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s:ibv oiibi :o

:ui :uiovv oi
xoxiv axb tvibi:
Stuy Cuic
:o
THE THEORY OF
MONEY AND CREDIT
iibvio vox xisis
Re/crt P. Murphy
MISES INSTITUTE
LvMI
Thc Thcery ej Mency en Crcit was rianslareo iom rle Ceiman ly
!.!. Barson ano pullisleo ly Jonarlan Cape (!onoon) in 1p.
Copyiiglr :o11 ly rle !uowig von Mises !nsrirure
Pullisleo unoei rle Ciearive Commons Arriilurion !icense .o.
http://creativecommons.org/licenses/by/3.0/
!uowig von Mises !nsrirure
18 \esr Magnolia Avenue
Auluin, Alalama 8:
Mises.org
isnx: p8-1-1o1-:-
C0NIlNI!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pieace . . . . . . . . . . . . . . . . . . . . . . . ix
|. IklNkI0kl0|M0Nl\
1. Tle !uncrion o Money . . . . . . . . . . . . .
:. n rle Measuiemenr o Value . . . . . . . . . . 11
. Tle Vaiious Kinos o Money . . . . . . . . . . . :
. Money ano rle Srare . . . . . . . . . . . . . .
. Money as an !conomic Cooo . . . . . . . . . . .
. Tle !nemies o Money . . . . . . . . . . . . . p
||. IklVk|0l0|M0Nl\
. Tle Concepr o rle Value o Money . . . . . . . .
8. Tle ereiminanrs o rle ljecrive !xclange Value,
oi Puiclasing Powei, o Money . . . . . . . . . .
v
vi Stuy Cuic te Thc Thcery ej Mency en Crcit
p. Tle Piollem o rle !xisrence o !ocal ieiences
in rle ljecrive !xclange Value o Money . . . . . 8
1o. Tle !xclange Rario Berween Money o ieienr
Kinos . . . . . . . . . . . . . . . . . . . . . p1
11. Tle Piollem o Measuiing rle ljecrive
!xclange Value o Money ano Vaiiarions in !r . . . pp
1:. Tle Social Consequences o Vaiiarions in rle
ljecrive !xclange Value o Money . . . . . . . . 1o
1. Moneraiy Policy . . . . . . . . . . . . . . . . 11
1. Tle Moneraiy Policy o !rarism . . . . . . . . . 1:
|||. M0Nl\kN08kNK|N6
1. Tle Business o Banking . . . . . . . . . . . . . 1
1. Tle !volurion o !iouciaiy Meoia . . . . . . . . 1
1. !iouciaiy Meoia ano rle emano oi Money . . . . 1
18. Tle Reoemprion o !iouciaiy Meoia . . . . . . . 1
1p. Money, Cieoir, ano !nreiesr . . . . . . . . . . . 1
:o. Piollems o Cieoir Policy . . . . . . . . . . . . 18
|V. M0NlIkk\klC0N!Ik0CI|0N
:1. Tle Piinciple o Souno Money . . . . . . . . . . 1p
::. Conrempoiaiy Cuiiency Sysrems . . . . . . . . . :o
:. Tle Reruin ro Souno Money . . . . . . . . . . . :1
Centcnts vii
k||lN0|Cl!
a. n rle Classicarion o Moneraiy Tleoiies . . . . ::
n. Tianslarois `ore on rle Tianslarion o Ceirain
Teclnical Teims . . . . . . . . . . . . . . . . :1
Clossaiy . . . . . . . . . . . . . . . . . . . . . . . :
!noex . . . . . . . . . . . . . . . . . . . . . . . . :p
|kl|kCl
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
\len Joe rle Plumleia small lusiness ownei wlo lecame a
leio among conseivarives wlen le clallengeo canoioare Baiack
lamas pioposeo rax likes in rle :oo8 piesioenrial campaign
compileo a lisr o Cliisrmas look iecommenoarions oi Thc Hmcr-
i.en Spc.teter, le incluoeo Thc Thcery ej Mency en Crcit, saying ir
was impoiranr ieaoing oi rlese rioulleo rimes. Alrlougl Aus-
riians weie glao rlar someone was liinging arrenrion ro Misess
classic woik, many weie unoeisranoally skeprical. Arei all, Thc
Thcery ej Mency en Crcit is a her look ro ieao.
Tle piesenr sruoy guioe seeks ro clange rlar common impies-
sion. !n piepaiing ir, ! lave ouno rlar Misess woik can le oiculr
ar rimes, lur rleie is a oenire mcthe lelino ir. !n orlei woios,
i rle ieaoei will pur in rle eoir ro woik rliougl rle look
merlooically, le oi sle will see rlar Mises sysremarically luilos
lis aigumenr iom one claprei ro rle nexr. \irl rle lelp o rlis
sruoy guioe, even rle laypeison will le alle ro unlock rle amazing
insiglrs conraineo in rlis rome, isr pullisleo a cenruiy ago.
ne o rle mosr enjoyalle suipiises oi me was ro oiscovei
jusr low impiessive an economisr !uowig von Mises ieally was,
even ar a ielarively young age. !n rlis single woik, Mises inre-
giareo (wlar we now call) micioeconomics wirl macioeconomics.
!e successully applieo suljecrivisr, maiginal uriliry rleoiy ro rle
case o moneya rask rlar lao eluoeo eailiei rleoiisrs in rle Aus-
riian riaoirion. As i rlar weienr enougl, Mises gave a sysremaric
explanarion o rle loom-lusr cycle, llaming ir on rle airicial
ix
x Stuy Cuic te Thc Thcery ej Mency en Crcit
expansion o lank cieoir ano rle coiiesponoing ieoucrion o rle
money iare o inreiesr lelow rle naruial iare.
Tlese accomplislmenrs alone woulo lave eaineo Mises an
impoiranr sear in rle lisroiy o economic rlouglr. Yer upon my
mosr iecenr ieaoing, ! iealizeo rlar Mises slowcases mucl moie o
lis ralenr. !oi one rling, le oisplays a rloiougl commano o rle
ielevanr lireiaruie, nor only in puie economic rleoiy lur also in
applieo ropics sucl as money ano lanking. !e also slows a piacri-
cal unoeisranoing o acrual nancial maikers, wlicl oren lelave
oieienrly iom rle oepicrion in acaoemic wiirings. !n rle nal
secrion o rle look (wiirren arei rle oiiginal ielease), Mises oeis
veiy wise policy iecommenoarions oi ieruining ro souno money.
Tle oimar o rle sruoy guioe ollows rle 1p eoirion o Thc
Thcery ej Mency en Crcit pullisleo ly rle Mises !nsrirure. ! ol-
low Misess woik veiy closely, oown ro rle inoivioual secrion leao-
ings. !acl claprei conrains an oveiall summaiy (excepr oi veiy
sloir clapreis), olloweo ly a oeraileo ourline. Tlen ! incluoe a
secrion on eirlei `oralle Conriilurions oi Teclnical `ores.
Tleie is also a lisr o new reims oi eacl claprei (wirl a ull lisr
incluoeo in rle lack as a glossaiy) ano nally a lisr o ve sruoy
quesrions ro ensuie rlar rle ieaoei is giasping rle essenrial poinrs
o eacl claprei.
!n oioei ro mooeinize rle sryle, lyplens lave leen oioppeo,
ano in a ew insrances, spelling las leen upoareo. !owevei, no
conrenr las leen alreieo iomrle !nglisl rianslarion as pullisleo
ly rle Mises !nsrirure.
! lope rlar rlis sruoy guioe eases rle unoeisranoalle inrimioa-
rion acroi ano allows a new geneiarion o ieaoeis ro expeiience
rle wealrl o wisoom conraineo in Misess isr majoi woik. As an
insiglrul plumlei (ano laypeison) las iemaikeo, ir is impoiranr
ieaoing oi rlese rioulleo rimes.
Roleir P. Muiply
`aslville, Tennessee
July, :o11
..
vav: i
Ikl NkI0kl 0| M0Nl\
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tuav:iv 1
Ikl |0NCI|0N 0| M0Nl\
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Summary
Money is necessaiy in a sociery laseo on piivare piopeiry ano
rle oivision o laloi. Tle uncrion o money is ro acilirare rlese
riaoes: Money is a commonly useo meoium o exclange.
!n a direct exchange, people accepr gooos in riaoe rlar rley
inreno ro peisonally use, wlerlei oi consumprion oi piooucrion.
Tleie is no meoium o exclange involveo in rle riansacrion.
!n an indirect exchange, ar leasr one peison in rle riansacrion
acceprs a gooo rlar le inrenos ro riaoe away in rle uruie oi some-
rling else. Tle irem rlar is accepreo in rle isr riaoe is a meoium
o exclange.
!ven leoie rle use o money, riaoeis woulo lave quickly ois-
coveieo rle leners o inoiiecr exclanges, ano rle use o meoia
o exclange ro acilirare rlem. Some gooos woulo lave lao a ai
lioaoei maiker rlan orleis. A riaoei wlo came ro maiker wirl an
unmaikeralle gooo woulo place limsel in a moie aovanrageous
laigaining posirion i le engageo in an inoiiecr exclange, ly riao-
ing lis gooo oi somerling rlar was moie maikeralle.
Because eveiy riaoei woulo acr in rlis aslion, rlose gooos
rlar weie inirially moie maikeralle, woulo see rleii maikeraliliry
enlanceo even uirlei. vei rime, a communiry woulo giavirare
ro one oi a ew commooiries rlar woulo le accepralle ro eveiy-
one in riaoe. Tlis is low money emeigeo iom an inirial srare o

Stuy Cuic te Thc Thcery ej Mency en Crcit


lairei. !isroiically rle maiker las oren closen golo ano silvei as
money.
Alrlougl orlei wiireis ourline orlei uncrions o money
sucl as a sranoaio o oeeiieo paymenrs oi a sroie o valuerlese
all owiomirs oenirion: money is a commonly accepreo meoium
o exclange.
Cheptcr 1: Thc Fun.tien ej Mency
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe 6eaera| lceaem|c Cea6|t|eas fer the 0se ef Meae
A peison living ly limsel on a riopical islano woulo nor neeo
money. Seveial people living in rle same louselolo woulo nor
neeo money eirlei, so long as rley pioouceo eveiyrling rley
neeoeo wirlin rle louselolo. !ven an enriie communirycon-
sisring o rlousanos oi millions o louselolos, eacl o wlicl spe-
cializeo in piooucing oieienr gooos ano seivicescoulo ger ly
wirlour rle use o money, assuming rleie weie a cenrial gioup oi
peison wlo acreo as a plannei ano rolo eveiyone wlar ro make,
ano oecioeo wlicl poirion o rle roral ourpur eacl peison woulo
ger ro consume.
!owevei, in a sociery laseo on rle division of labor, ano wleie
piivare inoiviouals own lorl consumprion gooos (TVs, iaoios,
Big Macs) ano piooucei gooos (riacrois, acroiies, coppei mines),
money is essenrial. !n sucl a sociery, rleie is no one peison oi
gioup wlo oecioes low scaice iesouices will le oeployeo. !acl
inoivioual musr make lis oi lei own plans, wlicl usually iequiie
exclanging piopeiry oi orlei peoples piopeiry. Tle uncrion o
money is ro acilirare rlese riaoes: Money is a commonly useo
mediumof exchange.
z. Ihe 0r|q|a ef Meae
!n a direct exchange, people accepr gooos in riaoe rlar rley inreno
ro peisonally use, wlerlei oi consumprion oi piooucrion. !oi
example, suppose Alan las a mun lur le is ieally lungiy oi
sl. Bill, on rle orlei lano, las a ner (wlicl can le useo ro carcl
sl) rlar le ooesnr ieally wanr, lur le rlinks Alans mun looks
Stuy Cuic te Thc Thcery ej Mency en Crcit
oelicious. ! Alan riaoes lis mun oi Bills ner, rlis is a oiiecr
exclange. Tleie is no meoium o exclange involveo in rle rians-
acrion.
!n an indirect exchange, ar leasr one peison in rle riansacrion
acceprs a gooo rlar le ecsnt inreno ro consume oi use limsel in
piooucrion. Rarlei, rle peison acceprs a gooo lecause le plans on
riaoing ir away again in rle uruie. !oi example, suppose rleie is
a woman wlo las knirreo a quilr, ano sle wanrs ro exclange ir oi
a ceirain paiakeer. !noirunarely, rle man wlo owns rle paiakeer
ooesnr wanr a quilr, lur is insreao inreiesreo in olraining a new
iaoio. Tle ownei o rle iaoio, lowevei, lares liios, lur is veiy
colo ar niglr. Tle woman wirl rle quilr, unoirunarely, is veiy
laio o leaiing ano las no use oi a iaoio.
!n rlis scenaiio, no oiiecr exclange is possille. !owevei, rle
woman coulo riaoe away lei quilr oi rle iaoioeven rlougl sle
peisonally las no use oi irano rlen riaoe rle iaoio in ruin oi
rle paiakeer. Tlese rwo successive riaoes woulo make all rliee
people lappiei. !n rlis example, rle iaoio woulo le a meoium o
exclange.
!ogically, rleie musr lave leen a rime wlen people lao gooos
ano riaoeo wirl eacl orlei, lur leoie money lao aiisen. !ven
leoie rle use o money, riaoeis woulo lave quickly oiscoveieo rle
leners o inoiiecr exclangesano rle use o meoia o exclange
ro acilirare rlem.
Some gooos (eggs, milk, learlei) woulo lave lao a ai lioaoei
maiker rlan orleis (relescopes, plilosoply looks, maclineiy). A
riaoei wlo came ro maiker wirl an unmaikeralle gooo sucl as
a relescope piolally woulonr le alle ro quickly no someone
wlo (e) lao rle irems rlar rle isr riaoei lopeo ro acquiie ano
(/) wanreo a relescope. !n rlis case, rle riaoei coulo impiove lis
laigaining posirion ly riaoing away lis relescope oi somerling
moie maikeralle, sucl as eggs, even i rle riaoei lao no oesiie ro
ear rle eggs.
Cheptcr 1: Thc Fun.tien ej Mency
Because eveiy riaoei woulo acr in rlis aslion, rlose gooos
rlar weie inirially moie maikeralle, woulo see rleii maikeralil-
iry enlanceo even uirlei: Tley woulo le oemanoeo nor only ly
people inrenoing ro use rlem oiiecrly, lur also ly people inreno-
ing ro use rlem as meoia o exclange. !n any pairiculai inoiiecr
exclange, a riaoei woulo naruially pieei ro sell lis own waies in
exclange oi rle mosr maikeralle meoium o exclange, lecause
rlis woulo place lim in rle mosr aovanrageous posirion as le con-
rinueo looking oi rle gooos le ulrimarely oesiieo. vei rime,
a communiry woulo giavirare ro one oi a ew commooiries rlar
woulo le accepralle ro eveiyone in riaoe. A commonly accepreo
meoium o exclange is money.
!isroiically, golo ano silvei lave leen rle rwo commooiries
mosr iequenrly employeo as money. Tley lave veiy similai piop-
eiries ano aie lorl excellenr meoia o exclange.
. Ihe !ecea6ar |aact|eas ef Meae
Money is, ly oenirion, a common meoium o exclange, wlicl
rleieoie seives ro acilirare rle exclange o gooos ano seivices.
!n a maiker economy, rlis is a ciucial uncrion ano we see
moneys impoirance ly ocusing on ir. Alrlougl orlei wiireis our-
line orlei uncrions o moneysucl as a sranoaio o oeeiieo
paymenrs, oi a aciliraroi o cieoir riansacrions, oi a sroie o value
rliougl rimerlese all ow iom irs use as a common meoium o
exclange. ..
8 Stuy Cuic te Thc Thcery ej Mency en Crcit
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Important Contributions
Mlses references Carl Menger, whose :8;: Grundstze (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 rst 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. Mengers approach
followed by Mlsesls refreshlngly clear: Money ls dened as a
commonly accepted medlum of exchange, and thls characterlstlc
enables all of the other functlons attrlbuted to lt.
..
Cheptcr 1: Thc Fun.tien ej Mency p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Direct exchange: An exclange in wlicl lorl pairies inreno ro oi-
iecrly use rle ieceiveo gooo, eirlei in consumprion oi pio-
oucrion.
Indirect exchange: An exclange in wlicl ar leasr one pairy inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir away in rle
uruie oi somerling else.
Division of labor: Tle siruarion in wlicl people specialize in pai-
riculai occuparions, piooucing ai moie rlan rley peisonally
can consume, ano riaoe away rleii suiplus ro ieceive some
o rle suiplus cieareo ly orleis.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion o riaoing ir away ro acquiie somerling else in rle
uruie.
Money: A meoium o exclange rlar is geneially accepreo in rle
communiry. Money rypically sranos on one sioe o viirually
eveiy exclange. ..
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
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Study Questions
1. \oulo a sociery laseo on roral cenrial planning in lorl
piooucrion ano consumprion neeo money? \ly oi wly
nor? (p. :p)
:. \ly ooesnr a oiiecr exclange involve rle use o a meoium
o exclange? (p. o)
. Can you rlink o ieasons rlar riaoeis evenrually giavirareo
rowaio golo ano silvei as money, as opposeo ro orlei irems
sucl as carrle oi aluminum?
. io meoia o exclange exisr /cjerc rle exisrence o money?
(pp. o:)
. !oi rle vaiious seconoaiy uncrions o money lisreo ly
Mises, explain loweacl is ielareo ro moneys iole as a com-
monly accepreo meoium o exclange. (pp. )
tuav:iv :
0N Ikl Mlk!0klMlNI 0| Vk|0l
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Summary
Tle classical economisrs ielieo on an objective theory of value, ano
naruially rlouglr rlar money was a measuiing ioo o rlis oljecrive
value. Mooein economics is laseo on a subjective theory of value,
wlicl riaces rle souice o value ro rle mino o rle inoivioual acroi.
Value is rle signicance given ro a pairiculai gooo ly a peison.
Suljecrive value is louno up wirl rle ioea o exclange. !acl
pairy ro a volunraiy riaoe gives up an iremrlar is lowei on lis value
ianking (oi scale of values), in exclange oi an irem rlar is liglei
on lis ianking. !xclanges will occui unril rleie aie no moie muru-
ally lenecial riaoes. !noiviouals suljecrive valuarions give iise ro
e/c.titc exclange iarios oi prices.
Tle law of diminishing marginal utility srares rlar rle value o
rle lasr unir o a commooiry oecieases as rle peison acquiies a
giearei quanriry o rle commooiry. Tle vaiious sclemes ro oene
an oljecrive measuiemenr o sarisacriona urilcannor ger
aiouno rle acr rlar value scales involve a ianking (1sr, :no, io,
erc.) ano nor a measuiemenr o rle inrensiry o value. !r is impossi-
lle ro peioim aiirlmerical opeiarions on rle maiginal uriliries o
vaiious unirs in oioei ro compure rle roral uriliry oi roral value
o rle enriie srock o rle gooo. ! someone says, iamonos aie
moie valualle rlan warei, wlar le means is rlar i oiceo ro give
up enc oiamono oi enc gallon o warei, le woulo cloose ro give up
rle larrei.
11
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
Knowleoge o oljecrive money piices causes people ro ievise
rleii suljecrive value scales. ljecrive money piices piovioe a
common oenominaroi oi rle maiker exclange values o all rle
vaiious gooos ano seivices availalle.
!owevei, money piices rlemselves aie consranrly clanging.
Tlar is wly Mises ano Mengei pieei ro say rlar money is an inoex
(nor a measuiemenr) o piices, since ir is less lialle ro conusion.
Cheptcr :: On thc Mcesurcmcnt ej e/uc 1
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Chapter Outline
. Ihe |mmeasara||||t ef !a|[ect|e 0se

