
Ðepenoing on rle iegularions, a lank miglr issue fiouciaiv
meoia nor lackeo lv monev irselí, lur lackeo lv anorlei
asser sucl as a commooirv lill.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneiallv, a measuie oí a fiim’s alilirv ro ouicklv 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 eouipmenr rlar will le useo ovei a long
peiioo.
..
Cheptcr 1¬: Fiáu.iery Mcáie ená thc Dcmená /er Mency 1ó:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was Aoam Smirl’s analogv ro explain rle oiawlack
oí using rle piecious merals as monev? (p. :o8)
:. !í fiar oi cieoir monev is emploveo, ooes ir srill make sense
ro use fiouciaiv meoia ro economize on rle use oí monev
in rle naiiowei sense? (pp. :oo–:oo)
:. \lv woulo popularion giowrl influence rle oemano ro
lolo monev? (pp. :oo–o1)
±. !xplain: “Tle oemano íoi monev ano monev 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 fiouciaiv meoia”? (p. :1±)
tuav:iv 18
Ikl kl0lM|I|0N 0| ||00C|kk\ Ml0|k
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle confioence in a lank’s alilirv ro ieoeem irs fiouciaiv meoia is
an all-oi-norling pioposirion: ií a poirion oí rle communirv pan-
ics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. Bv rleii
veiv naruie, fiouciaiv meoia cannor all le lonoieo lv rle lank
ar once. Conseouenrlv, some wiireis suggesr an ouriiglr piolili-
rion on rle piacrice. !owevei, lisroiicallv rlis ieouiiemenr woulo
lave leo ro a mucl laigei oiveision oí iesouices inro rle pioouc-
rion oí rle piecious merals as rle oemano íoi monev incieaseo.
A lank opeiaring in a comperirive enviionmenr can onlv issue
as mucl fiouciaiv 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 monev in rle naiiowei
sense, lecause rle orlei peison will nor wisl ro accepr rle lank’s
piomises ro pav.
Solvency means rlar an insrirurion (sucl as a lank) coulo slur
oown, sell offall oí irs assers, ano iaise ar leasr enougl monev ro pav
off all oí irs cieoirois. Liquidity is a sriongei conoirion, meaning
rlar rle insrirurion’s assers oelivei a cash flow allowing ir ro pav
irs lialiliries en timc. !í a fiim is liouio, ir is solvenr, lur ir miglr
le solvenr wlile illiouio. Banks issuing fiouciaiv meoia aie alwavs
illiouio.
1ó¡
1óó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Somerimes legislarion, lur alwavs pullic opinion, compels rle
lanks ro give pieíeience ro sloir-reimiarlei rlan long-reimloans.
Tlis is a ouire valio pieíeience, lackeo up lv cenruiies oí expe-
iience, simplv lecause ir limirs a lank’s alilirv ro issue fiouciaiv
meoia.
Cheptcr 1S: Thc Rcácmptien e/ Fiáu.iery Mcáie 1ó¬
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Ihe Necess|t¡ fer Ceme|ete lca|ºa|eace 8etweea Meae¡
aa6 Meae¡ !a|st|tates
So long as some people lelieve rlar a claim ro monev issueo lv
a pairiculai insrirurion is alsolurelv ielialle ano can le ieoeemeo
upon oemano, rlese people mav pass sucl claims among rlem-
selves as ií rlev weie monev. Tlis is wlar makes rlem monev
sulsrirures. !owevei, rle issuing insrirurion musr alwavs keep a
ieseive íuno oí monev in rle naiiowei sense ro ieoeem rle claims
wlenevei rlev aie piesenreo, in oioei ro mainrain rlis riusr. Sucl
ieoemprions will le ieouesreo 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 monev 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 alilirv ro ieoeem irs fiouciaiv meoia
is an all-oi-norling pioposirion: ií a poirion oí rle communirv
panics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. Bv
rleii veiv naruie, fiouciaiv meoia cannor all le lonoieo lv rle
lank ar once. `o marrei low wiselv a lank manages irs assers, ir
will nor le alle ro pav our monev 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 fiouciaiv
meoia.
1ó8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
). Ihe Case kea|ast the |ssae ef ||6ac|ar¡ Me6|a
Because oí rle inreinal conriaoicrion oí rle naruie oí fiouciaiv
meoia—wlicl ienoeis eveiv issuing insrirurion lialle ro iuin—
some wiireis suggesr an ouriiglr piolilirion on rle piacrice. !ow-
evei, lisroiicallv rlis ieouiiemenr woulo lave leo ro a mucl laigei
oiveision oí iesouices inro rle piooucrion oí rle piecious merals
as rle oemano íoi monev incieaseo. Tle lanks coulo suivive even
ií rlev weie legallv ieouiieo 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 fiouciaiv meoia.
Rarlei, ir was rle oesiie ro avoio a laige inciease in rle oljecrive
exclange value oí monev (i.e., a geneial íall in piices oí gooos ano
seivices).
e. Ihe ke6emet|ea |aa6
A lank opeiaring in a comperirive enviionmenr—wleie irs iivals
mav puisue oiffeienr policies ano wleie irs own clienrele is onlv a
íiacrion oí rle wlole communirv using rle same monev—can onlv
issue as mucl fiouciaiv 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 monev in rle naiiowei sense, lecause
rle orlei peison will nor wisl ro accepr rle lank’s piomises ro pav.
s. Ihe !e
·
ca||e6 “8aak|ae” I¡ee 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 monev ro pav off
all oí irs cieoirois. Liquidity is a sriongei conoirion, meaning rlar
Cheptcr 1S: Thc Rcácmptien e/ Fiáu.iery Mcáie 1óo
rle insrirurion’s assers oelivei a cashflowallowing ir ro pav irs lialil-
iries en timc. !í a fiim is liouio, ir is solvenr, lur ir miglr le solvenr
wlile illiouio.
Some wiireis suggesr rlar “piuoenr” lanks will invesr in sloir-
reim assers, in oioei ro iemain liouio. Yer lv rleii veiv naruie,
lanks issuing fiouciaiv meoia aie illiouio: rleii lialiliries aie imme-
oiarelv oue ií piesenreo, wlile rleii assers aie necessaiilv oí longei
ouiarion. Tle lesr sucl lanks can sriive íoi is solvencv.
6. Ihe !|ea|ficaace ef !hert·IermCeºer
Somerimes legislarion, lur alwavs pullic opinion, compels rle
lanks ro give pieíeience ro sloir-reim iarlei rlan long-reim
loans. Tlis is a ouire valio pieíeience, lackeo up lv cenruiies
oí expeiience. !owevei, rle explanarion íoi irs wisoom is net
rlar ir allows rle lanks ro ieoeem fiouciaiv meoia in rle evenr
oí a panic—rle lank’s asser maruiiries aie iiielevanr ií eveivone
slows up, oemanoing ieoemprion. Tle acrual lenefir íiom íocus-
ing lank loans on sloir-reim invesrmenrs is simplv rlar rle con-
sriainr clecks rle lank’s alilirv ro issue fiouciaiv meoia.
). Ihe !ecar|t¡ ef the |aºestmeats ef the Cre6|t
·
|ssa|ae 8aaks
Tleie is similai coníusion wlen ir comes ro pioposals seeking
ro guaianree rle (evenrual) ieoemprion oí all fiouciaiv meoia lv
means oí ieseive íunos consisring oí illiouio assers (sucl as moir-
gages). !ven ií rle pullic is ceirain rlar rlev will le ctcntue//y paio
in monev (in rle naiiowei sense) íoi rle claims ro monev rlar rlev
cuiienrlv lolo, even so, ií rleie is anv ooulr alour rle immcáie.y
oí rle pavmenr, rlen rle claims will no longei le monev sulsri-
rures. !nsreao, rle pullic will rake inro accounr rle oelav leíoie
1¬o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
ieceiving pavmenr, ano sucl claims will riaoe ar a oiscounr ro rle
monev irselí. (`ore rlar ií rle claims conrinue ro ciiculare as gen-
eiallv accepreo meoia oí exclange, even rlougl eveivone knows
rlar ieoemprion ar lesr will occui aírei some oelav, rlen rle claims
will lave lecome cieoir monev.)
ë. |ere|ea 8|||s ef lxchaaee as a Cemeeaeat ef the
ke6emet|ea |aa6
Alank cannor inciease irs issue oí monev sulsrirures (consisring oí
lorl monev ceirificares ano fiouciaiv meoia) levono 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
monev sulsrirures wlen oealing wirl /ercign cirizens, rle lank las
rle oprion oí keeping some oí irs ieseive íuno in rle íoim oí /er-
cign monev sulsrirures, as opposeo ro monev in rle naiiowei sense.
(Tlis is lecause rle íoieigneis wirl wlom rle lank’s clienrs wisl
ro oo lusiness, will accepr monev sulsrirures issueo lv insrirurions
íiom rleii iespecrive counriies.) Yer rlis piacrice means rlar rle
oiiginal lank’s ieseive íuno las a smallei piopoirion oí monev
in rle naiiowei sense, ano lence rlar irs own monev sulsrirures
consisr oí a liglei íiacrion oí fiouciaiv meoia (veisus monev cei-
rificares).
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Cheptcr 1S: Thc Rcácmptien e/ Fiáu.iery Mcáie 1¬1
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Technical Notes
• !n mooein rimes, one oí rle majoi conrioveisies wirlin
rle Ausriian Sclool conceins rle legirimacv oí íiacrional
ieseive lanking. Some Ausriians íollow Muiiav Rorl-
laio wlo aigueo rlar lank issuance oí fiouciaiv meoia
leaos ro rle loom-lusr cvcle ano is inleienrlv íiauou-
lenr—akin ro a waielouse managei ienring our rle gooos
rlar weie supposeolv 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 necessaiilv keep 1oo pei-
cenr ieseives oí monev in rle naiiowei sense, in oioei
ro íullv covei all oursranoing cusromei oeposirs. Tle íiee
lankeis aigue rlar maiker íoices will oereimine rle piopei
iario oí monev ceirificares ro fiouciaiv meoia in a com-
peririve lanking svsrem. (Viiruallv all mooein Ausriians
agiee rlar goveinmenr-sponsoieo .cntre/ /enling ano fiet
.urrcn.y aie lorl economicallv oesriucrive ano moiallv 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 veiv claprei, Mises offeis sraremenrs
rlar—vieweo in isolarion—woulo seem ro oefinirivelv sioe
wirl one camp veisus rle orlei. (Two oí rlese ouorarions
aie rle opening selecrions íoi rle sruov ouesrions lelow.)
Alrlougl Mises agiees wirl rle Rorllaioian, 1oo-peicenr-
ieseive camp rlar rleie is a paiaoox in rle veiv naruie oí
wlar fiouciaiv meoia claim ro le, on rle orlei lano le
1¬: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
also agiees wirl rle íiee lankeis rlar rle lisroiical oevel-
opmenr oí fiouciaiv meoia economizeo on iesouices (rlar
woulo lave orleiwise gone inro rle sociallv wasreíul pio-
oucrion oí moie golo ano silvei íoi moneraiv puiposes).
Tlus Mises ooes nor cleailv íall inro one camp oi rle orlei.