Va|aes
Tle classical economisrs (sucl as Aoam Smirl) ielieo on an objec-
tive theory of value, wlicl lelo rlar rle value o a commooiry
was laseo on an oljecrive ciireiion (sucl as rle amounr o laloi
iequiieo oi irs piooucrion). !n rlis minoser, ir was naruial ro view
money as a measuiing ioo o rlis oljecrive value. Jusr as a rlei-
momerei slows a liglei ieaoing on a lor oay rlan on a colo
oayieecring rle oljecrively waimei rempeiaruieso 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 o value ro rle mino o rle inoivio-
ual acroi. !n mooein economics, value ooesnr iesioe in plysical
rlings pei se, lur insreao is an arriilure asciileo ro plysical rlings
ly suljecrive pieeiences. Value is rle signicance given ro a pai-
riculai gooo ly a peison, wlo can imagine ways ro use rle gooo
ro lecome moie sariseo.
Suljecrive value is louno up wirl rle ioea o exclange. ! a
man values a piece o iion moie rlan a piece o lieao, ir means
rlar le woulo cloose rle oimei i aceo wirl a cloice lerween
rle rwo. !ven Rolinson Ciusoe, alone on lis oeseir islano, ieveals
lis valuarions ly lis exclanges wirl naruie. !oi example, le may
value sarisying lis lungei moie rlan le values sarisying lis oesiie
ro lounge on rle leacl, ano rlar is wly le exclanges lis leisuie
rime oi coconurs (ly climling riees).
\irl moie rlan one peison, valuarion guioes exclanges maoe
in rle maikerplace. !acl pairy ro a volunraiy riaoe gives up an
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
irem rlar is lowei on lis value ianking (oi scale of values), in
exclange oi an irem rlar is liglei on lis ianking. Tlis appai-
enr conriaoicrionwleie eacl peison gives up somerling less
valualle in exclange oi somerling moie valualleis peiecrly
sensille lecause value is in rle eye o rle leloloei, i.e., value is
suljecrive.
!n rle maiker, exclanges will occui unril rleie aie no moie
murually lenecial riaoes. Tle unoeilying suljecrive valuarions
riting acrs o exclange oo nor involve a measuiemenr o value.
(!oi an analogy, someone can iank lis iienos in oioei o impoi-
rance, wirlour implying rlar rleie is an oljecrive unir o iieno-
slip rlar rle peison measuies in eacl peison leoie consriucring
rle ianking. Someone can iepoir, Jim is my lesr iieno ano Sally
is my secono-lesr iieno wirlour leing alle ro say, Jim is a :
peicenr lerrei iieno rlan Sally.) All rlar is necessaiy is rlar a pei-
son le alle ro look ar any rwo possililiries, ano oecioe wlicl le
pieeis.
!ven rlougl maiker exclanges aie oiiven ly suljecrive valu-
arions rlar aie rlemselves nonquanrialle, nonerleless rlese ex-
clanges in ruin give iise ro e/c.titc exclange iarios oi prices. !oi
example, suppose Alice las rliee peais wlile Bol las rwo apples,
ano rlar on lei value scale Alice ianks rwo apples moie liglly
rlan rliee peais, wleieas Bol las rle opposire ianking. Tlese
suljecrive valuarionswlicl oo nor involve any measuiemenr o
rle amounr o value oi uriliry iesioing in eacl comlinarion o
iuirmean rlar rle rwo people can gain iom riaoing rle rliee
peais oi rle rwo apples. Tlis murually lenecial riaoe rlen esral-
lisles rlar rle oljecrive piice o an apple is 1. peais, ano rlar rle
piice o a peai is rwo-rliios o an apple. Tlus Alice ano Bols sul-
jecrive iankings o apples ano peais, alloweo oi rle oimarion o
an oljecrive maiker piice ieecreo in rleii exclange. Bur ir woulo
le nonsensical ro oesciile rlis scenaiio as one in wlicl an apple
gives o peicenr moie value ro people rlan a peai.
Cheptcr :: On thc Mcesurcmcnt ej e/uc 1
Tle law of diminishing marginal utility srares rlar rle value o
rle lasr unir o a commooiry (in someones possession) oecieases
as rle peison acquiies a giearei quanriry o rle commooiry. Tlis
ollows iom rle olseivarion rlar a peison will necessaiily assign
sulsequenr unirs o a commooiry ro rlose puiposes rlar le oeems
less ano less signicanr. !oi example, i a peison las only one gal-
lon o warei, le will arracl a giear signicance ro ir, lecause ir is
necessaiy ro srave o rliisr.
As a peisons access ro warei lecomes giearei, lowevei, rle lasr
(oi maiginal) gallon o warei lecomes less signicanr. Tle :rl
gallon, peilaps, will le oevoreo ro cooking, ano is nor neaily as
impoiranr as rle 1sr rliougl :rl gallons, wlicl weie oevoreo ro
oiinking. Ano rle 1,ooorl gallon miglr le useo ro wasl rle cai, a
ielarively unimpoiranr goal.
Tle vaiious sclemes ro oene an oljecrive measuiemenr o
sarisacriona urilcannor ger aiouno rle acr rlar value scales
involve a ianking (1sr, :no, io, erc.) ano nor a measuiemenr o
rle inrensiry o value. Tle ienowneo Clicago Sclool economisr
!iving !islei, oi example, oeviseo a clevei aigumenr ly wlicl
le equareo rle uriliry o rle 1oorl loa o lieao wirl rle uriliry
oeiiveo iom rle lasr ano secono-lasr unirs o uel oil. Ar rle same
rime, rle uriliry o rle 1orl loa o lieao was equal ro rle uriliry
o only rle lasr unir o uel oil. !islei concluoes rlar rle 1orl loa
o lieao musr lave only one-lal rle uriliry o rle 1oorl loa. Bur
rlis assumes away oiminisling maiginal uriliry in rle uel oil.
z. Ieta| Va|ae
! ir is impossille ro measuie rle value in a single unir o a gooo, ir
is olviously impossille ro peioim aiirlmerical opeiarions on rle
maiginal uriliries o vaiious unirs in oioei ro compure rle roral
uriliry oi roral value o rle enriie srock o rle gooo. ne piollem
wirl rlis appioacl is rlar a free good (sucl as aii) woulo eno up
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
wirl a roral value o zeio, since rle maiginal uriliry o one culic
merei o aii is zeio in mosr ciicumsrances.
!r musr le iepeareo rlar uriliry oi value is a concepr ielareo
ro rle acrs o cloice rlar a pairiculai inoivioual conremplares. !
someone says, iamonos aie moie valualle rlan warei, wlar le
means is rlar i oiceo ro give up enc oiamono oi enc gallon o warei,
le woulo cloose ro give up rle larrei. Bur i 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 i le wanreo
ro live longei rlan a ew oays). nly in rlis conriiveo case can we
meaningully speak o rle roral value o rle enriie srock o warei,
lecause in rlis siruarion rle roral value ano rle maiginal value
aie rle same, rle unir unoei consioeiarion is all rle warei in rle
woilo.
. Meae as a |r|ce |a6ex
Ar rlis poinr, ir sloulo le cleai rlar money cannor seive as a mea-
suiing ioo o suljecrive value. Tleie is a sense in wlicl money is
a measuie o oljecrive maiker exclange value, lowevei. !oi exam-
ple, i a cai riaoes oi s:o,ooo wlile a moroicycle riaoes oi s1o,ooo,
rlen rle cai las rwice as mucl exclange value. Someone liinging
a cai ro maiker can olrain rwice as many gooos ano seivices oi
ir, wleie rle amounr is measuieo in money piices.
Knowleoge o oljecrive money piices causes people ro ievise
rleii suljecrive value scales. Someone wlo oespises smoking ano
loves vegeralles may nonerleless place a liglei value on an
unopeneo cairon o cigaierres rlan on a romaro, lecause sle can
sell rle cairon oi money, ano rlen use rle money ro luy a romaro
as well as many orlei irems. !n rlis way, oljecrive money piices
piovioe a common oenominaroi oi rle maiker exclange values
o all rle vaiious gooos ano seivices availalle.
Cheptcr :: On thc Mcesurcmcnt ej e/uc 1
!owevei, lecause money piices rlemselves aie oereimineo
ly rle unoeilying suljecrive valuarions o rle riaoeis, rley aie
consranrly clanging. Tle vaiious comlinarions o gooos rlar one
moroicycle can luy rooay, may le oieienr romoiiow, nor only
lecause rle piice (quoreo in money) o rle moroicycle can clange,
lur also lecause rle piices (quoreo in money) o all orleis gooos
can clange. Tlar is wly Mises ano Mengei pieei ro say rlar
money is an inoex (nor a measuiemenr) o piices, since ir is less
lialle ro conusion. ..
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
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Important Contributions
The replacement of the classlcal economlsts labor (or cost) theory
of value, wlth sub[ectlve value theory, was a true revolutlon ln eco-
nomlc theory. The classlcal theory explalnedthe prlce of a goodby
the amount of labor or (more generally) the cost of produclng the
good. Although such an approach explalned the fact that prlces
and productlon costs tended to be slmllar, there were many prob-
lems. Por example, lt was clear that the actual day-to-day prlces
of goods were not determlned by productlon costs, so at best the
cost theory explalned long-run tendencles, not the determlnants
of actual market prlces. worse stlll, costs are themselves prlces,
and so to explaln the prlce of a good by the costs of produclng lt,
only pushes the problemback one step. 8y explalnlngthe prlces of
consumer goods through the lnteractlon of sub[ectlve valuatlons
ln the marketand then uslng these consumer prlces to explaln
the prlces of the producer goods needed to make themthe sub-
[ectlve value theorlsts resolved these problems. Although other
economlsts partlclpated ln the Sub[ectlvlst /Marglnal Pevolutlon,
lt was the Austrlan economlsts who worked out the loglcal foun-
datlons of the new approach, as Mlsess frequent references to
Menger, 8hm-8awerk, and wleser testlfy.
|rvlng Plsher was an lncredlbly lnuentlal economlst from the
Chlcago School, and arguably one of the founders of modern,
malnstream economlcs. Although economlsts pald llp servlce
to the sub[ectlvlst revolutlon ln value theory, nonetheless they
often fell back lnto the old hablt of vlewlng utlllty as a cardlnal,
measurable substance. Mlsess crltlque of Plsher ls a good lllustra-
tlon of thls tendency. Modern Austrlan economlsts also chlde thelr
..
Cheptcr :: On thc Mcesurcmcnt ej e/uc 1p
malnstream peers for relylng on mathematlcal models of utlllty
functlons that can easlly lead the economlst lnto forgettlng that
modern prlce theory only assumes that lndlvlduals can rank varl-
ous comblnatlons of goods frombest to worst. There ls no need to
assume that a consumer has an lntenslty of preference for varlous
goods that could be measured by unlts of utlllty. ..
:o Stuy Cuic te Thc Thcery ej Mency en Crcit
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New Terminology
Free good: A gooo rlar las a piice o zeio, lecause ir is nor scaice.
Tleie is enougl o rle gooo ro sarisy all luman wanrs rlar
ir can reclnically ulll.
Lawof diminishing marginal utility: Tle iule, oeoucille iom rle
naruie o economizing acrion, rlar eacl aooirional unir o
a gooo oi seivice will lave a lowei value, lecause a peison
will allocare successive unirs ro sarisying enos rlar aie less
ano less impoiranr.
Objective theory of value: An explanarion o value rlar ielies on rle
oljecrive piopeiries o a gooo, sucl as irs cosr o piooucrion
oi rle amounr o laloi rlar wenr inro irs consriucrion. (Tle
classical economisrs, sucl as AoamSmirl ano avio Ricaioo,
lelo an oljecrive rleoiy o value.)
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiy economy, piices aie rypically quoreo in
reims o rle money gooo.
Scale of values: An analyrical rool ly wlicl rle economisr inrei-
piers rle acrions o an inoivioual, wlo suljecrively ianks pai-
riculai unirs o gooos ano seivices in oioei iommosr ro leasr
impoiranr.
Subjective theory of value: An explanarion o value rlar ielies on
inoiviouals suljecrive iankings o pairiculai unirs o gooos
ano seivices. (Tle so-calleo Maiginal Revolurion o rle
eaily 18osspeaileaoeo ly Cail Mengei, \illiam Sranley
Jevons, ano !on \aliasoveiruineo rle oljecrive rleoiy
o value ano usleieo in rle suljecrive rleoiy.)
Value: Tle impoirance rlar an inoivioual places on a pairiculai
unir o a gooo oi seivice.
..
Cheptcr :: On thc Mcesurcmcnt ej e/uc :1
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Study Questions
1. !xplain: !n rle oloei polirical economy, rle seaicl oi a
piinciple goveining rle measuiemenr o value was ro a cei-
rain exrenr jusrialle. (p. 8)
:. \ly woulo an isolareo inoivioual srill neeo ro engage in
a compaiison o values leoie raking acrion wirl iespecr
ro scaice gooos? (p. 8)
. \ly ooes an exclange o rwo irems iequiie rlar rle people
making rle exclange place rle irems in ieveise oioei on
rleii value scales? (p. p)
. !xplain: Tle unrenaliliry o |\ieseis] aigumenr is slown
ly rle acr rlar ir woulo piove rlar rle roral srock o a iee
gooo musr always le woirl norling. (p. )
. !ow ooes money aio rle enriepieneui? (pp. 8p)
tuav:iv
Ikl Vkk|00! K|N0! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
A money substitute is a peiecrly secuie ano immeoiare claim on
money. Because rle claims rlemselves can acilirare inoiiecr ex-
clange, rley lecome a sulsrirure oi rle oiiginal commooiry
money.
Tle oenirion o mency sloulo seive rle puiposes o economic
rleoiy, rle mosr impoiranr leing rle explanarion o rle purchas-
ing power o money. !oi economics, wlar marreis is rle acrual
piacrices ano expecrarions o inoiviouals in rle maiker, iarlei rlan
legal oimaliries.
Commodity money is a common meoium o exclange rlar is
also an economic gooo in irs own iiglr. !oi example, golo, sil-
vei, ano even rolacco lave lisroiically leen useo as money, ano
yer people also valueo ano riaoeo rlese commooiries oi orlei
ieasons.
Fiat money is accepreo as a common meoium o exclange net
lecause o irs reclnological piopeiries, lur lecause o a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !oi exam-
ple, in rle cuiienr !nireo Srares gieen iecrangulai pieces o
papei lecome money wlen ceirain ink parreins aie placeo on
rlem.
Credit money occuis wlen a claim on a plysical oi legal peison,
alling oue in rle uruie, is irsel useo as a meoium o exclange.
:
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Some rleoiisrs explain rle value o money as oue ro Srare
commanos. Bur rle goveinmenr cannor oice people ro aoopr a
pairiculai irem as rle commonly accepreo meoium o exclange,
ler alone ro accepr ir wirl a pairiculai puiclasing powei. Tle gov-
einmenr can use irs riemenoous powei ro make ir moie likely rlar
people will aoopr a pairiculai irem (sucl as gieen pieces o papei
wirl ceirain ink parreins) as money, lur economically somerling
is money lecause o irs usage ly people in rle maiker. A govein-
menr eoicr pei se cannor riansoim ir inro money.
Cheptcr : Thc erieus Kins ej Mency :
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Meae aa6 Meae !a|st|tates
A money substitute is a peiecrly secuie ano immeoiare claim on
money. !oi example, suppose rle commonly accepreo meoium o
exclange is golo, ano a iepuralle lank issues a papei ricker enri-
rling rle leaiei ro one ounce o golo. So long as people in rle com-
muniry aie ceirain rlar rley will le paio in plysical golo wlenevei
rley piesenr rle ricker ro a liancl o rle lank, rlen sucl rickers
aie money sulsrirures ano may clange lanos ouiing puiclases rle
same way plysical golo woulo.
!n rle maiker economy, people can issue peiecrly secuie ano
immeoiare claims (i.e., ieoemprion rickers) ro all soirs o gooos,
nor jusr money. Bur rle ciucial earuie o sucl claims on money is
rlar rle claims rlemselves can acilirare inoiiecr exclange, ano so
lecome a sulsrirure oi rle oiiginal commooiry money. !n orlei
woios, pieces o papei enrirling rle ownei ro an ounce o golo
can ciiculare in rle maiker rle same way acrual 1 oz. golo coins
woulo (so long as eveiyone is assuieo o immeoiare ieoemprion).
!n piinciple meiclanrs miglr nevei acrually ruin rle rickers in, ro
ieceive rle plysical golo. !n conriasr, people miglr riaoe papei
claims guaianreeing rle ownei ro a loa o lieao, lur rley woulo
evenrually ieoeem rlem. Sucl rickers coulo nevei lecome lieao-
sulsrirures lecause rle papei coulonr seive rle same uncrion as
acrual lieao.
!oi economisrsas opposeo ro legal rleoiisrs oi rle lusiness-
peisonrle oenirion o mency sloulo seive rle puiposes o eco-
nomic rleoiy. Tle cenrial rask o rle economic analysis o money
is ro explain rle exclange iarios lerween money ano all orlei
gooos, i.e., ro explain rle purchasing power o money.
: Stuy Cuic te Thc Thcery ej Mency en Crcit
!n Misess juogmenr, rle mosr iuirul classicarion scleme ois-
ringuisles lerween rle unoeilying money in the narrower sense
veisus peiecrly secuie ano immeoiare ./eims ro sucl money, i.e.,
money sulsrirures. !e conceoes rlar ir woulo le logically consis-
renr ro incluoe money sulsrirures in rle oenirion o mency irsel,
lur lelieves lis pieeiieo oisrincrion (i.e., lerween money ano
money sulsrirures) will make ir easiei ro explain orlei plenom-
ena (sucl as rle puiclasing powei o money, as well as rle loom-
lusr cycle) moie cleaily in larei clapreis. (See rle Appenoix B on
page :1 oi a oiagiam ourlining Misess classicarion scleme oi
vaiious irems rlar aie oren incluoeo in rle concepr o money.)
z. Ihe |eca||ar|t|es ef Meae !a|st|tates
!n rle economic analysis o money, wlar marreis is rle acrual piac-
rices ano expecrarions o inoiviouals in rle maiker. !oi example,
wlerlei oi nor legislarion oeclaies rlar token coins aie /cge//y /in-
ing claims on money, i in pre.ti.c rle loloei o a roken can easily
exclange ir oi rle equivalenr amounr o acrual money, rlen c.e-
nemi.e//y spceling rle roken is a money sulsrirure.
Tle same piinciple applies ro banknotes. !oi example, con-
venrional accounrs say rlar Ausriia-!ungaiy iom 1poo ro 1p1
possesseo a paper standard, lecause /cge//y rle Ausrio-!ungaiian
Bank lao no olligarion ro ieoeem irs papei nores oi commoo-
iry money, ano in acr rle nores weie oeclaieo legal tender. Yer
in piacrice ouiing rlis peiioo, rle Ausrio-!ungaiian Bank woulo
volunraiily cash irs papei nores oi golo upon iequesr, ano so eco-
nomically speaking Ausriia-!ungaiy was on a gold standard.
. Cemme6|t Meae, Cre6|t Meae, aa6 ||at Meae
Commodity money is a common meoium o exclange rlar is also
an economic gooo in irs own iiglr. !oi example, golo, silvei, ano
Cheptcr : Thc erieus Kins ej Mency :
even rolacco lave lisroiically leen useo as money, ano yer people
also valueo ano riaoeo rlese commooiries oi orlei ieasons.
Fiat money is accepreo as a common meoium o exclange net
lecause o irs reclnological piopeiries, lur lecause o a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !oi exam-
ple, in rle cuiienr !nireo Srares gieen iecrangulai pieces o
papei aie nor money pei se. Tley only lecome money wlen rley
aie cur ro exacr size ano piinreo wirl rle coiiecr oesigns ly rle !.S.
Tieasuiy. Tlus rle gieen pieces o papei appeai ro lecome money
ly ar (i.e., commano) o rle !.S. goveinmenr. !owevei, in eco-
nomics rle oenirion o money is a commonly accepreo meoium
o exclange. Tle goveinmenr can only use irs poweis ro encoui-
age people ro use a pairiculai class o iremsoi example, gieen
pieces o papei wirl rle appiopiiare ink parreinsas a common
meoium o exclange, rle meie legal oeclaiarion isnr wlar makes
rlem money, economically speaking.
Credit money occuis wlen a claim on a plysical oi legal pei-
son (e.g., a coipoiarion oi goveinmenr agency), alling oue in rle
uruie, is irsel useo as a meoiumo exclange. To oisringuisl cieoir
mency iom meie cieoir, ir is necessaiy rlar people aie geneially
willing ro accepr rle claim in riaoe net lecause rley wanr ro wair
ano ieceive rle unoeilying paymenr (ro wlicl rle claim enrirles
rlem), lur lecause rley expecr ro le alle ro easily riaoe away rle
claim irsel oi orlei gooos. !oi example, suppose a goveinmenr
oiiginally piomiseo ro ieoeem irs papei nores immeoiarely upon
oemano oi commooiry money (sucl as golo). Bur ouiing a wai,
rle goveinmenr suspenos conveirililiry, so rlar rle papei nores
aie now nor legally linoing claims on anyrling. !owevei, i rle
pullic expecrs rlar ar some poinr in rle uruie, ieoeemaliliry will
le iesroieo, rlen rle nores woulo ciiculare as cieoir money (nor
ar money) lecause rley woulo le claims ro golo alling oue in
rle uruie (ar an unceirain oare). So long as rle papei nores aie
consioeieo so liquid rlar viirually eveiyone is willing ro accepr
:8 Stuy Cuic te Thc Thcery ej Mency en Crcit
rlem in riaoe, rley aie a common meoium o exclange ano lence
money.
. Ihe Cemme6|t Meae ef the |ast aa6 ef the |reseat
Some rleoiisrs explain rle value o money as oue ro Srare com-
manos. !oi example, Tle moneraiy unir o rle !nireo Srares is
rle oollai, lecause rle !.S. goveinmenr las passeo a law. Bur
rlis is a veiy inaoequare ieaoing o lisroiy, lecause goveinmenrs
cannor simply oice a pairiculai gooo ro commano a pairiculai
pur.hesing pevcr in rle maiker. !oi example, a king can collecr
raxes in rle oim o silvei coins, ano rlen debase rlem ly melr-
ing rlem oown ano minring a giearei numlei o coins wirl less
silvei conrenr pei coin. Bur rle maiker will ieacr ly iaising piices
(quoreo in reims o rle coins), ano even i rle king iesoirs ro price
controls wirl oiaconian penalries, le will cause sloirages in accoi-
oance wirl economic law.
..
Cheptcr : Thc erieus Kins ej Mency :p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
n pages , Mises aigues rlar roken coinage is nor
an inoepenoenr economic concepr, lur iarlei a special
rype o money sulsrirure. Token coinage was oevelopeo
ro acilirare small riansacrions. !oi example, in a counriy
using golo as irs commooiry money, ir woulo le awkwaio
ro puiclase an irem wirl a piice o rl o an ounce o
golo, i cusromeis lao ro use rle plysical golo irsel. Tle
goveinmenr miglr rleieoie pioouce a limireo numlei o
small oiscs (peilaps maoe o coppei oi nickel) rlar weie
srampeo wirl, !egal Tenoei, rl oz. o golo. !ven
rlougl rle acrual meral conrenr o rle rokens woulo le
less, rley woulo nonerleless riaoe ar rleii ace value so
long as eveiyone lelieveo rlar rle goveinmenr woulo airl-
ully exclange one ounce o plysical golo oi 1oo rokens.
Tle impoiranr poinr is nor wlerlei sucl ieoemprion weie
a legal iequiiemenr, lur meiely wlerlei in pre.ti.c people
expecreo rle oprion ro le availalle upon oemano. (Also
nore rlar rle coins Mises oiscusses on pages o1 aie
net roken coins, lur coins consisring o rle commooiry
money. !n orlei woios, sucl coins aie valueo lecause rley
acrually .ensist ej a iecognizeo weiglr in golo oi silvei, nor
lecause rle loloeis expecr ro le alle ro rcccm rlem oi
golo oi silvei.)
!n rle Misesian scleme, cieoir money is nor rle same as
a money sulsrirure lecause rle claims consriruring cieoir
money aie nor oue immeoiarely, wleieas rley musr le oi
a riue money sulsrirure. Money sulsrirures aie valueo rle
same as rle unoeilying money ro wlicl rley aie claims, a
o Stuy Cuic te Thc Thcery ej Mency en Crcit
lanknore enrirling rle leaiei ro one ounce o golo, upon
iequesr, will lave rle same puiclasing powei as one ounce
o golo. !owevei, a coipoiare lono piomising rle leaiei
one ounce o golo in o yeais, i ir is ro lecome a cieoir
money ano ciiculare as a common meoium o exclange,
will le suljecr ro an inoepenoenr valuarion, oepenoing nor
meiely on rle ielialiliry o rle claimano rle wair involveo,
lur also on rle liquioiry o rle lono. (See p. 1.)
..
Cheptcr : Thc erieus Kins ej Mency 1
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New Terminology
Banknotes: Papei nores issueo ly lanks, rypically enrirling rle
leaiei ro a specieo amounr o rle money gooo.
Cash (verb): To ieoeem a claim (sucl as a lanknore) ly paying rle
specieo amounr o rle money gooo.
Commodity money: A common meoiumo exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo oi nonmoneraiy iea-
sons.
Credit money: A common meoium o exclange rlar is a claim on a
peison oi legal peison (sucl as a coipoiarion oi goveinmenr
agency), nor alling oue unril a (possilly unceirain) uruie
oare.
Debase: To oilure rle value o rle money, oi example wlen a
iulei inrioouces lase merals inro rle coinage, ieoucing
rleii piecious-meral conrenr.
Fiat money: Acommon meoiumo exclange accepreo nor lecause
o irs reclnological piopeiries, lur lecause o a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !iar
money is nor lackeo up ly anyrling else.
Gold standard: Tle aiiangemenr ly wlicl a narions money (sucl
as rle !.S. oollai oi rle Biirisl pouno) can le ieoeemeo oi
a oenire weiglr o golo.
Legal tender: An irem rlar rle goveinmenr oeclaies ro le valio oi
rle paymenr o oelrs oenominareo in money, ar pai value.
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Liquid (adjective): Tle aliliry o leing solo oi rle ull maiker piice
wirl a veiy sloir seaicl rime. (!oi example, a slaie o coi-
poiare srock is mucl moie liquio rlan a louse.)
Money in the narrower sense: Tle acrual money gooo (wlerlei
commooiry, ar, oi cieoir money), nor incluoing money sul-
srirures.
Money in the broader sense: Tle acrual money gooo (wlerlei
commooiry, ar, oi cieoir money), plus money sulsrirures.
Money substitute: A peiecrly secuie ano insranrly ieoeemalle
claim on money, wlicl irsel ciiculares as money (in rle
lioaoei sense) lecause ir ullls rle uncrions o money.
Paper standard: Tle aiiangemenr ly wlicl rle goveinmenr ooes
nor ieoeem papei nores oi a piecious meral. (A papei sran-
oaio sranos in conriasr ro a golo sranoaio.)
Price controls: Coveinmenr oeciees rliearening nes oi orlei pun-
islmenr oi people riaoing ar piices rlar aie eirlei roo ligl
(in rle case o a piice ceiling) oi roo low (in rle case o a
piice ooi).
Purchasing power: Tle amounr o gooos ano seivices rlar a unir
o money can commano lecause o rle vaiious piices in rle
maiker.
Token coins: Coins rlar seive as iepiesenrarives o money (usually
in veiy small oenominarions), even rlougl rley oo nor con-
rain rle ull weiglr o meral in rle case o a commooiry
money.
..
Cheptcr : Thc erieus Kins ej Mency
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Study Questions
1. \lar is peculiai alour rle acr rlar people may use
claims on money, iarlei rlan money irsel? !ow is rlis
peculiaiiry explaineo ly ieeience ro rle special claiac-
reiisrics o money? (p. o)
:. \lar ooes Mises rlink o rle riearmenr economisrs lao
given ro money, leoie lis own conriilurion? (p. 1)
. \lar is rle rask o economic rleoiy, iegaioing money?
(p. 1)
. !xplain:
|
\
]
leieas ir is impossille ro sarisy an inciease
in rle oemano, say, oi lieao ly issuing moie lieao-rickers
. . . ir is peiecrly possille ro sarisy an incieaseo oemano oi
money ly jusr sucl a piocess as rlis. (p. )
. \oulo Mises le suipiiseo ar rle woilos cuiienr moneraiy
sysrem? (p. 1)
tuav:iv
M0Nl\ kN0 Ikl !IkIl
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
!nless ir iesoirs ro ouriiglr socialism, rle Srare musr conoim ro
rle maiker. !rs acrions in rle maiker aie goveineo ly rle !aws o
Piice. !n rlis iespecr, rle Srare las moie inuence rlan any orlei
enriry, lur rlis is oue ro rle Srares enoimous luoger.
!n economics, money is a common meoium o exclange. Bur
iom rle legal poinr o view, money is a common meoium o pay-
menr oi oelr serrlemenr. Money can only seive rlis uncrion (as
a meoium o oelr serrlemenr) lecause ir is a meoium o exclange.
Tlis is cleai wlen we consioei cases wleie a conriacr cannor le
ullleo as wiirren, ano so rle couir species a moneraiy paymenr
insreao.
Coveinmenr cannor oice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal sysrem can ceirainly allow
oelrois ro sarisy rleii conriacrual lialiliries ly paying wirl
irems ar a ace value liglei rlan wlar rle cieoirois acrually lelieve
rley aie woirl, lur rlis meiely means a pairial iepuoiarion o rle
oelr.
iiginally rle Srares only iole in rle moneraiy spleie was
ro supply iecognizalle coins rlar weie laio ro counreieir ano
rlar weie veiy similai in appeaiance, weiglr, ano neness. By pio-
oucing suiralle coins, rle Srare was meiely aciliraring commeice,
lecause meiclanrs woulonr neeo clemical resrs ano scales ro eval-
uare rle golo oi silvei rleii cusromeis piesenreo in paymenr.