(Òí couise Mises’s own view woulon’r serrle rle mooein
oispure: le coulo lave leen simplv misraken, iegaioless oí
lis posirion.)
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Cheptcr 1S: Thc Rcácmptien e/ Fiáu.iery Mcáie 1¬:
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New Terminology
Free banking (among modern Austrians): Tle oocriine loloing rlar
a íiee maiker in lanking will pick rle oprimal íiacrion oí
ieseives, wlicl mav le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue oí fiouciaiv meoia
pei se causes rle lusiness cvcle, onlv rlar excess ouanriries
oí fiouciaiv meoia oo, ano rlar sucl an ourcome is almosr
alwavs associareo wirl goveinmenr-suppoireo issues oí fiou-
ciaiv 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 pav irs lialiliries on rime. (All liouio
enreipiises aie also solvenr, lur nor necessaiilv vice veisa.)
Cash flow: Tle srieam oí monev pavmenrs ovei rime oue ro an
asser oi collecrion oí assers.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial.
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1¬± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
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Study Questions
1. !xplain: “Tlus rleie lies an iiiesolvalle conriaoicrion in
rle naruie oí fiouciaiv meoia. Tleii eouivalence ro monev
oepenos on rle piomise rlar rlev will ar anv rime le
conveireo inro monev 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 fiouciaiv meoia—wlar is
piomiseo is an impossililirv in so íai as rle lank is nevei
alle ro keep irs loans peiíecrlv liouio.” (p. :::)
:. !xplain: “Tle issue oí fiouciaiv meoia las maoe ir pos-
sille ro avoio rle convulsions rlar woulo le involveo in
an inciease in rle oljecrive exclange value oí monev, ano
ieouceo rle cosr oí rle moneraiv appaiarus.” (p. :::)
:. \len Mises savs oí coins rlar rleii “smoorl íaces rell no
rales oí rle merloos lv wlicl rlev lave leen acouiieo,”
is le making an aigumenr íoi oi againsr rle possililirv
oí cusromeis paving lanks íoi piovioing rlem wirl (íullv-
lackeo) oeposir ano clecklook seivices? (p. ::±)
±. \lv ooes Mises sav rlar a single lank wirl no comperi-
rois, oi an inousriv oí lanks opeiaring wirl uniíoim poli-
cies, woulo suffei no limirarions on rleii alilirv ro issue
fiouciaiv 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 1o
M0Nl\, Ckl0|I, kN0 |NIlkl!I
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Chapter Outline
¡. 0a the Natare ef the |re||em
Interest acciues as rle oiffeience lerween wlar a piooucei pavs
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 monev ano con-
sumei gooos, oi wlar aie calleo goods of the first order. `ow we
will invesrigare wlerlei clanges in rle supplv oí ano oemano íoi
monev can affecr rle monev-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
anv excess issue oí fiouciaiv meoia woulo le immeoiarelv ieruineo
ro rlem. Yer !oio Òveisrone, Toiiens, ano orlei memleis oí rle
Cuiiencv Sclool rlouglr orleiwise. Tlev coiiecrlv iecognizeo
rlar lv loweiing rle iare oí inreiesr, rle lanks coulo inouce rle
pullic ro accepr moie fiouciaiv meoia. Tlis is rle meclanism
rliougl wlicl lank cieoir policv can influence rle puiclasing
powei oí monev ano rle iare oí inreiesr.
1¬¡
1¬ó Stuáy Cuiác te Thc Thcery e/ 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 monev can influence rle iare oí inreiesr. !iisr, in rle
case oí merallic cuiiencv, sucl vaiiarions can áirc.t/y affecr rle iare
oí inreiesr lv oiiecrlv affecring rle subsistence fund. !oi example,
a íall in rle oemano ro lolo golo as monev, will ielease golo inro
inousriial puiposes ano rleielv make rle communirv wealrliei,
in rle same sense as ií rle amounr oí wlear sroieo in silos lao
incieaseo.
Vaiiarions in rle srock oí ano oemano íoi monev can influence
rle iare oí inreiesr ináirc.t/y ano in rle long iun, lv peimanenrlv
clanging rle oisriilurion oí piopeirv ano income. !oi example,
a ieoucrion in rle srock oí monev coulo ieoisriilure wealrl inro
rle lanos oí cieoirois, wlo reno ro save moie. Tlus rle iare oí
inreiesr woulo le peimanenrlv lowei lecause rle oveiall iare oí
saving woulo lave incieaseo.
!inallv, 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 monev. \len piices aie geneiallv iising, rle iare oí inrei-
esr renos ro le liglei, as enriepieneuis aie willing ano alle ro
offei moie ro loiiow monev. (`owaoavs 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 lca||||r|amkate aa6 the
Meae¡ kate ef |aterest
\len rle lanks issue moie fiouciaiv meoia, rle immeoiare iesulr
is a ieoucrion in rle iare oí inreiesr. Because rle lanks rvpicallv
Cheptcr 1o: 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 ouanrirarive ielarionslip lerween rle amounr oí new fiouciaiv
meoia issueo, ano rle íall in rle inreiesr iare. !noeeo, no marrei
low mucl new monev rle lanks cieare ano leno our, rlev 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 appaienrlv ar will. Aie rleie anv
íoices renoing ro ieesrallisl rle naruial piemiumoí piesenr veisus
íuruie gooos? \icksell aigueo rlar ií rle lanks pusl rle Monev
Rare oí !nreiesr lelowrle `aruial Rare oí !nreiesr, rlar íoices will
evenruallv iesroie rle Monev Rare lack ro rle `aruial Rare. Bur
lis aigumenr íoi wlv rlis sloulo occui is unsarisíacroiv.
e. Ihe |aflaeace ef the |aterest |e||c¡ ef the Cre6|t
·
|ssa|ae
8aaks ea |re6act|ea
As Bolm-Baweik explaineo ísee 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 eouililiium, rle monev
iare oí inreiesr eouals 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 reclnicallv possille ro lengrlen rle sriucruie oí
piooucrion, lur wirlour aooirional savings, rle sulsisrence íuno
will nor le alle ro íeeo rle woikeis wlile rlev laloi in rle longei
piocesses.
\len rle lanks lowei rle monev iare oí inreiesr lv issu-
ing fiouciaiv meoia, rlev inouce enriepieneuis ro acr as ií rle
1¬8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
sulsisrence íuno lao ieallv giown (wlen in íacr ir las nor).
!nriepieneuis loiiow monev ar rle lowei iares, liie woikeis,
ano riv ro lio awav iesouices íiom orleis ro legin longei-reim
piocesses. A geneial loom peiioo ensues, wleie mosr people íeel
piospeious.
Yer lecause rle issue oí fiouciaiv meoia ooesn’r acruallv make
socierv iiclei, rle loom musr necessaiilv come ro an eno. Tleie
aie plvsicallv nor enougl savings ro caiiv socierv íoiwaio, unril
rle rime wlen rle new (longei) piocesses vielo 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 onlv appaienrlv piofiralle, lecause oí rle íalse inreiesr iare.
Tle piices oí piooucei gooos íall, ano rle monev iare oí inreiesr
ieruins ro rle naruial iare.
s. Cre6|t aa6 lceaem|c Cr|ses
!n piacrice, rle lusr occuis wlen rle lanks slow oown rleii issue
oí íuirlei fiouciaiv meoia, rleielv allowing rle monev iare ro iise
rowaio irs piopei level. Yer even ií rle lanks srulloinlv riieo ro
lolo rle monev iare oown, evenruallv rlev woulo íail. Tle giow-
ing expansion oí rle ouanrirv oí monev 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 monev iare lelow rle naruial iare, rle woise is rle even-
rual ciisis.
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Cheptcr 1o: Mency, Crcáit, ená ¡ntcrcst 1¬o
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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 pav s¡o íoi a maruie Cliisrmas
riee, lur woulo onlv pav 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 lv consumeis’ suljecrive pieíeiences, rlen rle mai-
ker piice íoi an immeturc riee—one rlar neeoeo anorlei
veai ro íullv oevelop—woulo le s±o as well. Assuming
norling else clangeo, a capiralisr wlo invesreo s±o in
sucl a riee coulo wair one veai, rlen sell rle maruie
veision íoi s¡o, nerring a :¡ peicenr annual ieruin on
lis capiral. Tlus Bolm-Baweik explaineo rle alilirv ro
eain inreiesr ovei rime as oue ro rle unoeilving suljec-
rive pieíeience íoi piesenr veisus íuruie gooos. A capi-
ralisr wlo luvs íacrois oí piooucrion invesrs in “íuruie
gooos” wlicl rlen giow in maiker value as rlev iipen inro
“piesenr gooos.” Also nore rlar rle reim “iipen” is nor
ieseiveo íoi agiiculruial piooucrs: Bolm-Baweik woulo
sav rlar a capiralisr can invesr (sav) 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 giaouallv lecome a piesenr louse, ano lence
commano a liglei maiker value rlan rle inirial s1oo,ooo
invesrmenr.
18o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
• !n explaining rle loom ano lusr cvcle, Mises ielies on
Bolm-Baweik’s capiral rleoiv. Bolm-Baweik vieweo rle
use oí capiral gooos as a “iounoalour” wav oí sarisíving
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 plvsicallv 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 plvsical 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
ouicklv as possille, le will jusr climl rle riee iarlei rlan
seaicl íoi sricks.) Bolm-Baweik aigueo rlar rle iare oí
inreiesr ieflecreo rle communirv’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 communirv saveo moie (lv srock-
piling coconurs, sav), 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 eveivone ovei unril rle liglei our-
pur oí rle moie iounoalour piocesses came online. Tle
iare oí inreiesr in rlis scenaiio woulo peimanenrlv oecline,
ano socierv woulo aovance ro a peimanenrlv liglei sran-
oaio oí living, as woikeis coulo garlei moie coconurs pei
loui wirl rle use oí rleii new rools.
..
Cheptcr 1o: Mency, Crcáit, ená ¡ntcrcst 181
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Interest: !ncome acciuing ro rle ownei oí íuruie gooos as rlev
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 lv Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave fiisr accumulareo, in oioei
ro íeeo ano orleiwise suppoir rle woikeis as rlev 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 e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is “rle piollem,” rle naruie oí wlicl is ourlineo in
secrion 1? (pp. ::o–±ó)
:. \lv miglr rle oisriilurion oí income ano piopeirv alrei
rle long-iun iare oí inreiesr? (p. :±¬)
:. !í rle Monev Rare oí !nreiesr is pusleo lelow rle `aruial
Rare oí !nreiesr (oi moie accuiarelv, rle noimal iare oí
inreiesr), wlar lappens ro commooirv piices, accoioing ro
\icksell? (p. :¡¡)
±. \lar aie rle rwo main meclanisms lv wlicl rle monev
iare oí inreiesr iises lack ro rle naruial iare, aírei laving
leen pusleo oown lv rle lanks? (pp. :ó:–ó:)
¡. !xplain: “Ceirainlv, rle lanks woulo le alle ro pestpenc rle
collapse: lur neveirleless . . . rle momenr musr evenruallv
come wlen no íuirlei exrension oí rle ciicularion oí fiou-
ciaiv 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 lv rle
ioea rlar rle naruial oesiie oí rle lanks ro issue fiouciaiv 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
í
Bank Clairei Acr 18±±
]
rook rle powei oí
issuing new nores awav íiom piivare lanks ano vesreo ir com-
plerelv wirl rle Bank oí !nglano, wlicl irselí was ieouiieo ro
mainrain 1oo peicenr merallic lacking íoi anv new nores rlar ir
issueo. !owevei, rle Acr ciuciallv oio net impose sucl a iesriicrion
on rle exrension oí oeposirs. Peel’s Acr rlus conraineo a “saíerv
valve” rlar pievenreo a slaip iise in rle oljecrive exclange value
oí monev, lur ar rle same rime ir íaileo ro eliminare economic
ciises lecause ir eiioneouslv rlouglr rlev weie oue exclusivelv ro
unlackeo netcs.