Stuy Cuic te Thc Thcery ej Mency en Crcit


Tle Srares inuence in rle moneraiy spleie las giown le-
cause irs size las giown, lur also lecause o irs conriol o rle minr:
Tle Srare can wirloiaw coins o one meral ano ieplace rlem wirl
coins o a oieienr meral. Tle Srare also inuences rle moneraiy
spleie rliougl irs aliliry ro suspeno rle immeoiare ieoemprion
o money sulsrirures, conveiring rlem inro cieoir money oi even
ar money.
Cheptcr : Mency en thc Stetc
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe |es|t|ea ef the !tate |a the Market
Alrlougl ir commanos a laige inuence lecause o irs powei ro rax,
ulrimarely rle Srare musr conoim ro rle maiker. !nless ir com-
plerely alolisles piivare piopeiry ano oims a socialisr Srare, rle
goveinmenr can only successully clange maiker piices rliougl
irs own oecisions ro luy ano sell. Tle same is riue o money: meie
goveinmenr eoicrs cannor explain rle puiclasing powei o a com-
mon meoium o exclange.
z. Ihe |eqa| Ceacept ef Meae
!n economics, money is a common meoiumo exclange. Bur iom
rle legal poinr o view, money is a common meoium o paymenr
oi oelr serrlemenr. ! a conriacr calls oi one pairy ro pay lack a
loan o 1oo ounces o golo, plus ounces in inreiesr in one yeai,
rle legal sysremmusr speciy wlar rypes o gooos aie accepralle ro
sarisy rle conriacr. (!oi example, musr ir le oone in plysical golo,
oi can a lanknore oi a cleck wiirren on a lank accounroenomi-
nareo in golosarisy rle oelr? \lar alour roken coins rlar can
le exclangeo oi golo?) !owevei, money can only seive rlis unc-
rion (as a meoium o oelr serrlemenr) lecause ir is a meoium o
exclange. Tlis is cleai wlen we consioei cases wleie a conriacr
cannor le ullleo as wiirren, ano so rle couir species a moneraiy
paymenr insreao.
Coveinmenr cannor oice people ro arriilure a ceirain ex-
clange value ro a gooo. Tle legal sysrem can ceirainly allow
oelrois ro sarisy rleii conriacrual lialiliries ly paying wirl
irems ar a ace value liglei rlan wlar rle cieoirois acrually lelieve
8 Stuy Cuic te Thc Thcery ej Mency en Crcit
rley aie woirl, lur rlis meiely means a pairial iepuoiarion o rle
oelr.
. Ihe |aaeace ef the !tate ea the Meaetar !stem
iiginally rle Srares only iole in rle moneraiy spleie was ro sup-
ply coins o rle giearesr possille oegiee o similaiiry in appeai-
ance, weiglr, ano neness. !uirleimoie, ro oo irs rask well rle
Srare woulo manuacruie coins rlar weie laio ro counreieir, ano
rlar loie a iecognizalle sramp. !n rlis iegaio, rle Srare wasnr
cning money, lur was insreao meiely raking wlar thc merlct lao
closen as rle moneyoi example, goloano rlen piooucing
lunks o rle money in convenienr slapes. By piooucing suiralle
coins, rle Srare was meiely aciliraring commeice: i eveiyone iec-
ognizeo rle Srares one-ounce golo coin, ano knew rlar ir was gen-
uine, rlen meiclanrs woulonr lave ro iesoir ro clemical resrs ano
scales ro evaluare rle yellow meral rleii cusromeis piesenreo in
paymenr.
Tle Srares inuence in rle moneraiy spleie las giown le-
cause irs size (ielarive ro rle economy) las giown, lur also lecause
o irs conriol o rle minr. Tle Srare can exeir giear powei ovei
wlar irs suljecrs cloose as rle common meoiumo exclange, since
ir can (oi example) wirloiaw coins o one meral ano ieplace rlem
wirl coins o a oieienr meral. !ven so, rle Srare cannor avoio
rle laws o economics. Tle aileo arremprs ar bimetallist legisla-
tionwleie rle goveinmenr esrallisleo a xeo iario lerween rle
value o golo ano silveisloweo rle opeiarion o Greshams Law.
Tlar is, wlen rle acrual maiker values o golo ano silvei oeviareo
iom rle legal iario, people woulo loaio rle unoeivalueo meral
ano riy ro speno rle oveivalueo meral.
Tle Srare also inuences rle moneraiy spleie rliougl irs alil-
iry ro suspeno rle immeoiare ieoemprion o money sulsrirures,
conveiring rlem inro cieoir money oi even ar money.
..
Cheptcr : Mency en thc Stetc p
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Important Contributions
Carl Mengers explanatlon of the orlgln of money (lald out ln
chapter :) oers a satlsfactory rebuttal to the State theory of
money oered 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 showuslng Mengers approachhow money arose sponta-
neously on the market.
|n thls chapter we already see the benet of Mlsess fastldlous clas-
slcatlon scheme regardlng money. Armed wlth hls categorles of
money substltutes, commodlty money, and credlt money, Mlses
can explaln exactly how a State lnuences the money used by lts
sub[ects. whlle many others place great lmportance on State leg-
lslatlon regardlng tax payments and debt contracts, Mlses lnstead
looks at the States 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 Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Bimetallist legislation: !oirs ly rle goveinmenr ro esrallisl a
xeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr iequiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr paymenr in silvei ounces ar
a xeo mulriple o rle golo piice.
Greshams Law: Populaily summaiizeo as lao money oiives our
gooo, rle plenomenon ly wlicl people will lolo money
rlar is unoeivalueo ly legislarion, ano will speno rle money
rlar is oveivalueo ly legislarion. !oi example, i limerallisr
legislarion iequiies rlar meiclanrs accepr silvei ano golo ar
rle iario o 1-ro-1, wlen in acr rle acrual maiker exclange
iare is :o-ro-1, rlen eveiyone will riy ro luy wirl silvei, ano
no one will use golo oi making puiclases. Colo will seem
ro oisappeai, ano only silvei will le useo in commeice. !oi a
oieienr example, i rle goveinmenr passes legal renoei laws
on all goveinmenr-srampeo coins, rlen coins wirl low meral
value (sucl as !.S. quaireis minreo in rle yeai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. quaireis minreo in rle yeai 1po) will le loaioeo ly
people wlo iecognize rle value o rle silvei.
..
Cheptcr : Mency en thc Stetc 1
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Study Questions
1. !xplain: \len nores rlar aie appiaiseo commeicially
ar only lal rleii ace-value aie pioclaimeo legal renoei,
rlis amounrs unoamenrally ro rle same rling as gianring
oelrois legal ielie iom lal o rleii lialiliries. (p. 1)
:. !xplain: Srare oeclaiarions o legal renoei aecr only
rlose moneraiy olligarions rlar lave alieaoy leen con-
riacreo. (p. 1)
. \lar aie rle rwo meclanisms rliougl wlicl rle Srares
inuence on commeicial usage, lorl porenrial ano acrual,
las incieaseo? (pp. :)
. !xplain: A counriy rlar wisles ro peisuaoe irs suljecrs ro
go ovei iom one piecious-meral sranoaio ro anorlei can-
nor iesr conrenr wirl expiessing rlis aspiiarion in appio-
piiare piovisions o rle civil ano scal law. (p. )
. !xplain: Tle paiallel sranoaio was rlus ruineo, nor inro
a ooulle sranoaio, as rle legislarois lao inrenoeo, lur inro
an alreinarive sranoaio. (p. )
tuav:iv
M0Nl\ k! kN lC0N0M|C 6000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Meae Ne|ther a |re6act|ea 6ee6 aer a Ceasampt|ea 6ee6
Tiaoirionally, economic gooos weie oivioeo inro consumprion
gooos (wlar Mengei calleo gooos o rle isr oioei) ano pioouc-
rion gooos (wlar Mengei calleo gooos o liglei oioeis). Con-
sumprion gooos oiiecrly sariseo luman oesiies, wleieas pioouc-
rion gooos only sariseo rlem inoiiecrly. (!oi example, an apple
miglr le a consumprion gooo ro a lungiy man, wlile an apple
seeo woulo le a piooucrion gooo.) ! we insisr on a rwo-olo
scleme, rlen money musr le a piooucrion gooo, since ir is cleaily
nor a consumprion gooo. Yer rlis is piollemaric roo, lecause
money is veiy oieienr iom orlei rypes o piooucrion gooos.
A solurion is ro aoopr a rliee-olo sysrem, consisring o con-
sumprion gooos, piooucrion gooos, ano meoia o exclange. Tlis
makes sense, lecause money is nor a commeicial rool in rle
same way rlar accounr looks aie. Alrlougl in a ceirain sense
money acilirares commeice jusr as loars ano iailioaos oo, rley
oiei in a ciucial way: !ncieasing rle supply o money ooes nor
make rle communiry iiclei, wleieas laving moie loars, iailioaos,
ano orlei piooucrion gooos allows oi rle giearei sarisacrion o
luman oesiies. Tlis is wly money sloulo le classieo in a sepa-
iare caregoiy, namely meoia o exclange.

Stuy Cuic te Thc Thcery ej Mency en Crcit


z. Meae as |art ef |r|ate Cap|ta|
Private capital can le oeneo as rle aggiegare o rle piooucrs rlar
seive as a means ro rle acquisirion o gooos. Money sloulo cleaily
le incluoeo in rlis caregoiy, ano in acr lisroiically an inreiesr-
leaiing sum o money was rle srairing poinr o rle concepr o
capiral.
vei rime, rleoiisrs iealizeo rlar money was laiien ano oio
nor oiiecrly yielo irs iuirs rle way plysical seeos oi luman laloi
coulo. To explain wly people woulo le willing ro pay inreiesr on
money loans, we musr iecognize rlar money can le cx.hengc oi
orlei, piooucrive gooos. Tlis olseivarion ieinoices rle oecision
ro classiy money as a meoium o exclange, iarlei rlan a pioouc-
rion gooo: rle only way ro salvage rle inclusion o money as a pair
o piivare capiral, is ro istinguish ir iom orlei piooucrion gooos
ano iecognize irs special aliliry ro le exclangeo oi rlem.
. Meae Net a |art ef !ec|a| Cap|ta|
Social (or productive) capital can le oeneo as rle aggiegare o rle
piooucrs inrenoeo oi employmenr in uirlei piooucrion. ! we
oeny rlar money is a piooucrion gooo, rlen olviously ir cannor
le a pair o social (oi piooucrive) capiral.
..
Cheptcr : Mency es en L.enemi. Cee
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
Mlsess 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 dlcult 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
dlers from Lugen von 8hm-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 classlcatlon of money substltutes, credlt money, etc.,
ln thls chapter Mlses exerclses great preclslon ln denlng hls con-
cepts and [ustlfylng hls declslons. Por the lssues ln thls chapter,
Mlses tells thereader (p. 86) that thegroundwork wlll belmportant
for understandlng the dlscusslon of the equilibrium and money
rates of interest, whlch wlll occur ln part | | | of the book. ..
Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Equilibriumrate of interest: Tle iare o inreiesr coiiesponoing ro
rle riue supplies o capiral gooos ano consumei pieeiences
oi piesenr veisus uruie consumprion. Also known as rle
naruial iare o inreiesr.
Money rate of interest: Tle iare o inreiesr oereimineo in rle mai-
kerplace oi loans o money. (Tle money iare can oeviare
iom rle equililiium |oi naruial] iare o inreiesr, in a pio-
cess rlar is explaineo in pair i i i o rle look.)
Private capital: Tle aggiegare o rle piooucrs rlar seive as a means
ro rle acquisirion o gooos.
Social (productive) capital: Tle aggiegare o rle piooucrs inrenoeo
oi employmenr in uirlei piooucrion.
..
Cheptcr : Mency es en L.enemi. Cee
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar aie rle views o Rosclei ano Knies wirl iespecr ro
classiying money? (p. p)
:. \lar was !eleiicls oljecrion ro rlose (like Knies) wlo
wanreo ro oeny rlar a moneraiy exclange was an acr o
piooucrion? (pp. p8o)
. !xplain: Money is olviously nor a commeicial rool in
rle same sense as accounr looks, exclange lisrs, rle Srock
!xclange, oi rle cieoir sysrem. (p. 8)
. !xplain:
|
\
]
leieas rle clanges in rle value o . . . pioouc-
rion gooos ano consumprion gooos oo nor mirigare rle loss
oi ieouce rle gain o sarisacrion iesulring iom. . . clanges
in rleii quanriry, . . . clanges in rle value o money aie
accommooareo in sucl a way ro rle oemano oi ir rlar,
oespires inciease oi oecieases in irs quanriry, rle economic
posirion o mankino iemains rle same. (p. 8)
. \lar linoeieo rle oevelopmenr o a scienric unoeisrano-
ing o capiral ano inreiesr? (pp. 888p)
tuav:iv
Ikl lNlM|l! 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Meae |a the !ec|a||st Cemmaa|t
! a socialisr sociery complerely alolisles all piopeiry iiglrs ano
oisriilures scaice gooos ano seivices accoioing ro a cenrial plan,
rlen rleie is no scope oi even oiiecr exclange (ler alone inoiiecr
exclange) ano rleieoie no ioom oi money.
!owevei, some socialisr visionaiies conceoe rlar even in rleii
ioeal sociery, people woulo ierain owneislip iiglrs in peisonal
consumprion gooos sucl as cigaierres, apples, loaves o lieao,
sweareis, ano so oirl. !n rlis case, people woulo naruially engage
in murually lenecial riaoes, ano ulrimarely woulo osrei rle
oevelopmenr o money.
z. Meae Craaks
Tliouglour rle ages, ieoimeis lave llameo money oi social ills.
(Tle love o money is amously oeclaieo ro le rle ioor o all evil.)
Tle losriliry ro golo ano silvei is pairiculaily inrense. Yer rlese
ieoimeis nevei explain rleii ull vision o a woilo vitheut money,
oi i rley arrempreo sucl a oesciiprion, rle piollems wirl rleii
sclemes woulo le olvious.
p
o Stuy Cuic te Thc Thcery ej Mency en Crcit
rlei ciirics oo nor call oi rle alolirion o money pei se,
lur meiely oi an elasric cieoir sysrem, wlicl expanos oi con-
riacrs rle money supply accoioing ro rle communirys neeo oi
cuiiency. Accoioing ro rlis pairiculai gioup o money cranks, rle
cuiienr money ano lanking sysremimposes an airicial scaiciry ly
iesriicring cieoir ano claiging liglei inreiesr iares rlan necessaiy.
..
Cheptcr 6: Thc Lncmics ej Mency 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
Some socialisrs vieweo money irsel as a oiiry piooucr o
rle maiker economy, ano lelieveo rlar in a puie socialisr
sociery, rleie woulo le no neeo oi ir. !owevei, as Mises
explains, some o rle moie soplisricareo rleoiisrs imag-
ineo rlar rle woikeis in a socialisr communiry woulo lave
piopeiry iiglrs in consumprion gooos (ano peilaps pei-
sonal rools o rle riaoe oi skilleo airisans erc.). !owevei,
wlar .ennet le alloweo in a socialisr communirylesr ir
lecome a sysremo capiralismis piivare owneislip in rle
laige-scale means o piooucrion, sucl as aimlano, acro-
iies, iailioaos, erc.
Mises conceoes rlar a socialisr communiry rlar ieraineo
piivare owneislip in peisonal consumprion gooos, coulo
osrei rle emeigence o genuine money. !owevei, Mises
is net leie ieeiiing ro rle laloi ceiricares envisioneo
ly some socialisr rleoiisrs. !oi example, we coulo imag-
ine rlar socialisr acroiy ano aim manageis lano our one
ceiricare oi eveiy laloi loui (o suiralle qualiry) rlar
eacl woikei peioims. Tlen, once rle ciop o ourpur
gooos las leen laivesreo iom all rle vaiious acroiies
ano aimsincluoing nor jusr lorrles o milk lur also rele-
vision sers ano laskerlallsrle socialisr leaoeis oereimine
wlar iacrion o rle ciop eacl ceiricare enrirles rle leaiei
ro, laseo on rle size o rle laivesr ano rle roral num-
lei o ceiricares rlar weie issueo. Alrlougl many casual
olseiveis rlink rlar rlis is lasically wlar money isa claim
on rle ieal ourpur o socierysucl a viewis veiy supei-
cial. Acrual money (as opposeo ro a money sulsrirure) is
: Stuy Cuic te Thc Thcery ej Mency en Crcit
nor a claim on anyrling, ir is irs own gooo, lur o couise
ir is valueo lecause o irs expecreo puiclasing powei. ! a
ie oesrioys lal o rle ciop, rlen rle laloi ceiricares will
necessaiily enrirle rleii loloeis ro one-lal as mucl. Bur
wirl one unir o money, ir is nor necessaiily riue rlar irs
exclange value in rle maiker woulo oiop ly exacrly one-
lal, ano in any evenr rle piocesses goveining irs puiclas-
ing powei aie complerely oieienr iom rlose goveining
rle ieoemprion powei o a laloi ceiricare in a socialisr
communiry.
\len oealing wirl rle lasr caregoiy o money cianks on
page p, Mises explains rlar rle mainsrieam economisrs
o lis oay coulo nor eecrively ieure rlose wlo claimeo
rlar a massive expansion o rle money supplyin oioei
ro oiive rle inreiesr iare oown ro zeiowoulo liing alour
mareiial alunoance. Alrlougl mosr economisrs ano piacri-
cal lusinessmen slieo away iom sucl exrieme pioposals,
rley weie meiely rle logical exrension o rle pievailing
economic oocriines conceining money ano lanking. !r
woulo rake Misess own woik, in pairiculai lis oevelop-
menr o rle circulationcredit theoryof thetradecycle, ro aoe-
quarely explooe rlis vaiiery o moneraiy ciankislness.
..
Cheptcr 6: Thc Lncmics ej Mency
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Circulation credit theory of the trade cycle: Tle rleoiy oevelopeo ly
Mises (in rle piesenr look) explaining rle loom plase o
rle lusiness cycle as oue ro rle airicial expansion o lank
cieoir, maoe possille ly ouciaiy meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Money cranks: Veiy nave wiireis wlo lelieve rlar scaiciry is an
airicial insrirurional consriainr, ano rlar piospeiiry iequiies
only a sucienr willingness ro cieare moie money ano/oi
issue moie lank cieoir. ..
Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar rwo rienos cause rle emeigence o inoiiecr exclange
ro lecome ineviralle? (p. p1)
:. \oulo rle isolareo louselolo use money? \ly oi wly
nor? (p. p1)
. o all socialisrs piopose rle complere alolirion o money?
(p. p1)
. ! rle amounr o ieal ourpurnumlei o apples, TVs,
leair suigeiies, erc.weie ro all in lal, woulo rle pui-
clasing powei o money necessaiily all in lal? (p. p:)
. oes Mises enooise rle lanking rleoiies o Tooke ano
!ullairon? (p. p)
..
vav: ii
Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv
Ikl C0NCl|I 0| Ikl Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle main rask o economic rleoiy is ro explain moneys e/c.titc
exclange value, oi wlar is oren calleo rle pur.hesing pevcr ej
mency. Tlis ieeis ro rle amounr o gooos rlar someone can olrain
in rle maikerplace wirl a unir o money. Tlis explanarion in ruin
ulrimarely goes lack ro su/c.titc valuarions.
\lar sers money apair iom all orlei gooos is rlar money is
useul (ano lence valualle) ro people en/y lecause o irs puiclasing
powei. !n irs capaciry as a meoium o exclange, a unir o money is
only useul inasmucl as ir can le useo ro acquiie ethcr gooos ano
seivices.
\len we say a pairiculai gooo las oljecrive exclange value,
rle reim oljecrive is net useo ro mean rlar rlis value inlei-
enrly iesioes in rle oljecr. All maiker piices aie ulrimarely oerei-
mineo ly suljecrive luman pieeiences, ano rleieoie aie suljecr
ro clange wlenevei peoples valuarions clange. A rypical gooos
oljecrive exclange value is srill oereimineo ly rle suljecrive use-
values o rle eno usei. (!oi example, a cai manuacruiei will pio-
ouce cais laseo nor on lis peisonal wlims, lur on low mucl le
can claige oi rlem in rle maiker. Yer rlese piices rlemselves aie
oue ro lowmucl lis cusromeis enjoy oiiving rle vaiious velicles.)
Tle one essenrial oieience wirl money is rlar ir hes ne
suljecrive use-value, wlicl coulo ulrimarely explain irs oljecrive

8 Stuy Cuic te Thc Thcery ej Mency en Crcit


exclange value. !rs en/y valueue moneyoeiives iom irs alil-
iry ro exclange oi orlei gooos in rle maiker. Tlis is wly apply-
ing mooein suljecrive value rleoiy ro rle explanarion o oljecrive
money piices is sucl a riicky aaii. Tlose economisrs o Misess
oay wlo riieo ro explain rle puiclasing powei o money laseo
solely on irs inousriial applicarions, weie complerely evaoing rle
issue. !n pairiculai, rley woulo le lelpless ro explain rle puiclas-
ing powei o ar money.
Cheptcr : Thc Cen.cpt ej thc e/uc ej Mency p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. !a|[ect|e aa6 0|[ect|e |acters |a the Iheer ef
the Va|ae ef Meae
\len ir comes ro money, rle main rask o economic rleoiy is
ro explain irs e/c.titc exclange value, oi wlar is oren calleo rle
pur.hesing pevcr ej mency. Tlis ieeis ro rle amounr o gooos rlar
someone can olrain in rle maikerplace wirl a unir o money. Tlis
is an e/c.titc acr: i Tom sees rlar a oollai lill can puiclase rliee
posrage sramps, rlen Bill will olseive rle same puiclasing powei
as well.
!ven rlougl economics ocuses on rle explanarion o moneys
oljecrive exclange value, rle explanarion irsel ulrimarely goes
lack ro su/c.titc valuarions. !oi rle economisr giounoeo in rle
mooein suljecrive value rleoiy (oevelopeo ly Cail Mengei ano
lis olloweis), e// piices in rle maiker musr le explaineo ly ieei-
ence ro inoiviouals suljecrive valuarions. Tlis iule lolos even oi
money.
\lar sers money apair iom all orlei gooos is rlar money is
useul (ano lence valualle) ro people en/y lecause o irs puiclasing
powei. !n irs capaciry as a meoium o exclange, a unir o money is
only useul inasmucl as ir can le useo ro acquiie ethcr gooos ano
seivices.
\len ir comes ro explaining rle piice o, say, an oiiginal painr-
ing ly Picasso, rle economisr srairs wirl rle acr rlar some people
place a veiy ligl suljecrive value on loloing sucl airwoik. Tle
economisr las no olligarion ro explain vhy people enjoy rle meie
possession o a canvas coveieo in painr, le oi sle rakes rlis pie-
eience as a given, ano pioceeos ro explain rle exclange value o
rle Picasso in rle maikerplace. Yer wlen ir comes ro money, rle
o Stuy Cuic te Thc Thcery ej Mency en Crcit
economisr canr explain irs piice (i.e., puiclasing powei) meiely
ly saying rlar people enjoy acquiiing ano loloing casl lalances.
Sucl an aigumenrly irselwoulo le ciiculai, lecause rle rce-
sen people wanr ro lolo casl lalances is rlar money las puiclasing
powei. Tlar is wly explaining rle piice o money is a mucl sul-
rlei rask rlan explaining rle piice o a Picasso.
z. Ihe 0|[ect|e lxchaaqe Va|ae ef Meae
Tle oljecrive exclange value o gooos can le oeneo as rleii
oljecrive signicance in exclange oi rleii capaciry in given cii-
cumsrances ro piocuie a specic quanriry o orlei gooos as an
equivalenr in exclange. `owaoays we miglr use rle reim mar-
ket value ro expiess rle same concepr as oljecrive exclange value.
\len we say a pairiculai gooo las oljecrive exclange value,
rle reim oljecrive is net useo ro mean rlar rlis value inleienrly
iesioes in rle oljecr. (!n orlei woios, we aie nor using rle reim
rle same way rlar a gooo miglr lave an oljecrive weiglr oi coloi.)
All maiker piices aie ulrimarely oereimineo ly suljecrive luman
pieeiences, ano rleieoie aie suljecr ro clange wlenevei peoples
valuarions clange. Bur a gooos maiker value is srill oljecrive in
rle sense rlar any inoivioual can rake ir as a given acr.
Tle objective exchange value of money ieeis ro rle possililiry
o olraining a ceirain quanriry o orlei gooos in exclange oi rle
money, wlile rle price of money is rlis acrual quanriry o orlei
gooos. (Tle reims aie nor ioenrical, lur aie veiy similai, as Mises
explains on page 1o1.)
. Ihe |re||ems |ae|e6 |a the Iheer ef the Va|ae ef Meae
!n mooein economies, pioouceis as a iule evaluare rleii ourpur
on rle lasis o suljecrive exclange value, iarlei rlan suljecrive
use-value. !oi example, rle ownei o an auromolile acroiy
Cheptcr : Thc Cen.cpt ej thc e/uc ej Mency 1
ooesnr oioei lis employees ro pioouce cais rlar le limsel wanrs
ro oiive. n rle conriaiy, le insriucrs lis employees ro make cais
rlar le plans on sc//ing ro orleis, laseo on wlar lis cusromeis wanr
ro oiive. \len oimularing lis lusiness plans, rlen, le is guioeo
ly lis peisonal, su/c.titc valuarions o rle orlei gooos le will le
alle ro luy (louses, ancy meals, yaclrs, erc.) wirl rle ievenues
iom rle sale o lis cais.
!n oioei oi rle ownei o rle auromolile acroiy (ano orlei
pioouceis) ro accuiarely envision rle riaoeos o oieienr pioouc-
rion oecisions, le neeos ro knowrle e/c.titc exclange value o rle
vaiious cais le coulo manuacruie. !rs nor enougl rlar rle cai pio-
oucei knows rlar le values yaclrs ano sreak oinneis, le also neeos
ro know low mucl money le can iaise ly selling oieienr mooels
o lis cais, ano low mucl money le will neeo ro speno i le wanrs
ro acquiie yaclrs ano sreak oinneis. Tlus mosr piooucrion oeci-
sions involve a complex inreioepenoence on lorl suljecrive ano
oljecrive valuarions.
Tle one essenrial oieience wirl money is rlar ir hes ne sul-
jecrive use-value, wlicl coulo ulrimarely explain irs oljecrive ex-
clange value. !n conriasr, wlen ir comes ro rle auromoliles,
yaclrs, ano sreak oinneis, rle economisr ulrimarely coulo explain
rleii ielarive exclange values (i.e., low many auromoliles woulo
riaoe oi one yaclr, erc.) ly ieeience ro inoiviouals suljecrive use-
values iom rlem (i.e., low mucl people likeo oiiving cais, veisus
piloring yaclrs oi earing sreak).
Bur wirl money, irs en/y valueue moneyoeiives iom irs
aliliry ro exclange oi orlei gooos in rle maiker. Tlis is wly
applying mooein suljecrive value rleoiy ro rle explanarion o
oljecrive money piices is sucl a riicky aaii. Tlose economisrs o
Misess oay wlo riieo ro explain rle puiclasing powei o money
laseo solely on irs inousriial applicarions, weie complerely evao-
ing rle issue. !n pairiculai, rley woulo le lelpless ro explain rle
puiclasing powei o ar money. ..
: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
!n rle leginning o rlis claprei, Mises spenos rime plac-
ing lis analysis o money wirlin rle iamewoik o sul-
jecrive value rleoiy, as ir lao leen oevelopeo ly lis Aus-
riian pieoecessois (norally Mengei, Bolm-Baweik, ano
\iesei). Some o rle reiminology may appeai quainr ro
mooein economisrs, even rlose wlo lave sruoieo Ausriian
economics. Bur ro piopeily explain rle piocess ly wlicl
suljecrive inoivioual valuarions geneiare oljecrive maiker
piices, ir is necessaiy ro oisringuisl lerween use-value ano
exchange value, ano rlese conceprs in ruin lorl come wirl
a suljecrive ano an oljecrive oimension. !oi example, rle
oljecrive use-value o a pig woulo incluoe rle collecrion
o lacon sriips ir coulo plysically yielo, wlile rle oljec-
rive use-value o a romaro seeo woulo incluoe rle romaroes
ir coulo plysically yielo. Tlese woulo le empiiical acrs,
nor suljecr ro opinion. !owevei, a vegeraiian woulo piol-
ally assign a lowei su/c.titc use-value ro rle pig rlan ro
rle romaro seeo, wlile a mear-lovei miglr oo rle opposire.
n rle orlei lano, /eth rle vegeraiian ano rle mear-lovei
woulo agiee rlar rle e/c.titc cx.hengc value o rle pig is
mucl liglei rlan rlar o rle romaro seeo. !oi example, ir
woulo le an inoispuralle acr rlar rle pig coulo ercl moie
giams o golo (oi oollai lills) rlan rle romaro seeo, i lorl
weie pur up oi sale.
Applying rlese conceprs ro money, Mises explains (pp.
pp8) rlar rleie aie rwo accepralle ways o making
an impoiranr poinr. ne way is ro claim rlar moneys
Cheptcr : Thc Cen.cpt ej thc e/uc ej Mency
suljecrive use-value is rle same as irs suljecrive exclange-
value. (Tlar is, rle signicance rlar a pairiculai inoivioual
arriilures ro a quanriry o money, musr le rle same sig-
nicance rlar le oi sle arriilures ro rle gooos oi wlicl
rle money can le exclangeo, lecause rle money canr le
useo ro sarisy wanrs oiiecrly.) A oieienr way ro make rle
poinr is ro say rlar money hes ne use-value ar all, lecause
any value ir possesses necessaiily oeiives iom irs exclange
value. Mises ooesnr rake a posirion on wlicl o rlese alrei-
nare oesciiprions is lerrei, le meiely wanrs ro sriess rle
unoamenral poinr rlar people consioei money useul ano
valualle en/y lecause rley expecr ro use ir ro acquiie orlei
gooos. ( couise Mises is ralking alour money ue money.
A lai o golo, oi example, can srill possess use-value oi
irs inousriial oi oinamenral applicarions.) ..
Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Exchange value: Tle signicance o a gooo oue ro irs aliliry ro le
riaoeo oi orlei gooos. (!xclange value can le qualieo as
eirlei suljecrive oi oljecrive.)
Market value: Synonymous wirl rle oljecrive exclange value o a
gooo, rypically quoreo in money reims.
Objective exchange value of money: Tle possililiry o olraining a
ceirain quanriry o orlei gooos in exclange oi a unir o
money.
Price of money: Tle quanriry o gooos (oi seivices) rlar musr le
given up in exclange ro acquiie a unir o money.
Use-value: Tle signicance o a gooo oue ro irs aliliry ro le
oiiecrly useo ly rle ownei in consumprion oi piooucrion.
(!se-value can le qualieo as eirlei suljecrive oi oljecrive.)
..
Cheptcr : Thc Cen.cpt ej thc e/uc ej Mency
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is rle cenrial elemenr in rle economic piollem o
money? (p. p)
:. oes rle suljecrive rleoiy o value apply ro rle case o
money, as ro all orlei gooos? (p. p)
. !xplain: !n rle case o money, suljecrive use-value ano
suljecrive exclange value coincioe. (p. p)
. !xplain: !r sloulo le olseiveo rlar even oljecrive ex-
clange value is nor ieally a piopeiry o rle gooos rlem-
selves, lesroweo on rlem ly naruie. . . . (p. 1oo)
. ! money (e.g., golo) las an inousriial use as well as a
moneraiy use, wlar will le rle ielarion lerween irs oljec-
rive exclange values in rlose rwo oieienr applicarions?
(pp. 1oo)
tuav:iv 8
Ikl 0lIlkM|NkNI! 0| Ikl 08IlCI|Vl
lKCkkN6l Vk|0l, 0k |0kCkk!|N6
|0Wlk, 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle useulness o money oeiives solely iom irs puiclasing powei.
Tleieoie, rooays valuarion o money is oepenoenr on irs puiclas-
ing powei ycstcrey, wlicl in ruin was inuenceo ly moneys pui-
clasing powei rwo oays ago. Sucl ieasoning ooes nor leao ro an
innire iegiess, lecause ar some poinr in rle pasr we aiiive ar rle
srare o oiiecr exclange, wlen gooos weie only valueo oi rleii
oiiecr use. Tlis rleoiy o rle oiigin o money is rle only one com-
parille wirl a suljecrivisr explanarion.
Tle lisroiical conrinuiry in rle value o money oisringuisles ir
iomall orlei commooiries. People oo nor oeiive rleii uriliry iom
apples oi oianges laseo on rleii piices, lur people e evaluare rle
useulness o a quanriry o money laseo on irs puiclasing powei.
Tle piollem wirl many iival rleoiies o rle puiclasing
powei o moneysucl as a simple quanriry rleoiy oi supply ano
oemano explanarionis rlar rley lave ro rake rle value o money
as given, ano can only explain ctietiens iom rlis sripulareo srair-
ing poinr. Tley canr explain rle e/se/utc level o money-piices, i.e.,
rley canr explain rle acrual exclange iario lerween money ano
orlei gooos ar a pairiculai rime. Tle suljecrivisr, maiginal-uriliry

8 Stuy Cuic te Thc Thcery ej Mency en Crcit


rleoiy oevelopeo ly Mengei ano lis successois .en explain rle
piecise, alsolure money-piices o rle maiker rooay.
Tle exclange iario lerween money ano all orlei gooosin
orlei woios, rle puiclasing powei o moneymay le aecreo
ly clanges in peoples valuarions o rle money sioe er rle (orlei)
commooiries sioe o rle iario.
!n irs ciuoesr oim, rle quanriry rleoiy o money is olviously
wiong: !r is simply nor riue rlar, say, a ooulling in rle quanriry
o money will leao ro an exacr ooulling o all piices (quoreo in
money).
Mooein value rleoiy musr explain rle oemano ro lolo money
ly srairing wirl rle suljecrive pieeiences o rle inoivioual. Tle
communirys oemano ro lolo money is simply rle summarion o
rle inoivioual oemanos. `o inoivioual can make use o rle popu-
lai macio appioacles, wlicl employ oimulas involving roral
volume o riansacrions ano velociry o ciicularion. !conomisrs
rleieoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei o money.
Moneycerticates aie money sulsrirures rlar aie ully coveieo
ly money piopei, wlile duciary media aie money sulsrirures rlar
aie issueo alove rle ieoemprion uno.
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. Ikl l|lMlNI 0| C0NI|N0|I\ |N Ikl
08IlCI|Vl lKCkkN6l Vk|0l 0| M0Nl\
. Ihe 0epea6eace ef the !a|[ect|e Va|aat|ea ef Meae ea
the lx|steace ef 0|[ect|e lxchaaqe Va|ae
!n oioei oi inoiviouals ro evaluare rle suljecrive value o money,
rley musr isr consioei irs useulness wlicl is oeiiveo solely iom
irs puiclasing powei. !n rlis sense, rooays valuarion o money is
oepenoenr on peoples olseivarions o irs puiclasing powei ycstcr-
ey. Ano yesreioays puiclasing powei, in ruin, was inuenceo ly
moneys puiclasing powei rwo oays ago.
Sucl ieasoning ooes nor leao ro an innitc iegiess, lecause ar
some poinr in rle pasr we aiiive ar rle srare o oiiecr exclange,
wlen gooos weie only valueo oi rleii oiiecr use. Ar rlar rime,
gooos sucl as golo ano silveiwlicl woulo lecome money, oown
rle ioaoweie valueo exclusively oi rleii inousriial ano oina-
menral puiposes.
z. Ihe Necess|t fer a Va|ae |a6epea6eat ef the Meaetar
|aact|ea 8efere aa 0|[ect caa !ere as Meae
Tle pievious oiscussion las esrallisleo rlar in oioei oi inoivio-
uals ro place a value upon money, rley musr lave some lasis oi
oiecasring irs uruie puiclasing powei. Tle only way rley can
oo rlis, is i rle money gooo alieaoy las a lisroiy o oljecrive
exclange value, wlicl rle inoiviouals can consulr.
o Stuy Cuic te Thc Thcery ej Mency en Crcit
Tlis ieasoning slows rle aw in rle myrls alour rle ciearion
o money leing oue ro a social pacr. Rarlei, Mengeis rleoiy o
rle oiigin o moneyin wlicl rle money commooiries weie oiig-
inally useo as oioinaiy commooiriesis rle only one comparille
wirl a suljecrivisr explanarion.
. Ihe !|qa|caace ef |re