Tle oegiaoarion oí rle classical golo sranoaio was alieaov well
unoeiwav /c/erc rle ourlieak oí \oilo \ai !. !iisr, cirizens ceaseo
using golo in eveivoav riansacrions, ano rle acrual golo was srock-
pileo in rle vaulrs oí eacl counriv’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 oeflarionaiv conseouences, a
18:
18± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
riansirion lack ro an acrual golo cuiiencv—in wlicl people useo
genuine golo coins in oailv puiclases—is rle onlv iealisric cleck
on goveinmenr-sponsoieo inflarion.
Tle oiiginal érarisr aigumenrs íoi iegularing rle issue oí com-
pering nores lv piivare lanks oo nor look neailv as compelling
aírei rle expeiience oí Ceiman lvpeiinflarion. Tle allegeo evils
oí a íiee maiker in lanking aie norling compaieo ro rle acrual
evils unoei a goveinmenr monopolv oí rle cuiiencv.
People musr cloose lerween a fiar svsrem iegulareo lv inoex
numleis oí piices, oi a ieruin ro an acrual golo cuiiencv. !n oioei
ro pievenr iecuiiing economic ciises, rle alsolure piolilirion oí
rle íuirlei issuance oí fiouciaiv meoia is necessaiv. !í lanks con-
rinue wirl rle alilirv ro issue fiouciaiv meoia, ir leaves open rle
oesriucrion oí rle enriie moneraiv svsrem, as a cooioinareo pol-
icv oí expansion—peilaps unoei a \oilo Bank—woulo lave no
clecks on irs inflarionaiv porenrial.
Cheptcr :o: Pre//cms e/ Crcáit Pe/i.y 18¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. |kl|kI0k\ klMkkK
¡. Ihe Ceafl|ct ef Cre6|t |e||c|es
Since rle rime oí rle Cuiiencv Sclool, rle goveinmenrs oí !uiope
ano Ameiica lave leen guioeo lv rle ioea rlar rle naruial oesiie
oí rle lanks ro issue fiouciaiv meoia musr le cleckeo, in oioei ro
avoio economic ciises. !owevei, rlis goal conflicrs wirl rle orlei
oesiies ro íosrei “cleap monev” 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
í
Bank Clairei Acr 18±±] rook rle powei oí issuing
new nores awav íiom piivare lanks ano vesreo ir complerelv wirl
rle Bank oí !nglano, wlicl irselí was ieouiieo ro mainrain 1oo pei-
cenr merallic lacking íoi anv new nores rlar ir issueo. !owevei,
rle Acr ciuciallv oio net impose sucl a iesriicrion on rle exren-
sion oí oeposirs. !n orlei woios, piivare lanks coulo cieare moie
fiouciaiv meoia lv gianring loans (nor lackeo lv golo) ro rleii
cusromeis, rlus loweiing rle iare oí inreiesr ano expanoing rle
srock oí monev in rle lioaoei sense. !n rlis wav, Peel’s Acr con-
raineo a “saíerv valve” rlar pievenreo a slaip iise in rle oljecrive
exclange value oí monev (i.e., íalling piices oí gooos ano seivices),
18ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
lur ar rle same rime ir íaileo ro eliminare economic ciises lecause
ir eiioneouslv rlouglr rlev weie oue exclusivelv ro unlackeo netcs.
). Ihe Natare ef 0|sceaat |e||c¡
Manv wiireis, as well as rle geneial pullic, oo nor unoeisrano rle
“ieal” economic íoices lelino movemenrs in inreiesr iares: insreao
rlev view incieases in inreiesr iares as ailiriaiv ano unnecessaiv
consriainrs on rle communirv’s piospeiirv. !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 monev in rle nai-
iowei sense aie leing oiaineo lecause ir las issueo moie fiouciaiv
meoia rlan irs comperirois. Tlis lelavioi woulo occui wlerlei
oi nor goveinmenr oi cenrial lank iules ieouiieo 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 mvsreiious in
íoieign evenrs alreiing oomesric inreiesr iares, rlan (sav) a íoieign
ciop íailuie iaising oomesric íiuir piices.
e. Ihe 6e|6·|rem|am|e||c¡
Tle Bank oí !iance implemenreo a well-known golo-piemium
policv, in wlicl ir claigeo a piemium (somewleie in rle iange oí
o.± ro o.8 peicenr) on ieouesrs ro exclange íiancs íoi golo, ií rle
golo weie going ro le invesreo alioao seeking a liglei ieruin.
Tle puipose oí rle policv was ro wioen rle gap lv wlicl rle
Bank oí !iance coulo mainrain a lowei oiscounr iare rlan pie-
vaileo in orlei counriies. Tle policv linoeieo capiral ourflows ená
inflows, ano linoeieo rle íull incoipoiarion oí !iance inro rle
woilo maiker. Tle onlv wav ro riulv insulare Bank policv íiom
rle iesr oí rle woilo maiker woulo le ro leave rle golo sranoaio
Cheptcr :o: Pre//cms e/ Crcáit Pe/i.y 18¬
enriielv, aoopring cieoir monev oi fiar monev ano rleielv suffei-
ing inflarion.
s. !¡stems !|m||ar te the 6e|6·|rem|am|e||c¡
Cenrial lanks lave aoopreo orlei reclnioues ro linoei rle expoir
oí golo. !oi example, rlev miglr nor suiienoei golo ro expoireis
in rle mosr convenienr íoim, oi rlev miglr give woin-our coins
rlar lao sliglrlv less meral conrenr rlan rle coins inrenoeo íoi
oomesric use.
6. Ihe Nea
·
!at|sfact|ea ef the !e
·
ca||e6 “|||ee|t|mate”
0emaa6 fer Meae¡
Arremprs ro onlv 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 commooirv impoirarion ano
“illegirimare” specularion on íoieign invesrmenrs. !oi example,
wlar ií a íoieign companv wanreo ro wirloiaw oeposirs rlar ir lao
pieviouslv invesreo in a counriv? \oulo rle aurloiiries peimir a
“loss” oí golo in rlis ciicumsrance?
). 0ther Measares fer !treaethea|ae 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 manv aoopreo policies ro ieouce rle lower goldpoint ano rlus
encouiage impoirs oí golo. Tle rwo sers oí policies laigelv offser
188 Stuáy Cuiác te Thc Thcery e/ 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 Checae aa6 C|ear|ae Iraasact|eas as a
Meaas ef ke6ac|ae the kate ef 0|sceaat
!n Ceimanv leíoie rle fiisr \oilo \ai, rleie was an effoir ro
ieouce rle Ceiman people’s eveivoav use oí golo, ano ieplace
ir wirl rle use oí cleck ano cleaiing riansacrions. Tlis woulo
allegeolv allow rle Reiclslank ro lolo a laigei ieseive oí meral,
ano keep a lowei oiscounr iare. !owevei, rleie is no necessaiv
connecrion lerween rle long-iun iare oí inreiesr ano rle ouanrirv
oí fiouciaiv meoia.
|||. |k08|lM! 0| Ckl0|I |0||C\ |N Ikl |lk|00
|MMl0|kIl|\ k|Ilk Ikl Wkk
e. Ihe 6e|6·lxchaaee !taa6ar6
Ðuiing rle \oilo \ai !, rle majoi poweis (excepr rle !nireo
Srares) explicirlv suspenoeo rle golo sranoaio. !owevei, rle oegia-
oarion oí rle classical golo sranoaio was alieaov well unoeiwav
/c/erc rle ourlieak oí wai. !iisr, cirizens ceaseo using golo in eveiv-
oav riansacrions, ano rle acrual golo was srockpileo in rle vaulrs
oí eacl counriv’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, rlev roo lao
papei claims enrirling rlem ro rle golo rlar was sroieo elsewleie.
!n rlis wav, viiruallv rle enriie woilo lecame accusromeo ro
using papei as rleii monev, wlicl lao a moie ano moie renuous
Cheptcr :o: Pre//cms e/ Crcáit Pe/i.y 18o
link ro golo. As oí 1o:±, rle woilo piice oí golo was oominareo lv
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 monev.
¡e. k ketara te a 6e|6 Carreac¡
Alrlougl ir woulo lave unoesiialle oeflarionaiv conseouences, a
riansirion lack ro an acrual golo cuiiencv—in wlicl people useo
genuine golo coins in oailv puiclases—is rle onlv 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 pav íoi aimamenrs.
¡¡. Ihe |re||emef the |ree6emef the 8aaks
Tle oiiginal érarisr aigumenrs íoi iegularing rle issue oí comper-
ing nores lv piivare lanks oo nor look neailv as compelling aírei
rle expeiience oí Ceiman lvpeiinflarion. Tle allegeo evils oí a
íiee maiker in lanking aie norling compaieo ro rle acrual evils
unoei a goveinmenr monopolv oí rle cuiiencv.
¡z. ||sher’s |reeesa| fer a Cemme6|t¡ !taa6ar6
Tle íamous Ameiican economisr !iving !islei pioposeo rlar
inoex numleis woulo riack an aveiage oí commooirv 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 ailiriaiv: rleie is no scienrific wav ro
1oo Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
measuie rle “riue” clange in rle puiclasing powei oí golo íiom
monrl ro monrl. Anorlei piollem is rlar rle maiker alieaov
las reclnioues íoi lanoling clanges in rle puiclasing powei oí
monev: !islei’s pioposal woulo simplv leao ro an aojusrmenr oí
rle reclnioues. !inallv, even ignoiing rle orlei piollems, !islei’s
pioposal woulo nor counreiacr rle áiffcrcntie/ impacr rlar inflarion
las as ir unevenlv spieaos rliougl rle economv. !í rle piice inoex
incieases lv 1 peicenr in a ceirain monrl, rlis is lecause some
piices incieaseo lv moie rlan 1 peicenr, wlile orleis incieaseo
lv less.
¡). Ihe 8as|c 0aest|eas ef |atare Carreac¡ |e||c¡
People musr cloose lerween a fiar svsremiegulareo lv inoex num-
leis oí piices, oi a ieruin ro an acrual golo cuiiencv. !n oioei ro
pievenr iecuiiing economic ciises, rle alsolure piolilirion oí rle
íuirlei issuance oí fiouciaiv meoia is necessaiv. (Sucl a piolili-
rion musr go levono Peel’s Acr, ano incluoe lank oeposirs as well
as nores, íoi economicallv rle rwo aie eouivalenr.) !í lanks con-
rinue wirl rle alilirv ro issue fiouciaiv meoia, ir leaves open rle
oesriucrion oí rle enriie moneraiv svsrem, as a cooioinareo pol-
icv oí expansion—peilaps unoei a \oilo Bank—woulo lave no
clecks on irs inflarionaiv porenrial.