lx|st|aq |r|ces |a the 0eterm|aat|ea


ef Market lxchaaqe kat|es
Tle lisroiical conrinuiry in rle value o money oisringuisles ir
iom all orlei commooiries. !r is riue rlar rleie appeais ro le
ineiria wirl iespecr ro exclange iarios lerween gooos, i : apples
riaoe oi 1 oiange on Tuesoay, ir is unlikely rlar :o apples will
riaoe oi 1 oiange on \eonesoay. Bur ir is nor riue rlar Tues-
oays exclange iario somelowinuences \eonesoays. Rarlei, rle
unoeilying oereiminanrs o Tuesoays piice (sucl as peoples sul-
jecrive pieeiences oi rle rwo iuirs) piolally will nor clange veiy
mucl ly \eonesoay.
!n conriasr, economic rleoiy ecs neeo ro iely on Tuesoays
puiclasing powei o money, in oioei ro explain \eonesoays pui-
clasing powei o money. People oo nor oeiive rleii uriliry iom
apples oi oianges laseo on rleii piices, lur people e evaluare rle
useulness o a quanriry o money laseo on irs puiclasing powei.
. Ihe kpp||ca||||t ef the Marq|aa|0t|||t Iheer te Meae
Tle piollem wirl many iival rleoiies o rle puiclasing powei o
moneysucl as a simple quanriry rleoiy oi supply ano oemano
explanarionis rlar rley lave ro rake rle value o money as given,
ano can only explain ctietiens iom rlis sripulareo srairing poinr.
!oi example, ir is coiiecr ro say, ! a cai oiiginally las a piice o
s1,ooo, rlen an inciease in rle srock o money will, orlei rlings
equal, leao ro a new cai piice rlar is liglei rlan s1,ooo.
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc 1
Yer rlis isnr ieally a ull explanarion, wly wasnr rle cais oiig-
inal piice s1o, oi s1oo,ooo? Tle simple supply ano oemano ap-
pioaclcoiiecr as ai as ir goesly irsel canr explain rle e/se/utc
level o money-piices, i.e., ir canr explain rle acrual exclange iario
lerween money ano orlei gooos ar a pairiculai rime.
Tle suljecrivisr, maiginal-uriliry rleoiy oevelopeo ly Mengei
ano lis successois .en explain rle piecise, alsolure money-piices
o rle maiker rooay, jusr as ir can explain rle piecise exclange
iarios lerween apples ano oianges.
Ar isr ir appeais rlar money is a peculiai case rlar cannor
le lanoleo rlis way, lecause peoples maiginal uriliry o money
is irsel oeiiveo iom irs oljecrive puiclasing powei. Bur once we
inrioouce rle rime elemenr, we aie net aiguing in a ciicle. \e
aie explaining teeys puiclasing powei o money ly ieeience ro
ycstcreys puiclasing powei, ano so on. \e can logically ollowrle
clain all rle way lack in rime, unril rle poinr ar wlicl rle money
commooiry was valueo solely oi irs nonmoneraiy uses, i.e., leoie
ir lecame a meoium o exclange.
;. Meaetar aa6 Neameaetar |aaeaces kect|aq
the 0|[ect|e lxchaaqe Va|ae ef Meae
Tle pieceoing secrions lave esrallisleo rle erigin o rle value
o money. (`amely, suljecrive maiginal uriliry analysiscoupleo
wirl Mengeis explanarion o rle oiigin o moneycan explain
rooays alsolure level o rle puiclasing powei o money.) !r is now
accepralle ro ocus on rle laws oi piinciples goveining .hengcs
in rle value o money. !conomisrs usually srair ar rlis srep, even
rlougl logically rley sloulo lave explaineo rle oiiginal value o
money isr.
Tle exclange iario lerween rwo gooos can le aecreo ly
clanges in rle valuarion oi jusr one o rle gooos. !oi example,
on Tuesoay Jim may cloose ro oiink sooa ovei cougl meoicine.
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Bur on \eonesoay le may ieveise lis pieeiences, ano cloose
rle meoicine ovei rle sooa. Tlis olviously neeonr le oue ro Jims
suooen oisrasre oi sooa.
!n rle same way, rle exclange iario lerween money ano all
orlei gooosin orlei woios, rle puiclasing powei o money
may le aecreo ly clanges in peoples valuarions o rle money
sioe er rle (orlei) commooiries sioe o 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 oim, rle quantity theory of money is olviously
wiong: !r is simply nor riue rlar, say, a ooulling in rle quanriry
o money will leao ro an exacr ooulling o all piices (quoreo in
money).
Tle geim o riurl in rle lisroiical exposirions o rle quanriry
rleoiy is rlar a connecrion exisrs lerween vaiiarions in rle value
o money on rle one lano, ano vaiiarions in rle ielarions lerween
rle oemano oi money ano rle supply o ir on rle orlei. Tliougl-
our lisroiy, wiireis lave noreo rle parreins, lur rle rask oi rle
mooein economisr is ro expiess rlese riuisms wirl rle rools o
mooein suljecrive value rleoiy.
). Ihe !teck ef Meae aa6 the 0emaa6 fer Meae
Mooein value rleoiy musr explain rle oemano ro lolo money
ly srairing wirl rle suljecrive pieeiences o rle inoivioual. Tle
communirys oemano ro lolo money is simply rle summarion o
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc
rle inoivioual oemanos. `o inoivioual can make use o rle popu-
lai macio appioacles, wlicl employ oimulas involving roral
volume o riansacrions ano velociry o ciicularion. !conomisrs
rleieoie sloulo nor use sucl conceprs wlen explaining rle pui-
clasing powei o money.
!n ceirain cases ir is useul ro oisringuisl lerween rle inoivio-
uals oemano ro lolo money in rle lioaoei sense veisus money
in rle naiiowei sense. Tle oimei is rle inoiviouals oemano ro
lolo lorl money ano money sulsrirures (i.e., peiecrly secuie ano
immeoiare claims on money). Tle larrei is rle inoiviouals oemano
ro lolo money piopei.
Moneycerticates aie money sulsrirures rlar aie ully coveieo
ly money piopei, wlile duciary media aie money sulsrirures rlar
aie issueo alove rle ieoemprion uno. !oi example, i a pairiculai
commeicial lank acceprs 1,ooo ounces o golo in oeposirs wlicl
ir keeps in rle vaulr, lur issues 1,1oo papei lanknores enrirling
rle leaiei ro an ounce o golo upon piesenrarion, rlen 1,ooo o
rle nores aie money ceiricares, wlile 1oo aie ouciaiy meoia.
(!n commeicial piacrice rle nores aie inoisringuislalle, ano so we
can say rlar alour p1 peicenr o a given nore is coveieo wlile
rle iemainoei is unlackeo.)
. Ihe Ceaseaeaces ef aa |acrease |a the 0aaat|t ef Meae
Wh||e the 0emaa6 fer Meae kema|as 0achaaqe6 er 0ees
Net |acrease te the !ame lxteat
Aciuoe, meclanical veision o rle quanriry rleoiy o money lolos
rlar a ooulling o rle srock o money will leao ro a unioim oou-
lling o rle money piices o all orlei gooos ano seivices. Tle logic
lelino sucl a view iesrs on rle riue olseivarion rlar any given
quanriry o money can peioim all rle seivices o money oi rle
communiry, wirl rle appiopiiare piice level. !oi example, we
Stuy Cuic te Thc Thcery ej Mency en Crcit
can imagine rwo economies sioe-ly-sioe, wlicl aie equal in all
ways excepr rlar rle secono communiry las rwice rle amounr o
money as rle isr. !r is cleai rlar in rle secono communiry, rle
piices o all gooos ano seivices lave ro le exacrly ooulle rleii val-
ues in rle isr communiry, in oioei ro ienoei rlese economies
equal in all ieal iespecrs.
Yer iom rlis rlouglr expeiimenr, we .ennet concluoe rlar
i we sraireo wirl rle isr communiry, ano rlen magically oou-
lleo eveiyones loloing o money, rlar we woulo eno up wirl
rle secono communiry. !oi one rling, oieienr inoiviouals woulo
iespono oieienrly ro rle inciease in rleii loloings o money.
!veiyone woulo o couise ievise oownwaio lis oi lei maiginal
uriliry oi a unir o moneylecause rle srock in possession
incieaseolur rlese oownwaio movemenrs woulo nor le equal
oi all people. Because rle maiginal unir o money woulo le less
valualle rlan leoie rle magical inciease, people woulo now go
our ano luy moie gooos, renoing ro pusl up piices. Bur oiei-
enr people woulo inciease rleii puiclases in oieienr ways, ano
(in any iealisric scenaiio) woulo pusl up rle piices o some gooos
moie rlan orleis.
Anorlei complicarion is rlar in rle ieal woilo, new inuxes o
money oo nor magically augmenr rle casl lalances o eveiyone
in rle communiry piopoirionally. !nsreao, new money enreis rle
communiry rliougl incieaseo loloings o a small gioup o people
(sucl as rle owneis o golo mines, oi rle cusromeis wlo loiiow
money iom a lank issuing ouciaiy meoia). Tlus rle new money
iipples our inro rle economy, as rle isr iecipienrs speno rle new
money, rlen rle secono iecipienrs speno ir, ano so on.
`olooy woulo evei le so oolisl as ro claim rlar, say, a oou-
lling o rle quanriry o sugai woulo leao ro an exacr lalving o rle
exclange iario o sugai againsr all orlei gooos ano seivices. Yer
rlar is piecisely wlar rle ciuoe uanriry Tleoiisrs asseir wlen ir
comes ro money.
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc
. Cr|t|c|smef !eme krqameats kqa|ast the
0aaat|t Iheer
Alrlougl in irs ciuoe oim, rle quanriry rleoiy is eiioneous, even
so we can oeeno ir iom some invalio oljecrions. !oi example,
some wiireis oljecr rlar rle quanriry rleoiy only lolos .ctcris
peri/us (i.e., wlen orlei rlings aie lelo equal). Yer rlis is
laioly a gooo oljecrion againsr rle quanriry rleoiy, since a ciiric
coulo say rle same rling alour eny law oi piinciple in economic
science.
Anorlei oljecrion people lave iaiseo againsr rle quanriry rle-
oiy is rlar irs pieoicrions aie in acrual piacrice nullieo ly rle
lelavioi o hoards. !oi example, rle ciiric o rle quanriry rleoiy
miglr say rlar a laige inux o newmoney vent lave a renoency ro
pusl up piices, lecause some people in rle communiry will simply
expano rleii loloings o casl. n rle orlei lano, say rlese ciirics,
i rle oemano ro lolo money (oi ieasons o commeice) sloulo
suooenly inciease, rlis wonr leao ro a all in piices (as rle quan-
riry rleoiy woulo pieoicr), lecause rle loaios will ielease some o
rleii casl inro rle communiry ro sarisy rle new oemano.
Tle unoamenral piollem wirl rlis view is rlar economically,
rleie is no oisrincrion lerween rle noimal oemano ro lolo casl
veisus loaioing. Ar any momenr in rime, ctcry unir o money in
rle communiry is in someones casl lalance, rleie is no sucl rling
as money in ciicularion rlar coulo le conriasreo wirl money
sirring iole.
Tle money lelo ly a loaioei peioims rle same economic
uncrion as rle money lelo ly a noimal lusinesspeison, rley aie
lorl loloing rle money lecause rley expecr ro aclieve giearei
sarisacrions iom wlar ir can luy in rle uruie, rlan iom wlar
ir coulo luy in rle piesenr. Because o unceirainry, people oo nor
necessaiily eaimaik eveiy unir o money oi a pairiculai uruie
puiclase. `onerleless, wlen we analyze vhy people lolo money
Stuy Cuic te Thc Thcery ej Mency en Crcit
ar all, we iealize rlar rleie is no qualirarive oieience lerween rle
loaioei ano rle nonloaioei. All loaioing ieally means, is rlar
someone caiiies casl lalances laigei rlan lis peeis.
e. |arther kpp||cat|eas ef the 0aaat|t Iheer
Ceneially speaking, rle oemano oi money incieases ovei rime,
oue ro popularion incieases ano rle inrensicarion o rle oivision
o laloi (ano lence rle neeo oi exclange riansacrions). !oi rlis
ieason, ir was only a rleoierical cuiiosiry oi economisrs ro riy ro
explain wlar woulo lappen i rle oemano oi money ell, wlile
rle srock o money iemaineo rle same.
! we weie ro meclanically apply rle quanriry rleoiy ro sucl
a siruarion, we woulo concluoe rlar piices woulo iise (i.e., rle
puiclasing powei o money woulo all) unioimly, in oiiecr pio-
poirion ro rle oiop in oemano oi money. !owevei, a moie
sarisacroiy explanarion neeos ro rake inro accounr rle suljec-
rive valuarions o inoiviouals. Rarlei rlan ocusing meiely on
ciuoe aggiegares, ir is lerrei ro analyze rle scenaiio ly say-
ing rlar wlen rle oemano oi money alls (wlile rle srock o
ir iemains consranr), inoiviouals oiscovei rlar rley aie loloing
laigei casl lalances rlan rley oesiie. To impiove rleii posirion,
rley seek ro exclange some o rleii excess casl loloings oi
orlei gooos oi seivices. !n ooing so, rley pusl up rle piices o
rlese irems.
!venrually, rle all in moneys puiclasing powei ieouces rle
ieal size o an inoiviouals casl lalance unril le is lappy wirl ir. !
eveiyone in rle communiry oecioes le oi sle is loloing roo mucl
money, rle only way ro iesroie equililiium is oi piices ro iise.
! one peison ieouces lis casl lalance ly spenoing, rle sellei nec-
essaiily incieases lis casl lalance ly rle same amounr. Tle given
srock o money is ieaiiangeo among rle people in rle communiry,
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc
pei capira casl lalances lave ro iemain rle same. !ven so, rle iise
in piices can sarisy eveiyones oesiie ro lolo smallei casl lalances,
lecause casl is lelo oi rle puipose o acquiiing orlei gooos ano
seivices. People evaluare rle size o rleii casl loloings in reims o
irs puiclasing powei, nor ieally ly low many unirs o money rley
possess.
Alrlougl lisroiically rle oemano oi money irsel geneially
giowsexcepr peilaps oi nancial ciisesrleie aie cases wleie
rle oemano oi pairiculai lins o money may all oiamarically. A
noralle example is rle oemonerizarion o silvei. As rlis piecious
meral ceaseo leing useo as a meoium o exclange, ano lecame
valueo solely oi irs inousriial ano oinamenral applicarions, irs
exclange value ell.
|||. 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 |||aq
Tlus ai in rle claprei rle analysis o rle oljecrive exclange
value o money las only ielieo on oereiminanrs rlar coulo lave
jusr as well leen applieo ro eny commooiry, nor jusr rle com-
monly accepreo meoiumo exclange (i.e., rle money commooiry).
!n conriasr, secrion i i i examines possille clanges in rle oljec-
rive exclange value o money rlar can only apply lecause ir is a
meoium o exclange. Tle conrexr o rle oiscussion is rle laypei-
sons complainr o rle oeainess o living, meaning rlar eveiy gen-
eiarion piices seem ro le liglei rlan leoie.
8 Stuy Cuic te Thc Thcery ej Mency en Crcit
z. Waqaers Iheer: Ihe |aaeace ef the |ermaaeat
|re6em|aaace ef the !app| !|6e eer the 0emaa6 !|6e
ea the 0eterm|aat|ea ef |r|ces
\agnei explains rle geneial iise in piicesoi wlar is rle same
rling, rle geneial all in rle puiclasing powei o a unir o money
ly rle allegeo supeiioi powei o rle supply sioe o rle economy.
Tle selleis o gooos ano seivices srano moie ro gain iom piice
likes rlan rleii cusromeis srano ro lose, lecause rle piice o lee
(say) aecrs rle livelilooo o rle lurclei ai moie rlan ir aecrs
rle oirunes o rle aveiage louselolo. \agneis rleoiy is aweo,
lowevei, lecause ir cannor easily incoipoiare rle acr rlar ierail
piices musr also iespono ro clanges in wlolesale piices.
. W|esers Iheer: Ihe |aaeace ea the Va|ae ef Meae
lxerte6 | a Chaaqe |a the ke|at|eas 8etweea Natara|
lceaem aa6 Meae lceaem
\iesei arremprs ro explain rle peisisrenr iise in piices ovei rime ly
rle giaoual riansoimarion o a `aruial !conomy inro a Money
!conomy. As moie ano moie people ano iegions aie liouglr
inro rle piacrice o moneraiy exclange, \iesei aigues rlar cei-
rain rlings rlar weie pieviously lanoleo rliougl lome pioouc-
rion musr now le incluoeo in rle nal piice o gooos inrenoeo oi
maiker. \iesei oeis a specic example o rle piices o milk ano
eggs iising in a iuial village, once rle villageis lecome involveo
wirl iequenr riaoe wirl rle mucl laigei rown. !owevei, \iesei
ignoies rle olvious ip-sioe o rle oevelopmenr: rle piices o milk
ano eggs will le lowei in thc tevn lecause o rle newsouice o sup-
ply. Tle inregiarion o rle iuial village inro rle moneraiy nexus
gives no ieason oi a geneial iise in piices, ir meiely explains wly
rle gap in piices (lerween rle rown ano village) sloulo le wlirrleo
away.
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc p
. Ihe Mechaa|smef the Market as a |erce kect|aq the
0|[ect|e lxchaaqe Va|ae ef Meae
!n oiiecr exclange, i a porenrial luyei lelieves rlar rle asking
piice o rle sellei is roo ligl, rle exclange will nor occui. !ow-
evei, wirl rle use o money, rleie is anorlei possille ourcome,
rlar seems ro lappen in rle ieal woilo. Tle luyei may go aleao
ano pay a piice (in money) rlar le oiiginally oeemeo roo ligl,
lur will compensare ly incieasing rle asking piice oi rle gooos
rlar hc las ro sell. Tlus wage eaineis miglr acquiesce in liglei
ooo piices, yer oemano pay incieases iom rleii employeis. Tle
employeis, in ruin, miglr agiee, knowing rlar rley will iaise piices
rlemselves.
`one o rlis oiscussion ienoeis rle lasic rleoiy o piice oerei-
minarion invalio. !r meiely unoeiscoies rlar wirl rle special case
o money, peculiai siruarions can aecr irs valuarion rlar simply
cannor occui in rle case o oiiecr exclange.
|V. lKC0k!0!l!
;. Ihe |aaeace ef the !|te ef the Meaetar 0a|t aa6 |ts
!a|6||s|eas ea the 0|[ect|e lxchaaqe Va|ae ef Meae
!r is oren asseireo rlar rle size o rle moneraiy unir can aecr
irs puiclasing powei, i.e., rle geneial leiglr o piices. !n iegaio
ro wlolesale piices, rlis is cleaily alsuio: meiclanrs woulo aojusr
rleii laige-scale riansacrions ro aclieve rleii oesiies, iegaioless o
rle unir.
!owevei, rleie is some riurl ro rle asseirion wlen ir comes
ro ierail riaoe. !oi piacrical ieasons, eveiyoay puiclases rlar lave
veiy low piices compaieo ro mosr orlei gooos (sucl as lerrei
posrage oi pieces o iuir) musr coiiespono somewlar ro rle lowesr
8o Stuy Cuic te Thc Thcery ej Mency en Crcit
availalle oenominarion o rle money. Tle use o roken coinage
(wlicl can iepiesenr iacrions o rle sranoaio moneraiy unir) ano
money sulsrirures, as well as rle piacrice o selling mulriple unirs
o gooos (e.g., a oozen eggs) as a package, can piovioe a wioe iange
o exililiry, lur even so ir musr le aomirreo rlar rle size o rle
moneraiy unir ooes lave an inuence on piices quoreo ar rle ierail
level.
6. k Methe6e|eq|ca| Cemmeat
!n a ieview o rle isr eoirion o rle look, Pioessoi \alrei !orz
oeenoeo !augllin iom rle ciirique leveleo ly Mises (on pages
1::8 in rle piesenr eoirion o rle look). To ieview, !augl-
lin lao riieo ro explain rle value o papei guloen (wlicl oi a
rime weie nor ieoeemalle in piecious meral) ly rle piospecr o
rleii evenrual ieoemprion. Mises examineo rle oiscounr invesrois
placeo on lonos issueo ly rle same goveinmenr ano concluoeo
rlar rleie musr le some orlei acroi ar woik, ro explain rle pie-
miuminvesrois placeo on rle papei guloen. Tle answei, o couise,
was rlar rle papei guloen weie useo as money, wleieas rle lonos
weie nor. Tleieoie rle papei guloen weie valueo on accounr o
rleii use as meoia o exclange.
!orz oeenos !augllin ly ieeiiing ro sraremenrs iominuen-
rial guies rlar rley riuly oio speculare on rle evenrual ieoemp-
rion o rle papei guloen. Mises poinrs our rlar rlis enriiely misses
rle poinr o lis ciirique: !ven i ir is aomirreo rlar rle papei
guloen woulo evenrually le ieoeemalle oi golo, rlar acr woulonr
explain wly rle nores riaoeo ar a piemium ro lonos issueo ly
rle same goveinmenr. Moie geneially, !orz appioacles economic
piollems nor rliougl rleoierical ieasoning, lur ly appeal ro lis-
roiical ciicumsrances, a pioceouie rlar Mises iejecrs on merloo-
ological giounos.
..
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc 81
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
Onpage:o8, Mlses alludes toMenger and8hm-8awerks explana-
tlons of how prlces are determlned ln dlrect exchanges (l.e., what
most people call barter). Por example, suppose people ln a com-
munlty own horses, and others own cows. Lach person wlll rank
varlous unlts of each anlmal on hls own sub[ectlve scale of val-
ues. 8lll mlght conslder hls rst horse as the most lmportant anl-
mal, then hls rst cow, and then hls second horse. 1ohn, ln con-
trast, mlght conslder hls rst and then second cows to occupy the
hlghest- and second-hlghest ranks ln hls scale of values, whlle hls
rst 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 beneclal trades,
perhaps 8lll wlll trade hls :;th and :8th cows for 1ohns 6th horse,
because such a trade makes both men better o ln thelr own sub-
[ectlve vlews. (|n thls case, the prlce of one horse ls two cows.)
To understand the descrlptlon Mlses glves to the range of possl-
ble market prlces under bllateral competltlon, the reader should
consult the numerlcal example lnMurray Pothbard, Man, Economy,
and State (scholars edltlon, znd edltlon, Auburn, Ala.: Mlses |nstl-
tute, zoop, pp. :o6z6).
The rst sectlons of thls chapter lay out Mlsess famous regression
theorem, whlchsuccessfully applles sub[ectlvevaluetheory tothe
case of money. Larller economlsts had been unable to accompllsh
thls feat, because they thought the approachwouldleadtoa clrcu-
lar argument ln the case of money. (Howcan we explaln the ob[ec-
tlve purchaslng power of money by reference to sub[ectlve valu-
atlons, when those sub[ectlve valuatlons ln turn are completely ..
8: Stuy Cuic te Thc Thcery ej Mency en Crcit
dependent on moneys ob[ectlve purchaslng powerI |t seemed to
Mlsess 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 moneys purchaslng power today.) 8ut peoples expec-
tatlons about the future purchaslng power of money are formed
by thelr observatlons of the recent past, l.e., thelr observatlons
of moneys purchaslng power yesterday. we can push the expla-
natlon all the way back untll the polnt at whlch (commodlty)
money had an ob[ectlve exchange value due entlrely to lts use ln
nonmonetary appllcatlons.
On page :6o Mlses glves a slmple lllustratlon (lnvolvlng a pear,
lemonade, etc.) of how an lndlvlduals scale of values can be trans-
formed wlth the posslblllty of market exchange.
..
Cheptcr S: Thc Dctcrminents ej thc O/c.titc Lx.hengc e/uc 8
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei o money ly ieeience ro rle quan-
riry o money ano rle oemano ro lolo ir. (Tleie aie many
veisions o rle quanriry rleoiy, wirl rle moie meclanical
oneswlicl posir rlar a ooulling o rle money srock will
leao ro a ooulling o all piicesleing olviously wiong.)
Money certicates: Money sulsrirures rlar aie ully lackeo ly
money (in rle naiiowei sense).
Fiduciary media: Money sulsrirures issueo ovei ano alove rle
money (in rle naiiowei sense) lelo in rle ieoemprion uno.
!iouciaiy meoia aie unlackeo.
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeoly counreiacring rle pieoicrions
o a nave quanriry rleoiy o money.
Regression Theorem: Misess aigumenr rlar rle cuiienr puiclas-
ing powei o money is inuenceo ly peoples memoiy o
yesreioays puiclasing powei. Tle causaliry is riaceo lack
in rime, unril rle poinr ar wlicl rle money gooo was valueo
as a iegulai commooiry in oiiecr exclange. ..
8 Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: Tle suljecrive value o money musr le measuieo
ly rle maiginal uriliry o rle gooos oi wlicl rle money
can le exclangeo. (p. 1op)
:. ! all rypes o money musr lave oiiginally lao a nenmone-
raiy souice o valuarion, lowcan Mises explain ar money?
(pp. 11o11)
. ! rle pasr value o money is raken ovei ly rle piesenr,
ooes rlar mean cuiienr conoirions ano expecrarions lave
no inuence on rle value o money rooay? (p. 111)
. !xplain: ! all rle exclange iarios o rle pasr weie eiaseo
iom luman memoiy, rle piocess o maiker-piice-oerei-
minarion miglr ceirainly lecome moie oiculr . . . lur ir
woulo nor lecome impossille. (p. 11)
. !xplain:
|
A
]
meclanical rleoiy o piice-oereiminarion was
aiiiveo ara oocriine o Supply ano emano. . . . !r is coi-
iecr oi incoiiecr, accoioing ro rle conrenr given ro rle
woios Supply ano emano. (pp. 1:8:p)
tuav:iv p
Ikl |k08|lM 0| Ikl lK|!IlNCl 0| |0Ck|
0|||lklNCl! |N Ikl 08IlCI|Vl lKCkkN6l
Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. |ater|eca| |r|ce ke|at|eas
Money can peioim irs seivices iom viirually any locarion. Colo
sroieo in rle cellais o rle Bank o !nglano can le useo as a com-
mon meoium o exclange anywleie in rle woilo, rliougl rle use
o lanknores, clecks, ano clearing systems. !n conriasr, plysical
locarion is a ciucial earuie o orlei economic gooos. Coee in
Biazil is nor rle same gooo as coee in !nglano, iom rle pei-
specrive o !nglisl consumeis.
! we complerely oisiegaio rle possille (lur small) inuence
o rle posirion o money on irs valuarion, rlen we can oeiive rle
law rlar eveiy economic gooo rlar is ieaoy oi consumprion, las
a suljecrive use-value ue consumprion gooo ar rle place wleie
ir is, ano ue piooucrion gooo ar rlose places ro wlicl ir may le
rianspoireo oi consumprion. Tleieoie, rle money-piice o any
commooiry in any place musr le rle same as rle money-piice ar
any orlei place, once we aojusr oi rle money-cosr o rianspoira-
rion, unless rleie aie insrirurional limirs iesriicring exclange. (!n
rle ieal woilo, rleie aie possille cosrs o rle rianspoir o money,
8
8 Stuy Cuic te Thc Thcery ej Mency en Crcit
rle neeo ro ie-coin ir, ano so on, rlar woulo aecr rle foreign-
exchange rate sucl as rle cable rate. Tlese complicarions oo nor
aiise i we assume rle money irsel srays pur.)
z. k||eqe6 |eca| 0|ereaces |a the |archas|aq |ewer ef Meae
espire rle aigumenrs pur oiwaio in rle pievious secrion, many
people srill cling ro rle lelie rlar ones money goes uirlei in
some iegions compaieo ro orleis. !owevei, rlis eiioneous view
neglecrs rle acr rlar rle same plysical irem is a oieienr gooo,
economically speaking, oepenoing on irs locarion. A cockrail in a
lai in Manlarran is a oieienr gooo iom rle same oiink in a
lai in Boise, so rleii oieienr money-piices cannor leao us ro con-
cluoe rlar rle value o money is liglei in Boise rlan in Manlar-
ran. n rle conriaiy, rle puiclasing powei o money will reno
ro le equalizeo in all iegions wleie ir is useo, ano any appaienr
oisciepancies aie oue ro oieiences on rle commooiry sioe.
. k||eqe6 |eca| 0|ereaces |a the Cest ef |||aq
Closely ielareo ro rle allacy rlar rle puiclasing powei o money
can vaiy iom iegion ro iegion, is rle claim rlar rle cosr o liv-
ing is liglei in one aiea veisus anorlei. !eie roo we neeo ro
consioei rle suljecrive valuarions o inoiviouals, iarlei rlan rle
plysical arriilures o gooos ano seivices. An apairmenr caiiies a
liglei ienral piice in a iesoir rown neai a populai leacl, veisus
a iuial aiea wirl no special arriacrions, piecisely lecause people
value rle pioximiry ro rle leacl, rle local niglr lie, erc. !r is sim-
ply nor riue rlar rle same liesryle can le olraineo moie cleaply in
rle iuial rown rlan in rle iesoir rown. ! rle cosr o living rce//y
weie liglei in one locarion, people woulo move our o rle aiea
unril irs piices lao allen enougl ro eliminare rle oisciepancy.
..
Cheptcr : Thc Pre//cm in thc O/c.titc Lx.hengc e/uc ej Mency 8
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
Mises says on page 11 rlar rle money-piice o a commoo-
iry musr le rle same in all places, oue accounr leing maoe
oi rle money-cosr o rianspoir, en oisiegaioing rle
rime raken in riansir. Tlis cavear is necessaiy lecause rle
rime oimension aecrs rle suljecrive valuarion o gooos.
!oi an exrieme example, i ir rakes one yeai ro slip a new
compurei ro a colony on Mais, rle manuacruiei woulo
insisr on a liglei ierail piice (olrainalle in one yeai)
rlan rle cuiienr spor piice on !airl, even arei aooing
in explicir slipping expenses. Tlis is lecause rle com-
purei manuacruiei coulo ieceive ievenues iom !airl-
laseo cusromeis immeoiarely, wlicl is moie valualle rlan
laving ro wair a yeai ro ieceive rle same amounr o money
iom Mairian consumeis.
Mises conceoes on pages 1 rlar rleie is a limireo
sense in wlicl a iegions liglei cosr o living is lorl
valio rleoierically ano impoiranr in piacrice. `amely, oi
rlose woikeis wlo move ro a iegion ano oo net suljecrively
value irs ameniries, rle ligl money-piices oi ienr, paik-
ing, ooo, ano so on musr le compensareo ly an appiopii-
are inciease in rleii money-wages oi salaiies. !oi example,
a lospiral locareo in a iesoir leacl rown may neeo ro oei
a liglei salaiy ro arriacr (say) a qualieo liain suigeon, i
rleie lappen ro le no liain suigeons eagei ro live neai rle
leacl ano wlo aie rleieoie willing ro accepr rle noimal
salaiy in rle ace o alove-aveiage piices oi lousing in rle
iesoir rown. ..
88 Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Clearing systems: Aiiangemenrs rlar cancel our oi cleai iecipio-
cal nancial claims, so rlar only ner claims neeo le serrleo
rliougl rle acrual riansei o money.
Foreign-exchange rate: Tle exclange iario lerween a oomesric ano
oieign cuiiency.
Cable rate: Slang useo ly oieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
..
Cheptcr : Thc Pre//cm in thc O/c.titc Lx.hengc e/uc ej Mency 8p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar complemenraiy gooo is necessaiy ro ruin rle pio-
oucrion gooo coee in Biazil inro rle consumprion gooo
coee in !uiope? (p. 11)
:. !xplain: To wlar alsuio conclusions sloulo we nor come
i we iegaioeo gooos lying in lono in a cusroms oi excise
waielouse ano gooos o rle same reclnological species on
wlicl rle oury oi rax lao alieaoy leen paio as lelong-
ing ro rle same species o gooos in rle economic sense?
(pp. 1:)
. !xplain: !r is laioly possille ro agiee wirl rlese aigu-
menrs |pur oiwaio ly \iesei], wlicl smack a lirrle roo
mucl o rle cosr-o-piooucrion rleoiy o value ano aie
ceirainly nor ro le ieconcileo wirl rle piinciples o rle
suljecrive rleoiy. (p. 1)
. Can goveinmenr iesriicrions on rle movemenr o com-
mooiries ano woikeis explain oieiences in ierail piices?
(p. 1)
. \lar ooes Mises inreno wirl lis example o a lorel on rle
peaks ano valleys o rle Alps? (p. 1)
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|ereat


K|a6s ef Meae
! rle inlaliranrs o one counriy exclusively use a ceirain money
(sucl as golo) oi rleii oomesric puiclases, wlile a secono counriy
uses a oieienr money (sucl as silvei) oi rleii oomesric puiclases,
ano rle rwo counriies aie closely rieo economically rliougl riaoe,
rlen ir is incoiiecr ro say rlar golo is rle only common meoium o
exclange in rle isr counriy, ano silvei rle only one in rle secono
counriy. n rle conriaiy, lecause meiclanrs iom one counriy
can only riaoe gooos wirl rle orlei counriys meiclanrs rliougl
rle use o rle orlei oomesric money, ir is cleai rlar lorl monies
aie meoia o exclange among people in lorl counriies.
z. Ihe !tat|c er Natara| lxchaaqe kat|e |etweea 0|ereat
K|a6s ef Meae
\lerlei rwo oieienr monies opeiare sioe ly sioe in rle same
counriy unoei a parallel standard, oi wlerlei one money is useo
p1
p: Stuy Cuic te Thc Thcery ej Mency en Crcit
exclusively oi oomesric riaoe in one counriy wlile rle orlei
money is likewise useo in a secono counriy, rle same piinciple
opeiares ro iegulare rle exclange iario (oi wlar nowaoays woulo
le calleo rle exchangerate) lerween rle rwo monies. Tle rleoiy o
purchasing power parity says rlar rle exclange iario lerween rwo
monies is oereimineo ly rle iespecrive exclange iarios o eacl
money ano orlei gooos ano seivices.
!oi example, i rle piice o a laiiel o ciuoe oil, measuieo in
Ameiican oollais, is s1oo, wlile rle piice o a laiiel o ciuoe oil
quoreo in Japan is r8,ooo, rlen rle exclange iare lerween rle rwo
cuiiencies musr le s1 oi r8o. ! rle exclange iare weie oieienr,
rleie woulo le ailiriage oppoiruniries oi luying oil wirl one
cuiiency ano selling ir oi rle orlei. !oi example, suppose rle
exclange iare weie s1 oi rpo (iarlei rlan rle equililiium piice o
s1 oi r8o). !n rlar case, a Japanese invesroi coulo rake r8,ooo ano
luy a laiiel o ciuoe oil. Tlen le coulo sell rle oil ro an Ameiican
oi s1oo. !inally le coulo go ro rle oieign exclange maiker ano
riaoe lis s1oo oi rp,ooo. Tlus rle Japanese invesroi woulo lave
raken aovanrage o rle exisring piice iarios ro eoirlessly ruin lis
oiiginal r8,ooo inro rp,ooo. (!is eoirs ro pior iomrlis ailiriage
oppoiruniry woulo evenrually eliminare ir, since le woulo le acr-
ing ro pusl up rle yen-piice o oil, pusl oown rle oollai-piice o
oil, ano pusl oown rle yen-piice o a oollai lill.)
! we isr imagine a unieo iegion using a single money, wirl
no insrirurional olsracles ro riaoe among irs inlaliranrs, rlen ir
is cleai rlar all commooiries, incluoing money, will le oisriilureo
among rle popularion in accoioance wirl maiginal uriliry. ! some
people eno up loloing an alove-aveiage amounr o (say) llankers,
ir is lecause rleii oemano oi rlis gooo is liglei rlan aveiage. By
rle same roken, i some people acquiie laigei casl lalances rlan
orleis, ir is lecause rleii oemano ro lolo money is laigei. Tleie is
no quesrion o a oangeious riaoe oecir rlar coulo cause a oiain
o money iom some people ro orleis.
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Dicrcnt Kins p
Tle same piinciples lolo oi narions. Tle aggiegare guies o
impoirs ano expoirs aie simply rle summarion o rle riaoing acriv-
iries lerween rle inoiviouals in eacl counriy. An accumularion o
money in one counriy veisus anorlei can only le susrainalle i
rle oemano ro lolo money incieases in rle isr counriy ielarive
ro rle secono. A riaoe oecir net accompanieo ly sucl a slir in
rle oemano oi money will le quickly sel-ieveising, as rle piices
in rle counriy accumularing money will iise ano rle piices in rle
counriy losing money will all. ..
p Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
Mises aigues on pages 1p8o rlar even in cases wleie rle
consumeis in rwo oieienr counriies use oieienr monies
in eveiyoay riansacrions, nonerleless i rle iegions aie
closely louno ly inreinarional riaoe, rlen iom rle eco-
nomic poinr o view lorl |monies] musr le iegaioeo as
money oi eacl aiea. !poaring ro oui rimes, wlar Mises
las in mino is rlar rle Ameiican lusinessman wlo wanrs ro
impoir cais iom Japan, musr ar some poinr in rle riansac-
rion exclange oollais oi yen oi vice veisa. !n rlar iespecr,
rle yen is a meoium o exclange rlar is accepreo in riaoe
ly rle Ameiican lusinessman, in aooirion ro all o rle
Japanese. !owevei, ir is srill nor olvious rlar rlis sloulo
mean rlar rle yen is money even in rle !nireo Srares,
lecause rle oenirion o money is a commonly accepreo
meoium o exclange. To le suie, rle yen is commonly
accepreo emeng Hmcri.ens eing /usincss vith )epen, lur
ir is nor commonly accepreo in rle !nireo Srares pei se.
!owevei, rle impoiranr poinr is nor wlerlei we say rlar
rle yen is money in rle !nireo Srares, lur iarlei rlar we
unoeisrano Misess poinr rlar inreinarional riaoe iequiies
lusinesspeople ro accepr rle monies useo in oieign lanos.
n page 18: Mises wiires, |Classical polirical economy]
oemonsriareo rlar inreinarional movemenrs o money aie
nor consequences o rle srare o riaoe, rlar rley con-
srirure nor rle eecr, lur rle cause, o a avouialle oi
unavouialle riaoe-lalance. !e las in mino rle ollow-
ing conriasr in analysis: Suppose rle !nglisl speno one
million golo ounces impoiring wine iom !iance, wlile
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Dicrcnt Kins p
rle !iencl speno only poo,ooo golo ounces impoiring
sweareis iom !nglano. An !nglisl meicanrilisr woulo
piolally lemoan rle acr rlar lis counriymen weie
impoiring moie rlan rley weie expoiring, ano rlar rlis
unavoialle riaoe lalance was unwirringly losing 1oo,ooo
ounces o golo ro rle oasraioly !iencl. !owevei, rle
classical economisrs sucl as !ume, Smirl, ano Ricaioo
coulo poinr our rlar rle !iencl (in rle aggiegare) appai-
enrly oesiieo ro inciease rleii loloings o golo, wlile rle
!nglisl appaienrly oesiieo ro ieouce rleii loloings. !n
rlar case, rle only way ro sarisy rlese slirs in money
oemano woulo le oi rle !iencl ro slip rle !nglisl
1oo,ooo golo ounces woirl o gooos, oi wlicl rle !nglisl
woulo nor slip any (nonmoneraiy) gooos in ieruin. ..
p Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Parallel Standard: Amoneraiy sysremin wlicl rwo oieienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as money unoei a Paiallel Sranoaio.)
Exchange rate: Tle iario ar wlicl one cuiiency riaoes againsr an-
orlei in rle oieign-exclange maiker.
Purchasing Power Parity: Tle rleoiy sraring rlar rle exclange
iario lerween rwo monies is oereimineo ly rle iespecrive
exclange iarios o eacl money ano orlei gooos ano seivices.
..
Cheptcr 1o: Thc Lx.hengc Retie Bctvccn Mency ej Dicrcnt Kins p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \len !nglano opeiareo on a golo sranoaio, wlile Cei-
many opeiareo on a silvei sranoaio, ooes Mises rlink rlar
silvei sloulo lave leen consioeieo as money even in !ng-
lano? (pp. 1p8o)
:. !ow ooes rle oocriine o puiclasing powei paiiry explain
rle exclange iario lerween golo ano silvei in rle example
o clorl ano wlear? (p. 181)
. !xplain: ! no orlei ielarions rlan rlose o lairei exisr
lerween rle inlaliranrs o rwo aieas, rlen lalances in avoi
o one pairy oi rle orlei cannor aiise. (p. 18:)
. \lar was rle riain o rlouglr rlar Mises says oealr rle
Meicanrilisr Tleoiy irs oearl-llow? (p. 18:)
. !xplain:
|
!
]
nreinarional movemenrs o money, so ai as
rley aie nor o a riansienr naruie ano consequenrly soon
ienoeieo ineecrive ly movemenrs in rle conriaiy oiiec-
rion, aie always calleo oirl ly vaiiarions in rle oemano
oi money. (p. 18)
tuav:iv 11
Ikl |k08|lM 0| Mlk!0k|N6
Ikl 08IlCI|Vl lKCkkN6l Vk|0l 0|
M0Nl\ kN0 Vkk|kI|0N! |N |I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe k|ster ef the |re||em
Some o rle giearesr minos in economics lave oevoreo rlemselves
ro rle oevelopmenr o inoexes rlar woulo piovioe an oljecrive
measuiemenr o rle clange in rle puiclasing powei o money.
!owevei, sucl srarisrical reclniques lave nevei liveo up ro rleii
piomises, as even rleii own ciearois oren aomirreo.
z. Ihe Natare ef the |re||em
Jusr as we can expiess rle piice o any commooiry ly ieeience
ro low many unirs o money ir rakes ro puiclase one unir o
rle commooiry, rle opposire appioacl can yielo rle piice o a
unir o money in reims o rle commooiry. !owevei, rlis recl-
nique yielos as many piices o money as rleie aie commooiries.
\lar economisrs oesiie is a merloo oi comlining all o rlis inoi-
marion inro a single measuiemenr o rle puiclasing powei o
money. Tlen, a secono rask is ro ask o any perti.u/er commooirys
pp
1oo Stuy Cuic te Thc Thcery ej Mency en Crcit
piice clange, low mucl can le arriilureo ro oices aiising iom
rle sioe o money (in conriasr ro a clange in rle ielarive scaiciry
o rle gooo wlicl woulo also make irs piice iise).
. Methe6s ef Ca|ca|at|aq |a6ex Nam|ers
`eaily all arremprs ar measuiing rle oljecrive exclange value
o money lave ielieo on rle assumprion rlar i a laige enougl
collecrion o gooos aie incluoeo in rle lasker ro le measuieo,
rlen clanges in rle ielarive scaiciries o rle gooos rlemselves will
laigely cancel our. Tlus rle aveiage oi ner clange in rle piices o
e// rle gooos (as quoreo in money) will oemonsriare wlerlei rle
puiclasing powei o money las iisen oi allen. !noirunarely, in
piacrice ir is only possille ro caiiy our sucl calcularions ly making
e he. assumprions alour rle ielarive impoirance o vaiious ac-
rois. !n rle eno, rle economic rleoiisr ooes nor gain mucl iom
sruoying rle vaiious srarisrics o piice movemenrs rlar le coulo
nor olrain iom oeoucrive ieasoning alour rle naruie o exclange
ano money.
. W|esers keaemeat ef the Methe6s ef Ca|ca|at|aq
|a6ex Nam|ers
\iesei oeviseo rle mosr caieul ano sarisacroiy appioacl ro mea-
suiing rle oljecrive exclange value o money, wirl a reclnique
involving rle conriasr lerween nominal ano ieal income. !ow-
evei, even \ieseis appioacl lao seveial aral aws. !oi exam-
ple, ovei laige sriercles o rime, rle rypes o income people coulo
eain lecome incommensuialle, iolling \ieseis reclnique o irs
oesiieo piecision.
Cheptcr 11: Thc Pre//cm ej Mcesuring thc O/c.titc Lx.hengc e/uc ej Mency 1o1
;. Ihe |ract|ca| 0t|||t ef |a6ex Nam|ers
Tle ciiricisms leveleo againsr vaiious reclniques oi calcularing
inoex numleis ieei ro rle piollems o economic rleoiy. !n
piacrical use oi goveinmenr policy, rlese reclniques piovioe a
iougl guioe ro clanges in rle puiclasing powei o money. ..
1o: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
n page 18p Mises wiires, !nvaiialiliry in iespecr o rle
piopeiry ro le measuieo . . . is a sinc ue nen o all measuie-
menr. !oi example, i a peison is using a merei srick ro
measuie lengrl, rlen le musr le assuming rlar rle merei
sricks lengrl is irsel invaiialle. Yer wlen economisrs riy ro
measuie clanges in rle oljecrive exclange value o money
(i.e., in rle puiclasing powei o money), rley iun inro rle
piollem rlar rleie erc ne sucl invaiialle lenclmaiks. !
rle exclange iario lerween money ano any orlei commoo-
iry clanges, ir is nor cleai wlerlei rle clange oiiginares
iom rle sioe o money oi rle commooiry.
Some numeiical examples may claiiy Misess olseivarions
on inoex numleis (pp. 188po). ! rle piice o oil incieases
iom spo ro s1oo, wlile rle piice o a relevision alls iom
s1oo ro spo, ir is possille rlar rlese clanges lave norling ro
oo wirl rle puiclasing powei o money, ano meiely ieecr
a slir in oemano away iom relevisions ano inro oil. n
rle orlei lano, i e// piices (quoreo in money) in rle com-
muniry incieaseo exacrly ly 1o peicenr in one yeai, rlen
ir woulo le cleai rlar rle puiclasing powei o money lao
allen ano was rle oiivei o rle piice incieases. Bur in rle
ieal woilo, rlings aie nevei so cleai-cur. Typically some
piices iise wlile orleis all, ano rle piice movemenrs aie
nor in rle same peicenrages acioss commooiries. Tleie
is no nonailiriaiy way ro oereimine low mucl o a given
gooos clange in piice is oue ro clanges in irs ielarive value
(wirl iespecr ro orlei commooiries) veisus a clange in rle
puiclasing powei o money.
..
Cheptcr 11: Thc Pre//cm ej Mcesuring thc O/c.titc Lx.hengc e/uc ej Mency 1o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: nly ly lerring all moisels o srarisrics is ir pos-
sille oi rle economic rleoiisr ro mainrain lis piesrige in
rle ace o quesrions o rlis soir. (p. 188)
:. !xplain: !e wlo caies ro go ro rle rioulle o oemonsriar-
ing rle uselessness o inoex numleis oi moneraiy rleoiy
ano rle conciere rasks o moneraiy policy will le alle ro
selecr a gooo piopoirion o lis weapons iom rle wiirings
o rle veiy men wlo invenreo rlem. (p. 188)
. \ly aie inoex numleis nor veiy impoiranr oi rle exren-
sion o rle rleoiy o rle naruie ano value o money?
(pp. 18ppo)
. !ven i we gianr oi rle sake o aigumenr rlar a loa o
lieao possesses a consranr uriliry in rle oljecrive sense o
ooo value, wly is rlis appioacl unlelpul wlen ir comes
ro rle use o inoex numleis in moneraiy rleoiy? (p. 1p)
. oes Mises rlink rlar inoex numleis aie complerely use-
less? (p. 1p)
tuav:iv 1:
Ikl !0C|k| C0N!l00lNCl!
0| Vkk|kI|0N! |N Ikl 08IlCI|Vl
lKCkkN6l Vk|0l 0| M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe lxchaaqe ef |reseat 6ee6s fer |atare 6ee6s
People oren exclange piesenr gooos oi uruie gooos, oi example
ly lenoing money rooay (a piesenr gooo) in exclange oi a piomise
o iepaymenr o uruie piincipal plus inreiesr, oi ly agieeing rooay
ro exclange gooos againsr money in rle uruie. Alrlougl lusiness-
people rake giear caurion iegaioing clanges in rle piices o perti.-
u/er commooiries, rley rypically oo nor rake inro accounr rle pos-
sille all in rle oljecrive value o money irsel. To rle exrenr rlar
people e piorecr rlemselves in conriacrs iom possille clanges
in rle value o a cuiiency, ir is only a papei cuiiency rle value
o wlicl miglr all ielarive ro a cuiiency lackeo ly golo. !aioly
anyone (ar rle rime o Misess wiiring) iealizes rlar rle exclange
value o golo irsel coulo clange ouiing rle lengrl o a conriacr.
! clanges in rle puiclasing powei o money coulo le anric-
ipareo, rlen rleii impacr coulo le oser ly alreiing rle reims o
cieoir riansacrions. ! lorl lenoeis ano loiioweis expecr a weakei
cuiiency in rle uruie (i.e., iising piices o mosr gooos ano sei-
vices quoreo in rle cuiiency), rlen lenoeis will insisr on claiging a
1o
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
liglei inreiesr iare ano loiioweis will le willing ro pay ir, lecause
loans will le iepaio in weakei cuiiency.
z. lceaem|c Ca|ca|at|ea aa6 kcceaataac
Accounrancy is impeiecr in seveial iespecrs. !oi example, ir ielies
on suljecrive esrimares o unceirain acrois, sucl as rle value o
invenroiy (wlicl is oepenoenr on uruie oemano) ano rle likeli-
looo o oeaulr ly rle issueis o lonos. Yer anorlei majoi aw
is rlar accounranrs use moneraiy guies as i rley weie akin ro
measuies o lengrl ano weiglr. Bur since rle puiclasing powei o
money irsel can clange, accounrancy is analogous ro an aiclirecr
oesigning lluepiinrs in a woilo wleie iuleis lave vaiialle lengrls.
Moneraiy oepieciarion can cause lusinesspeople ro oveiesrimare
rleii piors ano unwirringly engage in capital consumption.
. !ec|a| Ceaseaeaces ef Var|at|eas |a the Va|ae ef Meae
Whea 0a| 0ae K|a6 ef Meae |s lmp|ee6
! rle quanriry o a commooiry sucl as coal is suooenly ano unex-
pecreoly incieaseo, ir will cause irs piice ro oiop. Tlis will luir
rlose people wlo weie loloing laige amounrs o coal (sucl as rle
owneis o coal mines ano wlolesaleis) ar rle momenr o rle piice
oiop, ano ir will lelp rle consumeis o coal (sucl as rle owneis
o iailioaos ano powei planrs). !owevei, rle gains will exceeo rle
losses oi rle communiry as a wlole, lecause rle giearei quanriry
o coal can yielo moie gooos ano seivices.
Tlings aie oieienr wirl rle money commooiry. !nsoai as irs
menctery seivices aie conceineo, aooirional quanriries conei no
ner leners on rle communiry. \len new quanriries o money
enrei rle economy (ioma newgolo mine, oi example), ir spieaos
unevenly rliouglour rle sysrem. Tle clie leneciaiies aie rle
Cheptcr 1:: Se.ie/ Censcucn.cs in thc O/c.titc Lx.hengc e/uc ej Mency 1o
oiiginal owneis, rlen rlose upon wlom rley isr speno rle new
money, ano so on. Tle loseis aie rlose wlose incomes (measuieo
in money) oo nor iise even as rley see piices going up in rle rlings
rlar rley luy. \ealrl is ieoisriilureo iom some gioups ro orleis,
lur rle communiry as a wlole is nor maoe iiclei ly rle inux o
new money (excepr possilly inoiiecrly i rle leneciaiies o rle
inarion make moie piooucrive use o rleii ieoisriilureo wealrl
rlan rle oimei owneis).
. Ihe Ceaseaeaces ef Var|at|eas |a the lxchaaqe kat|e
8etweea Iwe K|a6s ef Meae
Tle uneven inciease in piices oue ro an inux o new money
(eirlei iom golo oiscoveiies oi iom rle issuance o moie papei
money ano ouciaiy meoia) can leao ro ieoisriilurion even among
gioups using oieienr cuiiencies. !oi a mooein example, suppose
inirially rlar one !.S. oollai riaoes oi one euio, ano rlar rle piice
o a luslel o wlear inirially is s ano also c. Tlen rle !eoeial
Reseive piomises ro slaiply inciease rle quanriry o oollais ovei
rle nexr ew monrls, so rlar specularois on rle oieign exclange
maiker pusl oown rle value o rle oollai so rlar ir now riaoes oi
only one-lal o a euio.
!n rlis siruarion, rle piice o !.S. wlear woulo le c:.o iom
rle peispecrive o !uiopean milleis, wlile wlear puiclaseo iom
!uiopean aimeis woulo le rle oiiginal c. Tle oemano oi Amei-
ican expoireo wlear woulo inciease, wlile rle Ameiican oemano
oi !uiopean wlear woulo collapse. Tle piices o wlear in rle rwo
cuiiencies woulo quickly aojusr unril lalance lao leen iesroieo,
wirl !.S. wlear selling oi (say) s8 ano !uiopean wlear selling
oi c. Bur even arei rlis quick aojusrmenr, rleie woulo le a lasr-
ing aovanrage given ro Ameiican wlear expoireis, lecause rley
coulo sell wlear oi s8 insreao o s, even rlougl rleii expenses
1o8 Stuy Cuic te Thc Thcery ej Mency en Crcit
(on laloi, riacrois, erc.) lao nor yer iisen piopoirionally. !uio-
pean milleis ano consumeis o lieao woulo also lener, lecause
iom rleii peispecrive rle piice o wlear woulo lave allen iom
c ro c pei luslel, even wlile rleii money incomes srayeo rle
same. Two laige gioups o loseis woulo le !.S. consumeis ano
!uiopean wlear aimeis. nly arei all !.S. oomesric piices lao
aojusreo ro rle new quanriry o oollais woulo rle ieoisriilurion
cease.
..
Cheptcr 1:: Se.ie/ Censcucn.cs in thc O/c.titc Lx.hengc e/uc ej Mency 1op
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Technical Notes
n pages 1pp, Mises wiires, \len anylooy luys (oi
sells) coin, corron, oi sugai uruies . . . le is well awaie
o rle iisks rlar aie involveo in rle riansacrion. !e will
caieully weigl rle clances o uruie vaiiarions in piices,
ano oren rake sreps, ly means o insuiance oi hedging
transactions . . . ro ieouce rle aleatory acroi in lis oeal-
ings. !is puipose in rlis passage is ro conriasr rle lusi-
nessmans waiiness conceining initiue/ piice clanges
ovei rime, wirl rle lusinessmans (ar rlar rime) ignoiance
o clanges in rle puiclasing powei o money ovei rime.
!owevei, Misess oesciiprion is oiculr ro explain ro a
novice, lecause noimally economisrs woulo oesciile rle
use o futures contracts as thcmsc/tcs insuiance oi leog-
ing opeiarions. !oi example, i a aimei knows le will
lave a laige laivesr o wlear ro sell in six monrls, ano
lis aliliry ro make lis moirgage paymenrs ano pay orlei
expenses oepenos ciirically on rle piice o wlear, rle
aimei may wanr ro lock in rle piice ly selling uruies
conriacrs in wlear. n rle orlei sioe o rle riansacrion, a
laige opeiarion rlar makes lieao may irsel wanr ro lock
in rle piice o one o irs majoi inpurs, so rlar a suooen
piice spike wonr ciipple opeiarions. Tle lieao piooucei
woulo rlus glaoly /uy rle uruies conriacrs issueo ly rle
aimei. Tlis is a murually lenecial aiiangemenr in wlicl
no money clanges lanos in rle piesenr, lur rle rwo pairies
rooay lock in rle piice ar wlicl rley will exclange wlear
oi money in rle uruie. (Teclnically we lave oesciileo
a forward contract, wlicl is economically veiy similai ro a
uruies conriacr.) Tle use o uruies conriacrs ano orlei
11o Stuy Cuic te Thc Thcery ej Mency en Crcit
oeiivarives can allow maiker pairicipanrs ro leoge away
rleii exposuie ro pairiculai piice swings, wleie rley oi-
eir rle porenrial leners o a avoialle move wlile avoio-
ing rle oownsioe o an unavoialle move. Tlis is rle sense
in wlicl sucl conriacrs can seive as insuiance.
Mises wains (pp. :oo) rlar a oepieciaring cuiiency can
leao ro capiral consumprion. !oi a simple example, sup-
pose a man spenos s1oo,ooo on a macline rlar lasrs oi ren
yeais. ! piices aie sralle (ano oisiegaioing inreiesr), rle
man neeos ro eain ar leasr s1o,ooo eacl yeai in sales iev-
enue ovei ano alove laloi ano orlei expenses, in oioei
ro accounr oi rle oepieciarion on lis macline. ! ina-
rion causes lim ro eain ai moie rlan le oiiginally anrici-
pareo ovei rle yeais iomrle sale o lis gooos, arei serring
asioe s1o,ooo eacl yeai rle man miglr speno rle iemain-
ing pior on ancy oinneis ano vacarion ciuises. !ow-
evei, arei ren yeais (wirl s1oo,ooo in lano, oisiegaioing
inreiesr) rle man may oiscovei rlar lecause o rle all
in rle puiclasing powei o money, a new macline las a
piice o s:oo,ooo. Tlus rle man unwirringly consumeo
lal o lis capiral ovei rle oecaoe: le sraireo wirl one new
macline ano enoeo up wirl rle means ro luy only lal o a
new macline. Tle man iealizes rlar lis ancy oinneis ano
ciuises weie unoeo net our o piors lur ly earing away
ar lis lusiness assers.
..
Cheptcr 1:: Se.ie/ Censcucn.cs in thc O/c.titc Lx.hengc e/uc ej Mency 111
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New Terminology