Ònlv lv íieeing monev ano lanking íiom polirical influence
can people avoio economic ciises wlile mainraining rle liglesr
possille sralilirv oí rle puiclasing powei oí monev.
..
Cheptcr :o: Pre//cms e/ Crcáit Pe/i.y 1o1
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Technical Notes
• Òn pages :¬¬–8:, Mises oesciiles rle “golo-piemium pol-
icv” implemenreo lv 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 psvclological 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 luv 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 monev
in !iance. !owevei, ií ruining íiancs inro golo involves
pavmenr oí a (small) piemium ro rle Bank oí !iance, rlen
invesrois woulo onlv aoopr rle alove sriaregv ií rle oiffei-
ence in inreiesr iares weie sufficienrlv laige. Tleieíoie, rle
golo-piemiumpolicv gave rle Bank oí !iance a wioei mai-
gin ro keep inreiesr iares ielarivelv low, leíoie suffeiing
íiom an ourflow oí golo.
• Òn page :o8, Mises poinrs our rlar mosr aigumenrs ciiri-
cizing rle opeiarion oí a piivare, comperirive lanking svs-
rem weie “rloiougllv unsouno.” Tle one legirimare aigu-
menr came íiom rle Cuiiencv Sclool, wlicl (coiiecrlv)
poinreo our rlar ií piivare lanks issueo nores in excess
oí rleii golo ieseives (i.e., fiouciaiv meoia), rlis coulo
cause economic ciises. !ionicallv, rlis oangei onlv exisrs
wlen rle lanks all opeiare unoei a uniíoim oiscounr pol-
icv—rlev musr all inflare in unison, oi else rle lank rlar is
1o: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
rle mosr aggiessive will lave irs fiouciaiv meoia ieruineo
ro ir (rliougl cleaiing opeiarions), ano ir will ouicklv 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 monopolv.
As Mises savs, “`ow rle monopolizarion oí rle lanks-
oí-issue in eacl sepaiare counriv ooes nor meielv íail ro
oppose anv linoiance oí rlis uniíoimirv oí pioceouie: ir
mareiiallv íacilirares ir.”
..
Cheptcr :o: Pre//cms e/ Crcáit Pe/i.y 1o:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice oí golo (ouoreo in a counriv’s cuiiencv) alove wlicl
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi íoieigneis ro exclange rle oomesric cuiiencv 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 counriv.
Lower gold point: !noei rle golo sranoaio, rle minimum maiker
piice oí golo (ouoreo in a counriv’s cuiiencv) 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
cuiiencv.
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1o± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
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Study Questions
1. \lar was rle rleoierical eiioi oí rle Cuiiencv Sclool,
ano wlv was rlis misrake an “aovanrage” wirl iespecr ro
rle implemenrarion oí Peel’s Acr? (pp. :óo–¬o)
:. * \len Mises claims rlar a sole lank, engaging in a moie
inflarionaiv policv rlan irs comperirois, woulo enoangei
irs “solvencv” (p. :¬±), is rlar consisrenr wirl lis oefinirion
oí rle reim (veisus “liouioirv”) on page ::1?
:. !xplain: “Tle lanks woulo srill lave ro lave a oiscounr
policv even ií rleie weie no legislarive iegularion oí rle
nore covei.” (p. :¬±)
±. !ow oio !iance’s golo-piemium policv linoei lorl rle
ourflow ená inflow oí capiral? (p. :8:)
¡. !xplain: “Tleie is onlv one oangei rlar is peculiai ro rle
issue oí nores: rlar oí irs leing ieleaseo íiom rle common-
law olligarion unoei wlicl eveivloov wlo enreis inro a
commirmenr is sriicrlv ieouiieo ro íulfill ir ar all rimes ano
in all places. Tlis oangei is infinirelv giearei ano moie
rliearening unoei a svsrem oí monopolv.” (p. :oo)
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vav: iv
M0NlIkk\ klC0N!Ik0CI|0N
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tuav:iv :1
Ikl |k|NC|||l 0| !00N0 M0Nl\
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Chapter Outline
¡. Ihe C|ass|ca| |6ea ef !eaa6 Meae¡
Tle piinciple oí souno monev musr le placeo in rle conrexr oí
rle lioaoei, classical lileial piogiam oí conraining goveinmenr
rviannv. Jusr as a consrirurion oi a lill oí iiglrs woulo le aoopreo,
in liglr oí lisroiical aluses oí civil lileiries, in rle same wav rle
classical lileials oí rle ninereenrl cenruiv wanreo ro pievenr gov-
einmenrs íiom wiecking cuiiencies as lao occuiieo rliouglour
lisroiv.
Souno monev involves a merallic sranoaio, wirl all rokens ano
papei nores leing ieoeemalle in rle merallic monev upon oemano.
!n piacrice, rlis las meanr golo since rle lare ninereenrl cenruiv.
Alrlougl rleii ioeas weie coiiecr, rle classical lileials oio nor
aoeouarelv oeíeno rle golo sranoaio íiomirs ciirics, ano rle pullic
íell swav ro eiioneous inflarionaiv oocriines.
z. Ihe V|rtaes aa6 k||eee6 !hertcem|aes ef the 6e|6 !taa6ar6
!r is riue rlar rle pullic geneiallv welcomes inflarionism as op-
poseo ro rle oirloooxv oí rle golo sranoaio, lur onlv lecause
rlev misunoeisrano rle riue siruarion. Pioouceis welcome “ligl
1o¬
1o8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
piices” wlen ir is rleii own piices in ouesrion, lur rlev oon’r wel-
come incieasing piices in rle irems rlev rlemselves musr puiclase.
!nflarion can onlv give even rle appeaiance oí piospeiirv, in siru-
arions wleie rle majoiirv oon’r iecognize wlar is lappening. !oi
rlis ieason, inflarionism cannor le a lasring economic policv.
Conriaiv ro irs ciirics, rle golo sranoaio oio nor “collapse.”
Rarlei, ir was svsremaricallv ano inrenrionallv oesrioveo lv 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||·lme|e¡meat 0ectr|ae
An emplovei will onlv liie a man ií le is piooucrive enougl ro
jusriív rle wage le expecrs ro le paio. !í rle emplovei woulo lose
monev lv liiing rle man, le will iemain unemploveo. \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 moneraiv inflarion mav cause com-
mooirv piices ro iise íasrei rlan wage iares. Tlis will oeciease
rle unemplovmenr iare, lur onlv lecause ir effecrivelv loweis rle
woikeis’ real wages. Ònce rle laloi unions iealize wlar is lappen-
ing, rlev will legin oemanoing auromaric wage incieases rieo ro
rle “cosr oí living.” Tlen rle appaienr lenefirs oí inflarion (in
ieoucing unemplovmenr) will oisappeai.
e. Ihe lmereeac¡ kreameat |a |aºer ef |aflat|ea
Some wiireis conceoe rle negarive effecrs oí inflarion, lur aigue
rlar in ceirain emeigencv siruarions, ir is rle onlv merloo lv wlicl
Cheptcr :1: Thc Prin.ip/c e/ Seuná Mency 1oo
goveinmenrs can caiiv our viral rasks. Yer inflarion pei se ooes nor
inciease rle plvsical ano luman iesouices ar a counriv’s oisposal.
!í an apologisr íoi inflarion claims rlar ir is rle onlv wav ro finance
a wai, le is aomirring rlar rle pullic woulo nor agiee wirl rle
goveinmenr’s wai expenoiruies ií ir íullv unoeisrooo rle saciifice
rlev woulo enrail.
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:oo Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
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Important Contributions
• On pages azo–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 az+–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
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Cheptcr :1: Thc Prin.ip/c e/ Seuná Mency :o1
across the board. Say argued that relatlve prlces would adìust
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.
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:o: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
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New Terminology
Institutional unemployment: Tle siruarion wleie woikeis aie oual-
ifieo ano willing ro accepr jols ar pievailing wage iares, ver
cannor fino emploveis ro liie rlem.
Real wages: \age iares ielarive ro rle piices oí gooos ano seivices.
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Cheptcr :1: Thc Prin.ip/c e/ Seuná Mency :o:
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Study Questions
1. \lar was rle “seiious llunoei” oí rle ninereenrl-cenruiv
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 onlv efficacious wav ro iaise ieal wage iares?
(p. ±:±)
¡. \lar’s wiong wirl rle emeigencv aigumenr in íavoi oí
inflarion? (pp. ±:ó–:8)
tuav:iv ::
C0NIlM|0kkk\ C0kklNC\ !\!IlM!
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Chapter Outline
¡. Ihe |aflex|||e 6e|6 !taa6ar6
!noei lorl rle classical gold standard ano rle gold-exchange stan-
dard—as rlev lao exisreo leíoie \oilo \ai !—eacl narion’s cui-
iencv unir was legallv rieo ro an inflexille (i.e., consranr) exclange
iare againsr golo. Tle oiffeience lerween rle rwo svsrems was one
oí oegiee. !noei rle classical golo sranoaio, cirizens wirlin eacl
counriv caiiieo acrual golo coins ano useo rlem in eveivoav rians-
acrions. Anvloov coulo exclange golo íoi narional nores ano vice
veisa wirlour oelav. !arei, unoei rle golo-exclange sranoaio, cir-
izens onlv 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
ieouiiemenr, locking in a fixeo exclange iare oí golo againsr rle
narional cuiiencv. !nsreao, an agencv (sucl as rle cenrial lank)
:o¡
:oó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
woulo le given rle aurloiirv ro peg rle cuiiencv ro golo ar a iare
rlar coulo le suljecr ro a suooen clange. !í rle oiop in rle cui-
iencv againsr golo was seveie enougl, rle evenr woulo le calleo a
devaluation.
). Ihe |ree|¡
·
Vac|||at|ae Carreac¡
A freely-vacillating currency is one wirl no official peg ro golo ar
all. Tle cuiiencv is a cieoir oi fiar monev, lelo on accounr oí
irs expecreo íuruie puiclasing powei. !í rle goveinmenr exeicises
iesriainr, sucl a monev—even rlougl ir is a “lao cuiiencv”—can
peisisr.
e. Ihe |||as|ºe !taa6ar6
Somerimes a goveinmenr will announce a (vaiialle) peg ro irs cui-
iencv, ver 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.
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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 luving a commooirv in one cuiiencv
ano immeoiarelv selling ir in anorlei cuiiencv. Yer unoei
an illusive sranoaio, rle goveinmenr oí a counriv acrivelv
inreiíeies wirl rlis piocess, oíren ro keep rle piice oí
irs own cuiiencv alove rle maiker-cleaiing piice rlar
woulo aclieve puiclasing powei paiirv. !n Mises’s exam-
ple (p. ±:±), rle maiker cleais wlen one oollai riaoes íoi
1oo Ruiiranian iuis. !í a laiiel oí oil (sav) sells íoi s1oo in
rle !nireo Srares, ano íoi 1o,ooo iuis in Ruiirania, rleie
is no ailiriage oppoirunirv ar rle coiiecr exclange iare.