Capital consumption: A meraploi oenoring rle ieoucrion in cap-
iral lecause o a ailuie ro ieinvesr enougl our o cuiienr
ourpur.
Futures contract: A sranoaioizeo conriacr, riaoeo on an oiganizeo
exclange, wleie rwo pairies agiee ro exclange a gooo ar
a specieo piice (rle uruies piice) ar a specieo uruie
oare (rle oeliveiy oare). As conoirions clange ano alrei rle
uruies piice peiraining ro rle oeliveiy oare, rle exclange
will cieoir oi oelir rle accounrs o rle luyei ano sellei o
rle oiiginal uruies conriacr on a oaily lasis ro ieecr rle
clange. (! rle uruies piice goes up, rle luyei gains ano rle
sellei loses, erc.) Tlese oaily episooes o maiking-ro-maiker
iesroie rle maiker value o rle uruies conriacr irsel ro zeio.
!pon oeliveiy, rle sellei o rle uruies conriacr oeliveis rle
gooo, wlile rle luyei pays rle cuiienr spor piice oi rlar
oare, net rle uruies piice as oiiginally specieo.
Forward contract: Similai ro a uruies conriacr, rlougl a oiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oaily
maiking-ro-maiker. n rle oeliveiy oare, rle luyei pays rle
oiwaio piice as oiiginally specieo in rle conriacr. Tlus rle
oiwaio conriacr can aclieve a posirive oi negarive maiker
value, as conoirions clange ano cause rle acrual spor piice
(on rle oeliveiy oare) ro move alove oi lelow rle oiiginally
specieo oiwaio piice.
Hedging transaction: Anancial riansacrion in wlicl an inoivioual
arremprs ro ieouce lis oi lei exposuie ro a maiker ourcome.
11: Stuy Cuic te Thc Thcery ej Mency en Crcit
!oi example, someone wlo lelieves rlar Srock XYZwill our-
peioim mosr orlei srocks miglr go long ly puiclasing
seveial rlousano slaies o ir. Bur ro leoge limsel againsr a
geneial all in rle maiker, le miglr also go sloir an inoex
uno loloing all rle srocks in rle S&P oo. Tlus, even i
XYZalls in piice, rle invesroi will srill make money, so long
as Srock XYZ oiops ly a smallei amounr rlan mosr orlei
srocks.
Aleatory: epenoenr on clance, luck, oi an unceirain ourcome.
..
Cheptcr 1:: Se.ie/ Censcucn.cs in thc O/c.titc Lx.hengc e/uc ej Mency 11
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Study Questions
1. Relare rle ollowing commenr ro Misess eailiei oiscussion
(p. 1) o rle lyporlerical possililiry o ar money: !eno-
eis ano loiioweis aie nor in rle lalir o allowing oi pos-
sille uruie ucruarions in rle oljecrive exclange value o
money. (p. 1p)
:. ! rle puiclasing powei o money uncxpc.tc/y alls, wlo is
luircieoirois oi oelrois? (p. :oo)
. \lar is necessaiy ro eliminare rle unoesiialle conse-
quences o unlimireo inarionaiy policy? (p. :o)
. * Mises wiires, ! rle oljecrive exclange value o all rle
srocks o money in rle woilo coulo le insranraneously
ano in equal piopoirion incieaseo oi oecieaseo, |ano] i all
ar once rle money-piices o all gooos ano seivices coulo
iise oi all unioimly, rle ielarive wealrl o inoivioual eco-
nomic agenrs woulo nor le aecreo (p. :o). oes Misess
aigumenr assume rlar eveiyone lolos rle same iacrion
o lis oi wealrl in rle oim o casl lalances, oi ooes ir
also woik i some people lolo (say) laige amounrs o ieal
esrare, wlile orleis lolo mosrly casl? (Keep in mino rlar
oi rlis aigumenr Mises las assumeo away rle piollem o
conriacrs oi uruie gooos.)
. !xplain: !uiope lao expoireo slips ano iails, meral gooos
ano rexriles, uiniruie ano maclines, oi golo wlicl ir lirrle
neeoeo oi oio nor neeo ar all, oi wlar ir lao alieaoy was
enougl oi all irs moneraiy riansacrions. (p. :11)
*
uesrions wirl an asreiisk signiy rle quesrion is a pairiculaily oiculr one.
tuav:iv 1
M0NlIkk\ |0||C\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
iiginally, cirizens juogeo rle success o moneraiy policy ly rle
sounoness o rle coinage ir mainraineo in ciicularion. !n moo-
ein rimes monetary policy ieeis ro goveinmenr (oi cenrial lank)
eoirs ro alrei rle puiclasing powei o money. Tle clie insriu-
menr rliougl wlicl rle Srare caiiies our moneraiy policy is irs
sriong inuence on rle lin o money useo ly rle cirizeniy.
Inationism is rlar moneraiy policy rlar seeks ro inciease rle
quanriry o money. Nave inationism lelieves rlar money con-
srirures wealrl, ano rlar ciearing moie money will ruin pooi
inro iicl. A secono gioup o inarionisrs unoeisranos rlar piinr-
ing moie money will cause piices ro iise, lur cnerscs rle policy
lecause rley wanr ro lelp oelrois oi aclieve some orlei goal. A
rliio gioup o inarionisrs unoeisranos rlar rle policy in geneial
will wieak economic lavoc, lur rley suppoir ir roo lecause rley
lelieve some essenrial goveinmenr piogiams somerimes musr le
paio oi rliougl an ination tax. !conomics can say, wirlour
making any value juogmenrs, rlar inarionism is a veiy pooi pol-
icy oi aclieving irs srareo oljecrives.
Restrictionism oi deationism is policy rlar aims ar iaising rle
oljecrive exclange value o money. !r is unpopulai oi vaiious iea-
sons.
Because neirlei inarionism noi oearionism is capalle o
aclieving irs srareo oljecrives, rle only sensille moneraiy policy is
11
11 Stuy Cuic te Thc Thcery ej Mency en Crcit
one rlar aims ar eliminaring all goveinmenr inreieience wirl rle
puiclasing powei o money. !n piacrice, rlis means a iigio aolei-
ence ro a commooiry sranoaio, wlicl in mooein rimes means
eirlei rle golo oi silvei sranoaio.
!n reclnical economic rleoiy, rle only coleienr oenirion oi
ination is an inciease in rle quanriry o money (in rle lioaoei
sense o rle reim) rlar is nor oser ly a coiiesponoing inciease
in rle oemano oi money (in rle lioaoei sense o rle reim), wirl
rle necessaiy iesulr leing a all in rle puiclasing powei o money.
Deation is rle opposire, namely a ieoucrion in rle quanriry o
money rlar is nor oser ly a all in rle oemano oi ir, sucl rlar
piices reno ro all. Tle economisr wlo wisles ro inuence pullic
policy ano aveir oisasrei sloulonr lecruie orleis on rleii sloppy
use o reiminology, lur insreao sloulo expose rle eiiois o ine-
tienism.
Cheptcr 1: Menctery Pe/i.y 11
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Chapter Outline
. Meaetar |e||c 0eae6
iiginally, cirizens juogeo rle success o moneraiy policy ly rle
sounoness o rle coinage ir mainraineo in ciicularion. ! ano wlen
goveinmenrs violareo rlar riusr ly oelasing rle coinage, ir was oi
scal (i.e., luogeraiy) enos: rle aurloiiries neeoeo moie money
ano so ruineo ro inarion.
!n mooein rimes, lowevei, goveinmenrs use moneraiy pol-
icy ro aclieve orlei socio-polirical aims. Alrlougl pairiculai ac-
rions may avoi one moneraiy policy veisus anorlei lecause o rle
specic aovanrages rley expecr ro oeiiveoi example, rle owneis
o golo mines avoiing a ieruin ro rle golo sranoaioin geneial
monetary policy nowaoays ieeis ro goveinmenr (oi cenrial lank)
eoirs ro alrei rle puiclasing powei o money.
z. Ihe |astrameats ef Meaetar |e||c
Tle clie insriumenr rliougl wlicl rle Srare caiiies our mone-
raiy policy is irs sriong inuence on rle lin o money useo ly rle
cirizeniy. As conriollei o rle minr ano sole issuei o money sul-
srirures, rle mooein Srare las wioe oiscierion in rlis cloice ly
irs suljecrs. ! rle Srare oecioes ro iemain on a merallic sranoaio
(sucl as golo oi silvei), rlen ir srill musr cloose vhi.h piecious
meral. Moie geneially, i rle Srare oprs oi a cieoir oi ar money,
rlen rle Srare las rle uirlei oprion o alreiing rle quanriry o
money ar will, ro aclieve irs oljecrives iegaioing rle puiclasing
powei o money.
118 Stuy Cuic te Thc Thcery ej Mency en Crcit
. |aat|ea|sm
Inationism is rlar moneraiy policy rlar seeks ro inciease rle quan-
riry o money. Nave inationism lelieves rlar money consrirures
wealrl, ano rlar ciearing moie money will ruin pooi inro iicl.
A secono gioup o inarionisrs unoeisranos rlar piinring moie
money will cause piices ro iise (an elemenraiy acr rlar rle isr
gioup ails ro see). Yer even so rlis secono gioup cnerscs rle pol-
icy, lecause rley wanr ro lelp oelrois, oi aclieve some orlei goal,
ly iaising piices. !inally, a rliio gioup o inarionisrs unoeisranos
rlar rle policy in geneial will wieak economic lavoc, lur rley
suppoir ir roo lecause rley lelieve some goveinmenr piogiams
(sucl as oeense iom oieign invaoeis) aie alsolurely essenrial,
ano somerimes musr le paio oi rliougl an ination tax.
Tlis rliio oeense o inarion unoeiscoies rle anri-oemociaric
naruie o rle policy. !rs pioponenrs canoioly aomir rlar rle pullic
woulo nevei suppoir ceirain piogiams (sucl as majoi wais) i rley
weie oiceo ro explicirly leai rle ull nancial luioen rliougl
raxarion oi goveinmenr oecirs nanceo ly genuine savings. Bur
wlen rle piogiams aie unoeo (pairially) rliougl rle piinring
piess, ir is nor cleai ro rle aveiage vorei wlar is causing piices
ro iise ano lis sranoaio o living ro all. !e llames unions oi cui-
iency specularois, nor goveinmenr spenoing.
!ionically, i rle pullic anricipares a slaip juturc oecline in rle
puiclasing powei o money lecause o an inux o new nores
(piinreo ly rle goveinmenr), rlen piices in rle prcscnt can iise
in expecrarion. Yer unril rle new nores plysically exisr, rleie may
appeai a sloirage o nores. Tlus rle pullic ano acaoemics may
clamoi oi moie inarion, in oioei ro sarisy rle appaienr neeos
o commeice. Yer ir is inarionism irsel rlar las causeo rle piol-
lem, ano uirlei lours will only exaceilare rle siruarion.
!conomic science cannor juoge rle policy oljecrives o ina-
rionism, ir cannor say wlerlei ir is piopei ro (say) lelp oelrois
oi expoireis ar rle expense o orleis. Bur wlar economics .en
Cheptcr 1: Menctery Pe/i.y 11p
say, wirlour making any value juogmenrs, is rlar inarionism is
a veiy pooi policy oi aclieving irs srareo oljecrives. !acl o
irs allegeo goals (lelping oelrois, lelping expoireis, erc.) can le
aclieveo mucl moie oiiecrly ly orlei inreivenrions lesioes a gen-
eial oelasemenr o rle moneraiy unir. !n rlis sense economics can
ciiricize inarionism.
. kestr|ct|ea|smer 0eat|ea|sm
Restrictionismoi deationismis policy rlar aims ar iaising rle oljec-
rive exclange value o money. !r is unpopulai oi vaiious ieasons.
!iisr, goveinmenrs oo nor lener iom ir lecause rley musr sac-
iice porenrial spenoing in oioei ro (say) ieriie some o rle nores
collecreo rliougl raxarion. Secono, a narion wirl an appieciaring
cuiiency woulo see a oereiioiaring riaoe lalance in rle eyes o
rle pullic, wlicl is also unpopulai. !inally, rle piimaiy lene-
ciaiies o oearionism aie cieoirois, wlo geneially speaking aie a
small ano unpopulai gioup.
Tle only rime oearionism is polirically vialle occuis ejtcr a
peiioo o inarionism, eirlei oi marreis o piesrige oi ro assuie
inreinarional cieoirois ro conrinue using a ceirain counriys nan-
cial insrirurions. Yer even leie, a policy o oearionism ooes nor
simply ieveise rle laims o rle piioi inarion, lur insreao causes
many new laims o irs own. !oi example, many o rle cieoirois
wlo will le lelpeo ly rle cuiienr iouno o oearion weie net rle
same people laimeo ouiing rle inarion. !n geneial ir musr le
concluoeo rlar oearionism is a pooi merloo oi aclieving rle
specic aims o irs pioponenrs.
;. |aar|a||||t ef the 0|[ect|e lxchaaqe Va|ae ef Meae as
the k|mef Meaetar |e||c
! neirlei inarionism noi oearionism is capalle o aclieving irs
srareo oljecrives, rle only sensille moneraiy policy is one rlar
1:o Stuy Cuic te Thc Thcery ej Mency en Crcit
aims ar eliminaring all goveinmenr inreieience wirl rle puiclas-
ing powei o money. !n piacrice, rlis means a iigio aoleience ro
a commooiry sranoaio, wlicl in mooein rimes means eirlei rle
golo oi silvei sranoaio.
6. Ihe ||m|ts ef Meaetar |e||c
As all goveinmenr eoirs ro inuence rle puiclasing powei o
money musr ulrimarely woik rliougl rle suljecrive valuarions o
inoiviouals, in rlis iealm as in orleis rle goveinmenrs powei is
limireo. Tle aurloiiries cannor anricipare rle piecise, long-iun
eecrs o rleii eoirs ro manipulare rle cuiiency, ano rlis is one
o rle sriongesr aigumenrs egeinst sucl manipularion in rle isr
place.
). lxcarsas: Ihe Ceacepts |aat|ea aa6 0eat|ea
!n reclnical economic rleoiy, rle only coleienr oenirion oi
ination is an inciease in rle quanriry o money (in rle lioaoei
sense o rle reim) rlar is nor oser ly a coiiesponoing inciease
in rle oemano oi money (in rle lioaoei sense o rle reim), wirl
rle necessaiy iesulr leing a all in rle puiclasing powei o money.
Deation is rle opposire, namely a ieoucrion in rle quanriry o
money rlar is nor oser ly a all in rle oemano oi ir, sucl rlar
piices reno ro all. !owevei, oursioe rle iealm o reclnical eco-
nomics, rle reims inetien ano cetien lave ceirain connorarions.
Tle economisr wlo wisles ro inuence pullic policy ano aveir ois-
asrei sloulonr lecruie orleis on rleii sloppy use o reiminology,
lur insreao sloulo expose rle eiiois o inetienism.
..
Cheptcr 1: Menctery Pe/i.y 1:1
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Technical Notes
n page :1p Mises wiires, ! a counriy las a merallic sran-
oaio, rlen rle en/y measuie o cuiiency policy rlar ir can
caiiy our ly irsel is ro go ovei ro anorlei kino o money.
\lar Mises las in minoano rlis is loine our ly rle
impoiranr pliase ly irselis rlar rle classical golo sran-
oaio placeo sriicr limirs on eacl o rle pairiciparing coun-
riies. !n rle peiioo leoie rle isr \oilo \ai, oi example,
rle !nireo Srares goveinmenr peggeo rle oollai ro :.::
giains o golo (woiking our ro aiouno s:o. pei ounce),
wlile rle Biirisl goveinmenr peggeo irs own cuiiency ar
rle iare o s.: ro an ounce o golo. Tlus rle exclange
iare lerween rle oollai ano Biirisl pouno was xeo ar s.8
ro a pouno. ! rle !nireo Srares goveinmenr legan piinr-
ing up excessive amounrs o new oollais, rlis woulo reno
ro cause oomesric piices (quoreo in oollais) ro iise asrei
rlan rley oio (quoreo in pounos) in Ciear Biirain. Amei-
icans woulo srair impoiring moie iom (cleapei) Biirisl
pioouceis, ano rle iesulring riaoe oecir woulo allow rle
Biirisl ro accumulare moie ano moie oollais. Tlis in ruin
woulo pur piessuie on rle oieign exclange iare, wlicl
woulo (unoei a ar sranoaio) simply cause rle oollai ro
oepieciare againsr rle Biirisl pouno. Bur since lorl cui-
iencies weie rieo ro golo ar xeo iares, rle alling oollai
woulo open up an ailiriage oppoiruniry oi specularois ro
ruin rleii oollais inro rle !.S. aurloiiries in exclange oi
golo. Tlus, as irs golo ieseives legan ro owinole, rle !.S.
woulo lave ro alanoon irs inarionaiy parl. Tlus a meral-
lic sranoaio keeps slaip limirs on rle inarionaiy policies
o any single counriy.
1:: Stuy Cuic te Thc Thcery ej Mency en Crcit
n page :: Mises wiires, !n all counriies wleie ina-
rion las leen iapio, ir las leen olseiveo rlar rle oeciease
in rle value o rle money las occuiieo asrei rlan rle
inciease in irs quanriry. n rle ollowing page le explains
rlar rle value o money is inuenceo ly lorl supply en
oemano. !oi a mooein example, suppose rlar rle Claii-
man o rle !eoeial Reseive announceo rlar le woulo cause
rle quanriry o !.S. oollais ro iise ly a acroi o 1,ooo in
rle couise o a week. !ven ignoiing rle srep-ly-srep pio-
cess o inarion, rle eno iesulr woulo net simply le a gen-
eial 1,ooo-olo iise in piices. !nsreao, piices (quoreo in !.S.
oollais) woulo iise ly mucl merc rlan rlar, lecause Amei-
icans woulo no longei wanr ro lolo oollais. Tley woulo
no longei view rle oollai as a sae cuiiency, ano woulo
seek ro ieplace rleii oollai loloings wirl eirlei orlei cui-
iencies oi peilaps rle piecious merals. !n oioei ro iesroie
equililiium, rlen, piices woulo lave ro iise nor meiely on
accounr o rle exria quanriry o oollais, lur also lecause
o rle slaip oiop in rle suljecrive oesiie ro lolo rlem.
..
Cheptcr 1: Menctery Pe/i.y 1:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Monetary policy: Coveinmenr oi cenrial lank eoirs ro alrei rle
puiclasing powei o money.
Inationism: Moneraiy policy rlar seeks ro inciease rle quanriry
o money.
Nave inationism: !narionism suppoireo ly rle lelie rlar
money consrirures wealrl.
Ination tax: Tle ieoisriilurion o wealrl iom rle cirizeniy ro
rle goveinmenr (oi irs oesignareo leneciaiies) rliougl
inarion.
Restrictionism/Deationism: Moneraiy policy rlar aims ar iaising
rle oljecrive exclange value o money.
Ination: An inciease in rle quanriry o money (in rle lioaoei
sense o rle reim) rlar is nor oser ly a coiiesponoing
inciease in rle oemano oi money (in rle lioaoei sense o
rle reim), wirl rle necessaiy iesulr leing a all in rle pui-
clasing powei o money. (`ore rlar rlis is a reclnical eco-
nomic oenirion, nor necessaiily laving rle connorarions o
inarion in populai oiscussions.)
Deation: A ieoucrion in rle quanriry o money rlar is nor oser
ly a all in rle oemano oi ir, sucl rlar piices reno ro all.
(`ore rlar rlis is a reclnical economic oenirion, nor neces-
saiily laving rle connorarions o oearion in populai ois-
cussions.) ..
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar unarreiing possililiry ooes Mises suggesr iegaio-
ing Ben !ianklins suppoir o papei money eaily in lis
caieei? (p. :1)
:. \ly ooes nave inarionism iecommeno an inciease in
rle quanriry o money? (pp. :1p:o)
. !s ir possille oi someone ro suppoir inarionism, even
i le unoeisranos rlar ir will lave giave economic conse-
quences? (pp. ::1::)
. !xplain:
|
!
]
narion lecomes rle mosr impoiranr psy-
clological iesouice o any economic policy wlose conse-
quences lave ro le concealeo, ano so in rlis sense ir can le
calleo an insriumenr o unpepu/er, i.e., o anri-oemociaric,
policy, since ly misleaoing pullic opinion ir makes possi-
lle rle conrinueo exisrence o a sysremo goveinmenr rlar
woulo lave no lope o rle consenr o rle people i rle cii-
cumsrances weie cleaily laio leoie rlem. (pp. :::)
. \oulo Mises lave leen suipiiseo ly rle secono lal o
rle rwenrierl cenruiy, since le wiires, !n rle long iun,
a money wlicl conrinually ell in value woulo lave no
commeicial uriliry. !r coulo nor le useo as a sranoaio o
oeeiieo paymenrs (p. ::)?
tuav:iv 1
Ikl M0NlIkk\ |0||C\ 0| lIkI|!M
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
tatism as a rleoiy is rle oocriine o rle omniporence o rle Srare.
As a policy, rarism is rle arrempr ro iegulare all social ano eco-
nomic aaiis ly aurloiirarive commanomenr ano piolilirion.
Tle rarisr views money as a ciearuie o rle Srare, ano lence
(eiioneously) lelieves rlar a poweiul ano iicl Srare sloulo lave a
coiiesponoingly gooo money. Bur lisroiy is ull o cases wleie
even rle vicrois in a wai saw rle collapse o rleii cuiiency, oi
wleie a wealrly counriy lao a veiy weak cuiiency.
ren rle aurloiiries will riy ro mirigare rle consequences o
inarionismly imposing piice conriols. ! rle conriols aie applieo
ro a small numlei o irems, rlen shortages will oevelop lecause rle
pioouceis o rlese irems will see orlei piices iise lur will nor le
alle ro claige appiopiiare piices oi rle irems in quesrion. Tle
aurloiiries musr rlen eirlei alanoon rleii policy oi inreivene ui-
rlei srill, conriolling moie piices ano possilly compelling people
ro woik againsr rleii will.
A populai view lolos rlar a counriy expeiiencing a debit bal-
ance of payments cannor sralilize rle value o irs money, unril rle
unoeilying oeecrs aie iecrieo. !owevei, i a counriy uses puiely
merallic money, rlen a oelir lalance o paymenrs will evenrually
ieveise irsel auromarically, lecause rle ourow o meral will leao
ro alling oomesric piices. !oi counriies on cieoir oi ar money, a
similai piinciple lolos. A oelir lalance o paymenrs pei se cannor
1:
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
unilareially cause a narions cuiiency ro oepieciare, lecause rle
oelir lalance irsel is causeo ly inarion. `o marrei rle oieign
riaoe siruarion, a counriy can always cloose souno money.
! rle goveinmenr wisles ro avoio laving irs cuiiency arrackeo
ly specularois, ir neeo only alanoon inarionisr policies.
Cheptcr 1: Thc Menctery Pe/i.y ej Ltetism 1:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe Meaetar Iheer ef ltat|sm
tatism as a rleoiy is rle oocriine o rle omniporence o rle
Srare. As a policy, rarism is rle arrempr ro iegulare all social
ano economic aaiis ly aurloiirarive commanomenr ano pioli-
lirion. Alrlougl rle ourwaio appeaiances o piivare piopeiry ano
enriepieneuislip may le ler inracr, in piacrice rarism can only
le iealizeo as Srare Socialism. Because sociology ano economics
oerail rle limirs on wlar sleei miglr can aclieve in arrempring ro
ieoesign luman sociery, rarisrs seek ro oiscieoir rlese elos.
z. Nat|eaa| |rest|qe aa6 the kate ef lxchaaqe
Tle rarisr views money as a ciearuie o rle Srare, ano lence (eiio-
neously) lelieves rlar a poweiul ano iicl Srare sloulo lave a coi-
iesponoingly gooo money (i.e., money wirl a ligl exclange
iare). Bur lisroiy is ull o cases wleie even rle vicrois in a wai
saw rle collapse o rleii cuiiency, oi wleie a wealrly counriy lao
a veiy weak cuiiency.
. Ihe keqa|at|ea ef |r|ces | kather|tat|e 0ecree
ren rle aurloiiries will riy ro mirigare rle consequences o ina-
rionism ly imposing piice conriols, in wlicl people aie punisleo
ly nes oi piison senrences oi asking (oi even paying) piices
alove rle legal ceiling. ! rle conriols aie applieo ro a small num-
lei o irems, rlen shortages will oevelop lecause rle pioouceis o
rlese irems will see orlei piices iise lur will nor le alle ro claige
appiopiiare piices oi rle irems in quesrion. Tlis ourcome is rle
1:8 Stuy Cuic te Thc Thcery ej Mency en Crcit
opposire o wlar rle aurloiiries inrenoeo, rley lao imposeo rle
piice conriols ro keep rle irems accessille ro rle pullic, nor ro
eiaoicare rlem iom rle sroie slelves. Ar rlis poinr, rle aurloi-
iries musr eirlei alanoon rleii policy oi inreivene uirlei srill,
conriolling moie piices ano possilly compelling people ro woik
againsr rleii will.
. Ihe 8a|aace