!owevei, ií rle Ruiiranian goveinmenr announces rlar ir
will pur people in piison wlo pav 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 nowonlv cosr
¡,ooo iuis pei laiiel, compaieo ro rle oomesric piice oí
1o,ooo iuis. Ruiiranian iefineis will rlus riv ro sell rleii
iuis againsr oollais, in oioei ro luv oil ano impoir ir. !ow-
evei, íoieigneis will nor wanr ro sell manv oollais íoi iuis
ar rle iario oí 1-ro-¡o, lecause rle acrual maiker iario is
1-ro-1oo. Conseouenrlv rle Ruiiranian iefineis will com-
plain rlar rlev “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 e/ Mency ená Crcáit
in mino a scenaiio sucl as rle íollowing: Suppose a !.S.
capiralisr invesrs s1 million luiloing a íacroiv in Ruiira-
nia. Ar rle oiiginal, maiker-oereimineo exclange iare, rle
capiralisr sells lis s1 million íoi 1oo million iuis, ano uses
rle cuiiencv ro luv mareiials, liie woikeis, erc. in Ruii-
rania ro ser up rle íacroiv. !veiv veai rle íacroiv 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 monev lack ro lis lank accounr in rle !nireo Srares.
Tlus íiom eirlei rle viewpoinr oí rle íacroiv 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 veai. !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 íacroiv eains irs usual ¡ mil-
lion iuis, rle Ameiican invesroi can’r ger rle monev our oí
rle counriv. !r’s riue rlar officiallv speaking, lis ¡ million
iuis is now woirl s1oo,ooo, ooulle rle pievious amounr.
Bur rlis is lirrle consolarion, since no one wirl oollais will
acruallv 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
anv oí irs cirizens cauglr accepring sucl an offei. Tlus rle
Ameiican’s s1 million íacroiv in Ruiirania las effecrivelv
leen raken ovei lv rle Ruiiranian goveinmenr, since ir
conriols rle íoieign-exclange maiker, ano conveiring iuis
inro oollais is rle onlv wav rle Ameiican ownei can oeiive
anv lenefir íiom lis invesrmenr.
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Cheptcr ::: Centcmperery Currcn.y Systcms :oo
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New Terminology
Classical gold standard: Tle svsrem lv wlicl a counriv’s cuiiencv
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 svsrem lv wlicl a counriv’s cui-
iencv is ieoeemalle on oemano íoi a fixeo weiglr oí golo,
rlougl somerimes onlv lv orlei goveinmenrs ano cenrial
lanks. !n Mises’s usage, unoei a golo-exclange sranoaio
rle cirizens useo onlv papei nores in eveivoav riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Flexible standard: Tle svsrem lv wlicl a counriv’s cuiiencv is
ieoeemalle íoi a vaiialle weiglr oí golo, ro le announceo
lv rle goveinmenr ar irs oiscierion.
Currency peg: Tle vaiialle ano nonlegallv-linoing iare ar wlicl a
goveinmenr is cuiienrlv mainraining irs cuiiencv’s exclange
iare againsr golo.
Devaluation: Tle siruarion in wlicl a counriv on rle flexille sran-
oaio announces a laige oiop in rle value oí irs cuiiencv
againsr golo.
Freely-vacillating currency: A cieoir oi fiar cuiiencv rlar las no
official peg ro golo ar all. !rs maiker piice flucruares jusr as
anv commooirv.
:1o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Illusive standard: Tle svsrem lv wlicl a counriv’s cuiiencv 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.
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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. ±:o)
:. \lv oio rle unoirlooox sraresman pieíei rle reim “peg”
ro “ieoemprion”? (p. ±:o)
:. * Mises savs (p. ±:1) rlar cieoir ano fiar monevs “aie nor
monev sulsrirures lur monev piopei in rlemselves.” Ðoes
rlis mean rlar commooirv monev is nor monev piopei?
±. \lar is rle oursranoing insrance oí a íieelv-vacillaring cui-
iencv? (p. ±:1)
¡. \lv ooes Mises oislike rle reim “scaicirv 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 monev involves a ienunciarion oí infla-
rion. Tlis is onlv possille ií rle pullic iecognizes rle íurilirv oí
inreivenrionisr goveinmenr.
Tle ieruin ro souno monev srill means a ieruin ro rle golo
sranoaio. Ònlv unoei rlis svsrem will rle oereiminarion oí rle
moneraiv unir’s puiclasing powei iemain oursioe rle spleie oí
goveinmenr conriol. Tle onlv wav ro riulv saíeguaio a narion’s
monev is ro iemove all avenues íoi inflarion. Tlis incluoes nor
onlv rle goveinmenr’s iesoiring ro rle piinring piess ro finance
irs oeficirs, lur also commeicial lanks’ alilirv ro issue oeposirs nor
íullv lackeo up lv monev piopei.
!oi a ielarivelv small counriv (“Ruiirania”) rle goveinmenr
oí wlicl las leen using inflarion ro finance irs oeficirs, rle gov-
einmenr musr fiisr (rempoiaiilv) piolilir rle íuirlei issuance oí
fiouciaiv meoia oenominareo in “iuis.” Ònce rle iui’s exclange
iare (as well as rle piice oí golo ouoreo in iuis) las cleailv peakeo,
rle goveinmenr oí Ruiirania locks in rle cuiienr maiker piice oí
eirlei a !.S. oollai oi golo (ouoreo in iuis). An agencv 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 e/ Mency ená Crcáit
Tle !nireo Srares goveinmenr musr ieruin ro rle classical
golo sranoaio. An agencv will le esrallisleo rlar will luv 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 caiiv íull-weiglr golo coins in rleii casl
lalances.
Ònlv an alanoonmenr oí rle inreivenrionisr minoser, coupleo
wirl a ieruin ro rle classical golo sranoaio, can saíeguaio rle
cuiiencv.
Cheptcr :¡: Thc Rcturn te Seuná Mency :1¡
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
¡. Meaetar¡ |e||c¡ aa6 the |reseat Irea6 Iewar6
k||·keaa6 ||aaa|ae
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 lv inflarion can le llameo upon capiralism,
giving rle goveinmenr ver anorlei pierexr ro expano irs powei.
Tle ieruin ro souno monev involves a ienunciarion oí infla-
rion. Tlis is onlv possille ií rle pullic iecognizes rle íurilirv oí
inreivenrionisr goveinmenr.
z. Ihe |ateera| 6e|6 !taa6ar6
Tle ieruin ro souno monev srill means a ieruin ro rle golo
sranoaio. Ònlv unoei rlis svsrem will rle oereiminarion oí rle
moneraiv unir’s puiclasing powei iemain oursioe rle spleie oí
goveinmenr conriol.
Tle onlv wav ro riulv saíeguaio a narion’s monev is ro iemove
all avenues íoi inflarion. Tlis incluoes nor onlv rle goveinmenr’s
iesoiring ro rle piinring piess ro finance irs oeficirs, lur also com-
meicial lanks’ alilirv ro issue oeposirs nor íullv lackeo up lv
monev piopei. !n orlei woios, goveinmenrs musr speno onlv wlar
rlev rax oi loiiow, ano lanks musr le piolilireo íiomissuing new
fiouciaiv meoia.
:1ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
). Carreac¡ keferm|a kar|taa|a
!oi a ielarivelv small counriv rle goveinmenr oí wlicl las leen
using inflarion ro finance irs oeficirs, rle ciucial rling is ro ouicklv
assuie woilo invesrois rlar rle cuiiencv is sralilizeo. Tleie is
a rwo-srep piocess involveo. !iisr, rle goveinmenr oí Ruiirania
musr (rempoiaiilv) piolilir rle íuirlei issuance oí fiouciaiv meoia
oenominareo in “iuis,” rle cuiiencv oí rle counriv. 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 ouoreo
in iuis) las cleailv 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
(ouoreo in iuis). An agencv 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 agencv is alloweo ro issue new iuis,
wlicl aie lackeo up 1oo peicenr lv rle new oeposir. Ar rlis poinr,
rle iui will le lack on eirlei a oollai- oi golo-exclange sranoaio,
ano no new fiouciaiv meoia can le issueo.
e. 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 Tieasuiv nores oi lank lalances
nor lackeo up 1oo peicenr lv 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 veiv 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
1o¬1.)
An agencv will le esrallisleo rlar will luv 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 caiiv íull-weiglr golo coins in rleii casl lalances.
s. Ihe Ceatreºers¡ Ceacera|ae 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 conrioveisv 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 1o:± Colo Reseive Acr (ano
was rle golo piice useo in rle Bierron \ooos svsrem). 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-1o:: piice oí s:o.ó¬ pei ounce
oí golo was rle riue paiirv, wlicl Roosevelr rlen oislonoieo as
one oí lis fiisr acrs in office. !uirleimoie, rle people wlo weie
laimeo lv rle piioi inflarion woulo nor necessaiilv le rle same
ones ro lenefir íiom a cuiienr lour oí oeflarion. !oi example, ir is
riue rlar a lono oiiginallv issueo in (sav) 1o:8, piomising ro pav
s1,ooo pei veai íoi fiírv veais, woulo lave lao irs “ieal” maiker
value salorageo wlen !ÐR oevalueo rle oollai. Yer ií rle oiiginal
puiclasei oí rle lono solo ir in (sav) 1o¡o, rlen rle new ownei
las alieaov raken inro accounr rle new inflarionaiv iegime. Tle
:18 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
íull capiral loss las alieaov leen alsoileo lv rle oiiginal ownei.
Ar rlis poinr, ro iaise rle puiclasing powei oí rle oollai lv iesroi-
ing golo ro irs íoimei paiirv, 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 meielv lecause ir affecrs oeíeiieo pavmenrs.
Monev is nor neurial, ano an inrenrional oeflarion will lave unoe-
siialle conseouences rlar will occui in aooirion ro—iarlei rlan
unooing—rle eailiei conseouences oí rle inflarion.
Ceac|a6|ae kemarks
Tle pullic ano mosr inrellecruals lamenr rle conseouences oí infla-
rion, ver rlev suppoir rlose policies (goveinmenr oeficir spenoing
ano low inreiesr iares) rlar ieouiie inflarion. Ònlv an alanoon-
menr oí rle inreivenrionisr minoser, coupleo wirl a ieruin ro rle
classical golo sranoaio, can saíeguaio rle cuiiencv.
..
Cheptcr :¡: Thc Rcturn te Seuná Mency :1o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• Òn pages ±:o–±o, Mises lamenrs rlar even manv sup-
poireis oí souno monev 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 rleoiv oí rle riaoe cvcle (oevelopeo
in pair i i i, claprei v) slows rle weakness in rlis rlink-
ing. Tlar is wlv Mises leie aovocares a complere pioli-
lirion on rle issuance oí new fiouciaiv meoia, since le
lelieves ir is rle onlv suie wav ro avoio íuruie ciises rlar
will inevirallv oiscieoir capiralism. (`ore rlar Mises’s sug-
gesreo ieíoims woulo net riansíoim rle lanking svsrem
inro a 1oo-peicenr-ieseive aiiangemenr, lecause rle pie-
viouslv issueo fiouciaiv meoia woulo srill exisr.)
• Alrlougl rlev aie similai, Mises’s pioposals (in secrions :
ano ±) íoi cuiiencv ieíoim in rle geneiic small counriv
“Ruiirania” veisus rle !nireo Srares aie oiffeienr. Mises
wanrs ro ouicklv srop rle iapiolv oepieciaring cuiiencv oí
Ruiirania, rle goveinmenr oí wlicl las leen monetizing
its deficits. Mises is conrenr ro srop rle oownwaio spiial lv
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 fiouciaiv meoia—in oioei ro
aiiesr rle loom-lusr cvcle—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 e/ Mency ená Crcáit
s1o, ano peilaps s:o, so rlar rle pullic woulo caiiv 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 counriv ro ieruin ro a golo sranoaio
ar a lisroiic paiirv, a move rlar woulo ieouiie oeflarion.
Stabilizers: Tlose wlo wanr a counriv ro ieruin ro a golo sranoaio
lv 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, lv iesoir ro rle piinring piess.
..
::: Stuáy Cuiác te Thc Thcery e/ 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,
rlev llameo piivare enreipiise íoi claiging ouriageous
piices ano piofireeiing.” (p. ±:¬)
:. * Mises wiires (pp. ±:¬–:8) rlar allegeolv piogiessive gov-
einmenrs will nor alanoon rleii “mosr íoimioalle weapon,
inflarion.” Yer isn’r rlis a veision oí rle ciirioue 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)
±. \lv ooes Mises (lumoiouslv) 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!
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avvixbix a
0N Ikl C|k!!|||CkI|0N 0|
M0NlIkk\ Ikl0k|l!
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Chapter Outline
¡. Cata||act|c aa6 kcata||act|c Meaetar¡ 0ectr|ae
Monev is sucl an impoiranr pair oí economic liíe rlar wiireis ana-
lvzeo ir leíoie rle oevelopmenr oí orlei aieas oí economic rleoiv.
!ven aírei rle oevelopmenr oí catallactics ano rle mooein suljec-
rive rleoiv oí value, acarallacric rleoiies oí monev peisisr. Yer a
necessaiv conoirion oí a sarisíacroiv rleoiv oí monev is rlar ir is
emleooeo in a moie geneial rleoiv oí exclanges, wirlin wlicl
exclanges involving monev aie meielv a componenr.
!conomic rleoiv is oifficulr, ano ieouiies rlar rle economisr
fiisr consioei rle íoimarion oí piices in rle case oí oiiecr exclange.
Yer evenruallv rle analvsis musr le geneializeo ro incluoe inoiiecr
exclange ano rle iole oí monev, oi else rle conclusions mav go
asriav.
z. Ihe “!tate” Iheer¡ ef Meae¡
Tle “Srare” rleoiv oí monev claims rlar rle value oí monev iesrs
on rle aurloiirv oí rle liglesr civil powei, iarlei rlan leing rle
iesulr oí valuarions in rle maiker. Alrlougl irs pioponenrs mav
nor iealize ir, rle Srare rleoiv oí monev ooesn’r even arrempr ro
::¡
::ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
explain rle puiclasing powei oí monev, wlicl is rle piimaiv pui-
pose oí a moneraiv rleoiv.
). !chameeter’s kttemet te |erma|ate a Cata||act|c
C|a|mIheer¡
As an analogv, ir is accepralle ro call monev a claim on rle geneial
srock oí gooos. Yer rle norion oí monev as a claim cannor seive as
an acrual rleoiv oí monev, seeking ro explain rle exclange iario
lerween monev 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 monev. !is íailuie illusriares rlar ir is a oeao eno ro analvze
monev as a claim.
e. “Meta|||sm”
Knapp oefines metallism as rle moneraiv oocriine claiming rlar
rle unir oí value is a ceirain ouanrirv oí meral. Knapp’s oefinirion
is uncleai, lur le uses rle reim ro incluoe all rlose rleoiies oí
monev rlar aie net nominalistic.
s. Ihe Ceaceet “Meta|||sm” |a W|eser aa6 |h|||eeeº|ch
Knapp’s cumleisome classificarion scleme las uníoirunarelv leen
aoopreo lv 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 lae||sh !chee|s ef 8aak|ae Iheer¡
Some wiireis, influenceo lv Knapp, inreipiereo rle clasl lerween
rle Cuiiencv ano Banking Sclools as a clasl lerween merallism
Hppcnáix H: On thc C/essifi.etien e/ Menctery Thcerics ::¬
ano nominalism. !owevei, rlis is nor ieallv rle ciux oí rleii aigu-
menr. Because le oisoaineo rleoiv alrogerlei, Knapp was unalle
ro even expiess rle acrual conrioveisv lerween rle rwo !nglisl
sclools oí rlouglr on lanking.
..
::8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
• !n rlis claprei (e.g., pp. ±ó± ano ±¬:), Mises iejecrs rle rle-
oiv rlar rle value oí monev eouals rle value oí rle piecious
merals. Tlis mav suipiise some ieaoeis, since rliouglour
rle look Mises cleailv enooises rle classical golo sranoaio,
ano le also srares rlar people in commeice (iiglrlv) evalu-
are coins on rleii meral conrenr, nor on rle sramp placeo
lv rle legislaruie. !owevei, rleie is no conriaoicrion leie.
Mises agiees rlar rle moneraiv unir sloulo ulrimarelv le
a fixeo weiglr oí golo (oi anorlei commooirv). !owevei,
ro explain rle te/uc (oi rle puiclasing powei) oí rlar
moneraiv unir, one neeos a rleoiv oí inoiiecr exclange,
giounoeo in rle suljecrive rleoiv oí value.
• !n lis ciirioue oí Sclumperei (in secrion i i i), Mises ex-
plains rlar a sarisíacroiv rleoiv oí monev musr rake inro
accounr all oereiminanrs oí irs puiclasing powei, incluo-
ing “loaios.” !oi example, ií people in rle communirv
lecome íeaiíul ano riv ro accumulare an exria monrl’s
woirl oí expenses in rle íoim oí casl, rlen orlei rlings
eoual rle puiclasing powei oí monev will iise (i.e., piices
will íall). A rleoiv rlar oisiegaioeo rle iole oí loaios
woulo le unalle ro explain wlv rle value oí monev
clangeo.
..
Hppcnáix H: On thc C/essifi.etien e/ Menctery Thcerics ::o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Catallactics: Tle sruov oí exclanges oi (moie naiiowlv) rle sruov
oí moneraiv exclanges, wirl an emplasis on rle oereimina-
rion oí piice iarios.
Metallism: As oefineo lv Knapp, rle moneraiv oocriine claiming
rlar rle unir oí value is a ceirain ouanrirv oí meral.
Nominalism: Tle moneraiv 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 e/ Mency ená Crcáit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: “Tleie aie piollems oí rleoiv íull compielen-
sion oí wlicl can le arraineo onlv wirl rle aio oí rle
rleoiv 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 rleoiv oí oiiecr
exclange, is inevirallv ro go asriav.” (p. ±ó:)
:. !xplain: “!acrs oo nor speak: rlev neeo ro le spoken e/eut
lv a rleoiv.” (p. ±ó¬)
:. !xplain: “Tle Srare Tleoiv oí monev—ano all acarallacric
rleoiies oí monev 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 monev rlar is nor
clanging owneis ar rle veiv momenr unoei consioeiarion
is awairing emplovmenr. `eveirleless, ir woulo le incoi-
iecr ro call sucl monev ‘unemploveo’: as pair oí a ieseive
ir sarisfies a oemano íoi monev, ano conseouenrlv íulfils
rle claiacreiisric íuncrion oí monev.” (p. ±¬1)
¡. Ðoes Mises rlink rlar rle papei monev expeiiences oí rle
wai veais pose a ieíurarion oí carallacric rleoiies oí monev?
(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
í
Tle rianslaroi’s nore in Appenoix B is selí-explanaroiv ano
neeos no summaiv leie. !owevei, we lave iepioouceo rle
rianslaroi’s excellenr oiagiam ro illusriare rle Misesian clas-
sificarion scleme iegaioing oiffeienr moneraiv conceprs.]
::1
6|0!!kk\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aleatory: Ðepenoenr on clance, luck, oi an unceirain ourcome.
Banker: A peison wlo lenos our orlei people’s monev.
Banking School: An !nglisl sclool oí rlouglr wlicl aigueo rlar
rle lanks weie incapalle oí inoepenoenrlv alreiing rle iare
oí inreiesr oi rle puiclasing powei oí monev, lecause rle
maiker woulo use cleaiing opeiarions, lills oí exclange, ano
orlei reclnioues ro ieceive rle cieoir ir oemanoeo íoi lusi-
ness puiposes.
Banknotes: Papei nores issueo lv lanks, rvpicallv enrirling rle
leaiei ro a specifieo amounr oí rle monev gooo.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairv ro a pav a fixeo sum oí monev ro anorlei pairv ar
a specifieo íuruie oare oi upon oemano. A lill oí exclange
is geneiallv riansíeialle rliougl enooisemenr.
Bimetallist legislation: !ffoirs lv rle goveinmenr ro esrallisl a
fixeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr ieouiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr pavmenr in silvei ounces ar
a fixeo mulriple oí rle golo piice.
Cable rate: Slang useo lv íoieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
:::
::± Stuáy Cuiác te Thc Thcery e/ 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 monev.
Cash (verb): To ieoeem a claim (sucl as a lanknore) lv paving rle
specifieo amounr oí rle monev gooo.
Cash flow: Tle srieam oí monev pavmenrs ovei rime oue ro an
asser oi collecrion oí assers.
Catallactics: Tle sruov oí exclanges oi (moie naiiowlv) rle sruov
oí moneraiv 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 fiouciaiv meoia.
Circulation credit theory of the trade cycle: Tle rleoiv oevelopeo
lv Mises (in rle piesenr look) explaining rle loom plase oí
rle lusiness cvcle as oue ro rle airificial expansion oí lank
cieoir, maoe possille lv fiouciaiv meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Classical gold standard: Tle svsrem lv wlicl a counriv’s cuiiencv
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 onlv ner claims neeo le serrleo
rliougl rle acrual riansíei oí monev.
C/essery ::¡
Commodity Credit: A loan gianreo rliougl rle ienunciarion oí rle
use oí piesenr gooos lv rle lenoei. Commooirv cieoir mav
involve monev ceirificares lur nor fiouciaiv meoia.
Commodity money: A common meoiumoí exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo íoi nonmoneraiv iea-
sons.
Convertible Treasury notes: Papei nores issueo lv rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in monev upon oemano.
Cover (of note issue): Assers lacking rle issue oí new lanknores.
Ðepenoing on rle iegularions, a lank miglr issue fiouciaiv
meoia nor lackeo lv monev irselí, lur lackeo lv anorlei
asser sucl as a commooirv lill.
Credit: Tle alilirv ro ieceive piesenr gooos in exclange íoi rle
piomise oí oeliveiing (rvpicallv a giearei numlei oí ) íuruie
gooos.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple oí a counriv collecrivelv speno less on íoieign gooos ano
assers rlan vice veisa. !r is serrleo lv an inflow oí monev ro
rle counriv.
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
agencv), nor íalling oue unril a (possillv unceirain) íuruie
oare.
Currency peg: Tle vaiialle ano nonlegallv-linoing iare ar wlicl a
goveinmenr is cuiienrlv mainraining irs cuiiencv’s exclange
iare againsr golo.
::ó Stuáy Cuiác te Thc Thcery e/ 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 Cuiiencv Sclool
rlouglr rle suppiession oí rle issue oí fiouciaiv meoia in
rle íoim oí lanknores (wlicl was cooifieo in Peel’s Acr)
woulo solve rle piollem, lecause irs memleis eiioneouslv
excluoeo oemano (oi cuiienr accounr) oeposirs íiom rleii
analvsis.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle alilirv ro wiire oiaírs oi wirloiawmonev upon
oemano. (Tooav a sranoaio “clecking accounr” woulo le an
example.)
Debase: To oilure rle value oí rle monev, 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 counriv collecrivelv speno moie on íoieign gooos
ano assers rlan vice veisa. !r is serrleo lv an ourflowoí monev
íiom rle counriv.
Deflation: A ieoucrion in rle ouanrirv oí monev rlar is nor offser
lv a íall in rle oemano íoi ir, sucl rlar piices reno ro íall.
(`ore rlar rlis is a reclnical economic oefinirion, nor neces-
saiilv 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 monev 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 counriv on rle flexille sran-
oaio announces a laige oiop in rle value oí irs cuiiencv
againsr golo.
Direct exchange: An exclange in wlicl lorl pairies inreno ro
oiiecrlv 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 rlev peisonallv
can consume, ano riaoe awav rleii suiplus ro ieceive some
oí rle suiplus cieareo lv 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 lv aurloiirarive commanomenr ano piolilirion.
Exchange rate: Tle iario ar wlicl one cuiiencv riaoes againsr
anorlei in rle íoieign-exclange maiker.
Exchange value: Tle significance oí a gooo oue ro irs alilirv ro le
riaoeo íoi orlei gooos. (!xclange value can le oualifieo 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 lv rle appiopiiare aurloiirv. !iar
monev is nor “lackeo up” lv anvrling else.
::8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Fiduciary media: Monev sulsrirures issueo ovei ano alove rle
monev (in rle naiiowei sense) lelo in rle ieoemprion íuno.
!iouciaiv meoia aie “unlackeo.”
Fixed capital: Assers emlooieo in ouialle invesrmenrs sucl as íac-
roiies ano specializeo eouipmenr rlar will le useo ovei a long
peiioo.
Flexible standard: Tle svsrem lv wlicl a counriv’s cuiiencv is
ieoeemalle íoi a vaiialle weiglr oí golo, ro le announceo
lv 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 cuiiencv.
Forward contract: Similai ro a íuruies conriacr, rlougl a íoiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oailv
maiking-ro-maiker. Òn rle oeliveiv oare, rle luvei pavs rle
íoiwaio piice as oiiginallv 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 oeliveiv oare) ro move alove oi lelow rle oiiginallv
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 mav le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue oí fiouciaiv meoia
pei se causes rle lusiness cvcle, onlv rlar excess ouanriries
oí fiouciaiv meoia oo, ano rlar sucl an ourcome is almosr
alwavs associareo wirl goveinmenr-suppoireo issues oí fiou-
ciaiv meoia.
C/essery ::o
Free good: A gooo rlar las a piice oí zeio, lecause ir is nor scaice.
Tleie is enougl oí rle gooo ro sarisív all luman wanrs rlar
ir can reclnicallv íulfill.
Freely-vacillating currency: A cieoir oi fiar cuiiencv rlar las no
official peg ro golo ar all. !rs maiker piice flucruares jusr as
anv commooirv.
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 oeliveiv oare). As conoirions clange ano alrei rle
íuruies piice peiraining ro rle oeliveiv oare, rle exclange
will cieoir oi oelir rle accounrs oí rle luvei ano sellei oí
rle oiiginal íuruies conriacr on a oailv lasis ro ieflecr rle
clange. (!í rle íuruies piice goes up, rle luvei gains ano rle
sellei loses, erc.) Tlese oailv episooes oí maiking-ro-maiker
iesroie rle maiker value oí rle íuruies conriacr irselí ro zeio.
!pon oeliveiv, rle sellei oí rle íuruies conriacr oeliveis rle
gooo, wlile rle luvei pavs rle cuiienr spor piice íoi rlar
oare, net rle íuruies piice as oiiginallv specifieo.
Gold-exchange standard: Tle svsrem lv wlicl a counriv’s cui-
iencv is ieoeemalle on oemano íoi a fixeo weiglr oí golo,
rlougl somerimes onlv lv orlei goveinmenrs ano cenrial
lanks. !n Mises’s usage, unoei a golo-exclange sranoaio
rle cirizens useo onlv papei nores in eveivoav riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Gold standard: Tle aiiangemenr lv wlicl a narion’s monev (sucl
as rle !.S. oollai oi rle Biirisl pouno) can le ieoeemeo íoi
a oefinire weiglr oí golo.
:±o Stuáy Cuiác te Thc Thcery e/ 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-
irv 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 pav irs own cieoirois wlile irs
assers aie nor ver 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: Populailv summaiizeo as “lao monev oiives our
gooo,” rle plenomenon lv wlicl people will lolo monev
rlar is unoeivalueo lv legislarion, ano will speno rle monev
rlar is oveivalueo lv legislarion. !oi example, ií limerallisr
legislarion ieouiies 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 eveivone will riv ro luv wirl silvei, ano
no one will use golo íoi making puiclases. Colo will seem
ro oisappeai, ano onlv 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. ouaireis minreo in rle veai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. ouaireis minreo in rle veai 1o¡o) will le loaioeo lv
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” lv 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 monev,
so long as Srock XYZ oiops lv a smallei amounr rlan mosr
orlei srocks.
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeolv counreiacring rle pieoicrions
oí a naïve ouanrirv rleoiv oí monev.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial.
Illusive standard: Tle svsrem lv wlicl a counriv’s cuiiencv 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 pairv inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir awav in rle
íuruie íoi somerling else.
Inflation: An inciease in rle ouanrirv oí monev (in rle lioaoei
sense oí rle reim) rlar is nor offser lv a coiiesponoing
inciease in rle oemano íoi monev (in rle lioaoei sense oí
rle reim), wirl rle necessaiv iesulr leing a íall in rle pui-
clasing powei oí monev. (`ore rlar rlis is a reclnical eco-
nomic oefinirion, nor necessaiilv laving rle connorarions oí
“inflarion” in populai oiscussions.)
Inflation tax: Tle ieoisriilurion oí wealrl íiom rle cirizeniv ro
rle goveinmenr (oi irs oesignareo leneficiaiies) rliougl
inflarion.
:±: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Inflationism: Moneraiv policv rlar seeks ro inciease rle ouanrirv
oí monev.
Institutional unemployment: Tle siruarion wleie woikeis aie oual-
ifieo ano willing ro accepr jols ar pievailing wage iares, ver
cannor fino emploveis ro liie rlem.
Interest: !ncome acciuing ro rle ownei oí íuruie gooos as rlev
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 sarisíving enos rlar aie less
ano less impoiranr.
Legal tender: An irem rlar rle goveinmenr oeclaies ro le valio íoi
rle pavmenr oí oelrs oenominareo in monev, ar pai value.
Liquid (adjective): Tle alilirv oí leing solo íoi rle íull maiker
piice wirl a veiv sloir seaicl rime. (!oi example, a slaie
oí coipoiare srock is mucl moie liouio rlan a louse.)
Liquidity: Tle siruarion in wlicl an insrirurion’s assers will oelivei
a casl flowallowing ir ro pav irs lialiliries on rime. (All liouio
enreipiises aie also solvenr, lur nor necessaiilv vice veisa.)
Loan banking: Banking rliougl rle use oí commooirv 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 monev 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 (ouoreo in a counriv’s cuiiencv) 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
cuiiencv.
Market value: Svnonvmous wirl rle oljecrive exclange value oí a
gooo, rvpicallv ouoreo in monev reims.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion oí riaoing ir awav ro acouiie somerling else in rle
íuruie.
Metallism: As oefineo lv Knapp, rle moneraiv oocriine claiming
rlar rle unir oí value is a ceirain ouanrirv oí meral.
Mixed economy: An economv 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 exrensivelv iegulares rleii use oí rlis piopeirv,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Monetary policy: Coveinmenr oi cenrial lank effoirs ro alrei rle
puiclasing powei oí monev.
Monetizing government deficits: Coveiing rle oiffeience lerween
goveinmenr expenoiruies veisus rax ieceiprs ano loans íiom
piivare lenoeis, lv iesoir ro rle piinring piess.
Money: A meoium oí exclange rlar is geneiallv accepreo in rle
communirv. Monev rvpicallv sranos on one sioe oí viiruallv
eveiv exclange.
Money certificates: Monev sulsrirures rlar aie íullv lackeo lv
monev (in rle naiiowei sense).
:±± Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Money cranks: Veiv naïve wiireis wlo lelieve rlar scaicirv is an
airificial insrirurional consriainr, ano rlar piospeiirv ieouiies
onlv a sufficienr willingness ro cieare moie monev ano/oi
issue moie lank cieoir.
Money in the broader sense: Tle acrual monev gooo (wlerlei
commooirv, fiar, oi cieoir monev), plus monev sulsrirures.
Money in the narrower sense: Tle acrual monev gooo (wlerlei
commooirv, fiar, oi cieoir monev), nor incluoing monev sul-
srirures.
Money substitute: A peiíecrlv secuie ano insranrlv ieoeemalle
claim on monev, wlicl irselí ciiculares as monev (in rle
lioaoei sense) lecause ir íulfills rle íuncrions oí monev.
Money rate of interest: Tle iare oí inreiesr oereimineo in rle mai-
kerplace íoi loans oí monev. (Tle monev iare can oeviare
íiom rle eouililiium íoi naruial] iare oí inreiesr, in a pio-
cess rlar is explaineo in pair i i i oí rle look.)
Naïve inflationism: !nflarionism suppoireo lv rle lelieí rlar
monev consrirures wealrl.
Nominalism: Tle moneraiv 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 possililirv oí olraining a
ceirain ouanrirv oí orlei gooos in exclange íoi a unir oí
monev.
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 rleoiv oí value.)
Paper standard: Tle aiiangemenr lv 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: Amoneraiv svsremin wlicl rwo oiffeienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as monev unoei a Paiallel Sranoaio.)
Peel’s Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei oí issuing newnores awav íiompiivare lanks
ano vesreo ir complerelv wirl rle Bank oí !nglano, wlicl
irselí was ieouiieo ro mainrain 1oo peicenr merallic lack-
ing íoi anv new nores rlar ir issueo. !owevei, rle Acr ciu-
ciallv oio net impose sucl a iesriicrion on rle exrension oí
oeposirs, meaning rlar piivare lanks coulo cieare moie fiou-
ciaiv meoia lv gianring loans (nor lackeo lv 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 ouanrirv oí gooos (oi seivices) rlar musr le
given up in exclange ro acouiie a unir oí monev.
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiv economv, piices aie rvpicallv ouoreo in
reims oí rle monev gooo.
Private capital: Tle aggiegare oí rle piooucrs rlar seive as a
means ro rle acouisirion oí gooos.
:±ó Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Purchasing power: Tle amounr oí gooos ano seivices rlar a unir
oí monev 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 rleoiv sraring rlar rle exclange
iario lerween rwo monies is oereimineo lv rle iespecrive
exclange iarios oí eacl monev ano orlei gooos ano seivices.
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei oí monev lv ieíeience ro rle ouan-
rirv oí monev ano rle oemano ro lolo ir. (Tleie aie manv
veisions oí rle ouanrirv rleoiv, wirl rle moie meclanical
ones—wlicl posir rlar a ooulling oí rle monev srock will
leao ro a ooulling oí all piices—leing olviouslv 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 monev is influenceo lv people’s memoiv oí
vesreioav’s puiclasing powei. Tle causalirv is riaceo lack
in rime, unril rle poinr ar wlicl rle monev gooo was valueo
as a iegulai commooirv in oiiecr exclange.
Restorers: Tlose wlo wanr a counriv ro ieruin ro a golo sranoaio
ar a lisroiic paiirv, a move rlar woulo ieouiie oeflarion.
Restrictionism/Deflationism: Moneraiv policv rlar aims ar iaising
rle oljecrive exclange value oí monev.
Scale of values: An analvrical rool lv wlicl rle economisr inrei-
piers rle acrions oí an inoivioual, wlo suljecrivelv ianks pai-
riculai unirs oí gooos ano seivices in oioei íiommosr ro leasr
impoiranr.
C/essery :±¬
Seigniorage: Tle oiffeience lerween rle maiker value oí monev
ano rle cosr ro pioouce ir.
Shortages: A sloiríall in rle ouanrirv 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 emplovmenr 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 counriv ro ieruin ro a golo sranoaio
lv 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
eailv 18¬os—speaileaoeo lv Cail Mengei, \illiam Sranlev
Jevons, ano !éon \alias—oveiruineo rle oljecrive rleoiv
oí value ano usleieo in rle suljecrive rleoiv.)
Subsistence fund: A concepr useo lv Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave fiisr accumulareo, in oioei
ro íeeo ano orleiwise suppoir rle woikeis as rlev engage in
rime-consuming piooucrion piocesses.
Token coins: Coins rlar seive as iepiesenrarives oí monev (usuallv
in veiv small oenominarions), even rlougl rlev oo nor con-
rain rle íull weiglr oí meral in rle case oí a commooirv
monev.
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice oí golo (ouoreo in a counriv’s cuiiencv) alove wlicl
:±8 Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
ir is piofiralle—incluoing all cosrs oí rianspoir, ie-coinage,
erc.—íoi íoieigneis ro exclange rle oomesric cuiiencv 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 counriv.
Use-value: Tle significance oí a gooo oue ro irs alilirv ro le
oiiecrlv useo lv rle ownei in consumprion oi piooucrion.
(!se-value can le oualifieo 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 lv economisr Knur
\icksell, rle lvporlerical iare oí inreiesr rlar woulo occui
ií gooos weie riaoeo oiiecrlv againsr eacl orlei wirlour rle
use oí monev.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneiallv, a measuie oí a fiim’s alilirv ro ouicklv 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–:o
Banknore, :ó, 8¡, 1:ó, 1:o, 1±¡
Bills oí exclange, 1:o, 1¡1
Bimerallism, :8
Bolm-Baweik, !ugen von, 18,
ó:, 81, 1¬¬, 1¬o–8o
Business cvcle, 1¬:, 1¬¬–¬8, 18±,
1oo, ::o
C
Calle iare, 8ó
Capiral
consumprion, 1oó, 11o
piivare, ±±, ±¡
social, ±±, ±¡
Capiralisr, 1:¡, 1:¬
Ciicularion cieoir, 1:¡, 1:8,
1:o, 1±o, 1±:
Ciicularion cieoir rleoiv oí rle
riaoe cvcle. Scc Business
cvcle
Classical economisrs, 11, 1:, 18,
:o
Cleaiing svsrems, 8¡, 1¡ó–¡¬
Commooirv cieoir, 1:¡, 1:8,
1±o
Commooirv monev, ::, :ó–:¬,
:o
Cosr oí living, 8ó, 8¬
Cieoir, 1±ó, 1¡1, 1¡o
Cieoir monev, ::, :¬, :o–:o, :ó,
:8, :o, 1ó:, 1óo–¬o, :oó
Cieoir policv, 18:–o±
Cieoir riansacrions, 1o¡–oó,
1:¡, 1:¬–:8
Cuiiencv Sclool, 1¬¡, 18¡,
1o1–o:, 1o±, ::8–:o
Cuiiencv specularion, 1:8–:o,
1::
D
Ðeflarion, 11¡–1ó, 11o, 1:o,
18o, :1¬–18
Ðeflarionism, 11¡–1ó, 11o
:±o
:¡o Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
Ðiminisling maiginal urilirv,
law oí, 11, 1¡
Ðiiecr exclange
oefinirion, :, ¡
piice oereiminarion in, 81
iole in rleoiv oí monev, ó¬,
óo, ::¬, :::
Ðivision oí laloi, ¡
E
!rarism, 1:¡, 1:¬, 1::
F
!iar monev, ::, :¬, :ó, :8, 8±,
1ó:, 1¬1, :oó
!iouciaiv meoia, ó8, ¬:, 1:¡,
1:ó, 1:8, 1:o, 1±o, 1±:,
1±¡–¡1, 1¡:–ó:, 1ó¡–¬±,
18±, :1¡–1ó, ::o
!islei, !iving, 1¡, 18, 18o–oo
!oieign exclange iare, 8ó, o:,
1:1, 1:o, 1::, :o¬–o8, :11
!oiwaio conriacr, 1oo
!uruies conriacr, 1oo
G
Colo sranoaio, :ó, o¬, 11¬, 1:o,
1:1, 18:–8±, 188–8o,
1o¬–o8, :oo, :o:, :o¡–11,
:1:–::
Coloen iule (oí maruiirv marcl-
ing), 1:¬
Cooos
consumprion, ±:, ¡1, 8¡, 8o,
1¬¡
íiee, 1¡
oljecrive exclange value oí,
óo–ó1
piesenr veisus íuruie, 1o¡,
1:¡, 1:¬–:8, 1¬o
piooucrion, ±:, ¡1, 8¡, 8o,
1¬¡
suljecrive exclange value oí,
óo–ó1
Cieslam’s !aw, :8
H
!oaios, ¬¡–¬ó
!oiwirz, Sreve, 1¬1–¬:
I
!noex numleis, oo–1o:, 18o–oo
!noiiecr exclange
oefinirion, :, ó
emeigence oí, :–±, ¡–¬
ineviralilirv, ¡±
ielarion ro fiouciaiv meoia,
1:o
ielarion ro rleoiv oí monev,
::o, :::
!nflarion, 11¡–1ó, 118–1o, 1:o,
1:±, 18±, 18o, 1o8, :o:,
:1¡, :1¬–18
!nflarionism, 11¡–1ó, 118–1o,
1:o, 1:±, 1:¡–:ó, 1:¬–:o
!nreiesr
monev iare oí, 1¬¡, 1¬ó–¬8,
18:
naruial iare oí, 1¡±, 1¡¬, 1óo,
1¬ó–¬8, 18:
souice oí, 1¬¡, 1¬o
¡nácx :¡1
J
Jevons, \illiam Sranlev, :o
L
!egal renoei legislarion, :ó, :o
!iouioirv, :¬, :o, 1ó¡, 1ó8–óo,
1o±
M
Maiginal ievolurion, :o
Meoium oí exclange, ¡–ó, ±:,
8o
Mengei, Cail, 8, 1:, :o, :o, ¡o,
ó:, ó8, ¬o, ¬1, 81, 1¬o
Moneraiv policv, 11¡–::
Monev
lioaoei sense, in rle, 1:8,
1±ó, 1¡:, 1¡¡–¡¬, 1¡8
ceirificares, ó8, ¬:
commooirv. Scc Commooirv
monev
cianks, ¡o, ¡:
cieoir. Scc Cieoir monev
oefinirion, :, ¡
fiar. Scc !iar monev
íuncrion oí, :–±, ¡
inoex oí piices, 1¬, 1±o
measuie oí maiker exclange
value, 1ó
naiiowei sense, in rle, :ó,
1±¡, 1¡:, 1¡¡–¡¬, 1ó¡,
1ó¬–ó8, 1óo–¬o, 18ó
oljecrive exclange value oí.
Scc Monev, puiclasing
powei oí
oiigin oí, :–±, ¡–¬, ó¬, ¬1
puiclasing powei oí, ::, :¡,
:8, :¬, ¡¬, ¡o–óo, ó¬–ó8,
óo, ¬ó–¬¬, ¬o–8o, 8ó,
oo–1o1, 1oo–1o, 11¡–1ó,
1¡¡–¡ó, 1ó8, 1oo
ouanrirv rleoiv oí. Scc Cuan-
rirv rleoiv oí monev
seconoaiv íuncrions oí, ±, ¬,
:¡, :¬
socialism ano, ±o, ¡1
souno, 1o¬–:o:, :1:–::
srare’s influence on, :8
srare rleoiv oí, :¬, :8, :o,
::¬–:8, :::
sulsrirure, ::, :¡–:ó, :o–:o,
:ó, :o, 1¡1, 1ó¬, 1óo–¬o
supplv ano oemano, ¬:,
¬:–¬8, 8±, 1¡¡–¡¬, 1¬ó
P
Papei sranoaio, :ó
Paiallel sranoaio, o1
Peel’s Acr, 1¡¬, 18:, 18¡–8ó,
1o±
Piices
causeo lv suljecrive pieíei-
ences, 1±, ¡¬–¡8, ¡o
conriols on, :8, 1:¡, 1:¬–:8,
1:o, 1::, :o¬–o8
Puiclasing powei paiirv, o:, o¬,
:o¬
Q
Cuanrirv rleoiv oí monev, ó8,
¬o, ¬:, ¬:–¬¬
:¡: Stuáy Cuiác te Thc Thcery e/ Mency ená Crcáit
R
Regiession rleoiem, 81–8:
Ricaioo, Ðavio, :o
Rorllaio, Muiiav, 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:
Solvencv, 1ó¡, 1ó8–óo, 1o±
T
Token coins, :ó, :o, 8o, 1±¡
Tiaoe lalance o:–o:, o±–o¡,
11o, 1:1, 1:¡–:ó, 1:8
Tiaoe cvcle. Scc Business cvcle
U
!nemplovmenr, connecrion
wirl inflarion, 1o8
!rilirv, 11, 1¡, 18–1o
V
Value
cosr rleoiv oí, 18
oefinirion, 11, 1:
laloi rleoiv oí, 18
measuiemenr oí, :1
oljecrive rleoiv oí, 11, 1:,
18, :o
oljecrive use, ó:, ó¡
suljecrive rleoiv oí, 11,
1:–1±, 18, :o, ¡¬–¡8,
¡o–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, 8o, 1oo

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