ef

|ameats Iheer as a 8as|s ef


Carreac |e||c
A populai view lolos rlar a counriy expeiiencing a debit balance of
payments cannor sralilize rle value o irs money, unril rle unoei-
lying oeecrs aie iecrieo. !owevei, rle classical economisrs ano
larei rle Cuiiency Sclool oemonsriareo rle aws in rlis view. !
a counriy uses puiely merallic money, rlen a oelir lalance o pay-
menrs will evenrually ieveise irsel auromarically, lecause rle our-
ow o meral (sucl as golo) will leao ro alling oomesric piices.
!venrually, iesioenrs will pieei ro luy iom oomesric pioouceis
iarlei rlan oieigneis, ano oieign puiclaseis will pieei ro luy
moie cleaply iom rlem as well. Tlus rle oelir lalance will ruin
inro a credit balance of payments, ano rle moneraiy meral will reno
ro ow lack inro rle counriy rlar oiiginally expeiienceo rle oiain.
!oi counriies on cieoir oi ar money, a similai piinciple lolos.
A oelir lalance o paymenrs pei se cannor unilareially cause a
narions cuiiency ro oepieciare, lecause rle oelir lalance irsel is
causeo ly inarion. `o marrei rle oieign riaoe siruarion, a coun-
riy can always cloose souno money.
;. Ihe !appress|ea ef !peca|at|ea
\len inarionisr policies leao ro a oepieciarion o a counriys
money againsr orlei cuiiencies, goveinmenr ocials will oren
oenounce oieign specularois oi arracking rle cuiiency. Yer
Cheptcr 1: Thc Menctery Pe/i.y ej Ltetism 1:p
in geneial, specularois cannor alrei rle aveiage piice o a gooo
(incluoing money), rley simply smoorl our rle ups ano oowns.
Tle specularoi riies ro luy low ano sell ligl (oi vice veisa). By
luying unoeivalueo cuiiencies, rle specularoi pusles up rle piice
rowaio irs long-iun level, ano ly selling oveivalueo cuiiencies,
rle specularoi pusles rlem oown rowaio rle coiiecr level. !
rle goveinmenr wisles ro avoio laving irs cuiiency arrackeo ly
specularois, ir neeo only alanoon inarionisr policies. ..
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
On pages z(6(8, Mlses explalns the process by whlch llmlted
lnterventlons lead to undeslrable consequences, even from the
polnt of vlew of the authorltles. These ln turn lead to further lnter-
ventlons, ln an attempt to counteract the bad consequences. The
process contlnues untll the authorltles elther abandon thelr pro-
gram or reach full-blown soclallsm. Although economlsts before
Mlses understood the undeslrable eects 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 :po he would dellver a speech entltled, Mlddle of the Poad
Pollcy Leads to Soclallsm.
On pages z(pz, 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 condently 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
ows and exchange rates.
..
Cheptcr 1: Thc Menctery Pe/i.y ej Ltetism 11
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
tatism(as theory): Tle oocriine o rle omniporence o rle Srare.
tatism(as policy): Tle arrempr ro iegulare all social ano economic
aaiis ly aurloiirarive commanomenr ano piolilirion.
Mixed economy: An economy possessing aspecrs o lorl capiral-
ism ano socialism, in wlicl piivare inoiviouals ierain nom-
inal owneislip o rle means o piooucrion, lur rle gov-
einmenr exrensively iegulares rleii use o rlis piopeiry,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Debit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple o a counriy collecrively speno moie on oieign gooos
ano assers rlan vice veisa. !r is serrleo ly an ourowo money
iom rle counriy.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple o a counriy collecrively speno less on oieign gooos ano
assers rlan vice veisa. !r is serrleo ly an inow o money ro
rle counriy.
Shortages: A sloirall in rle quanriry o gooos oeieo oi sale,
compaieo ro rle amounr consumeis wisl ro puiclase. Sloir-
ages aie causeo wlen a piice ceiling lolos rle piice lelow
rle maiker-cleaiing level. ..
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \ly ooes economic science pose a rliear ro rarism?
(p. :)
:. Arei a piice ceiling is imposeo, wlar lappens once rle
srocks o gooos rlar weie alieaoy on rle slelves lave leen
solo o? (p. :)
. !xplain: ! rle iegularion o piices lao leen successul, ir
woulo lave paialyzeo rle wlole economic oiganism. Tle
only rling rlar maoe possille rle conrinueo uncrioning
o rle social appaiarus o piooucrion was rle incomplere
enoicemenr o rle iegularions rlar was oue ro rle paial-
ysis o rle eoirs o rlose wlo ouglr ro lave execureo
rlem. (p. :8)
. !xplain: Piice ucruarions aie ieouceo ly specularion,
nor aggiavareo, as rle populai legeno las ir. (p. :)
. !xplain: Tle ucruarions o rle oieign-exclange iare
aie nor oereimineo solely ly leais selling lur jusr as mucl
ly lulls luying. (p. :)
..
vav: iii
M0Nl\ kN0 8kNK|N6
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tuav:iv 1
Ikl 80!|Nl!! 0| 8kNK|N6
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Summary
A banker is one wlo lenos our orlei peoples money, a capitalist
lenos our lis oi lei own money. Tle lusiness o lanking alls
inro rwo oisrincr caregoiies: (1) rle negoriarion o cieoir rliougl
rle loan o orlei peoples money ano (:) rle gianring o cieoir
rliougl rle issue o ouciaiy meoia.
!n rleii iole as negoriaroi o cieoir (oi credit intermediaries),
lanks loiiow iom lenoeis ar a ceirain iare o inreiesr ano rlen
leno ir ro loiioweis ar (wlar piomises ro le) a liglei iare o
inreiesr.
Cieoir riansacrions involve rle exclange o piesenr oi uruie
gooos. Cieoir riansacrions can le oivioeo inro rwo gioups:
(1) Tlose in wlicl one pairy las rle lener o olraining a gooo
in rle piesenr wlile rle orlei pairy las rle oisaovanrage o pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairy las
rle lener o olraining a gooo in rle piesenr wlile rle orlei pairy
ooes net suei any coiiesponoing oisaovanrage. !oans o rle isr
rype (in wlicl rle lenoei acrually ienounces rle use o lis money)
involve commodity credit wlile loans o rle secono rype (in wlicl
rle lank issues ouciaiy meoia) involve circulation credit.
Tle ciucial earuie in loans o ouciaiy meoia is rlar rle oiigi-
nal oeposiroi is net engageo in a cieoir riansacrion. !e ierains rle
ull use o lis money, even as rle lank lenos ir ro someone else.
1
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
Tlis piocess incieases rle roral amounr o money in rle lioaoei
sense.
nly ly iecognizing rle unoamenral oisrincrion lerween
nores ano current accounts rlar aie eirlei (e) lackeo veisus (/) un-
lackeo ly money, can rle economisr lope ro unoeisrano rle
lioaoei iole rlar ouciaiy meoia play in economic cycles.
Cheptcr 1: Thc Busincss ej Benling 1
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Chapter Outline
. Ipes ef 8aak|aq kct||t
A banker is one wlo lenos our orlei peoples money, a capitalist
lenos our lis oi lei own money. Tle lusiness o lanking alls
inro rwo oisrincr caregoiies: (1) rle negoriarion o cieoir rliougl
rle loan o orlei peoples money ano (:) rle gianring o cieoir
rliougl rle issue o ouciaiy meoia. (Recall rlar ouciaiy meoia
aie nores ano lank lalancesclaims on moneyrlar aie nor acru-
ally coveieo ly money in ieseive.)
z. Ihe 8aaks as Neqet|aters ef Cre6|t
!n rleii iole as negoriaroi o cieoir (oi credit intermediaries), lanks
loiiow iom lenoeis ar a ceirain iare o inreiesr ano rlen leno ir
ro loiioweis ar (wlar piomises ro le) a liglei iare o inreiesr.
!n rlis acriviry, piuoenr lanks will oley rle golden rule ly wlicl
rleii lialiliries will nor maruie eailiei rlan rleii assers. !n orlei
woios, rle lanks sloulo net loiiow sloir ro leno long, i rley
wanr ro avoio rle iisk o insolvency. !ollowing rle goloen iule, ly
marcling rle maruiiries o assers ano lialiliries, will nor eliminare
all iisks o couise, lecause any invesrmenr coulo go soui ano rle
loiiowei oeaulr on rle loan iom rle lank.
. Ihe 8aaks as |ssaers ef ||6ac|ar Me6|a
Cieoir riansacrions involve rle exclange o piesenr oi uruie
gooos. Cieoir riansacrions can le oivioeo inro rwo gioups:
(1) Tlose in wlicl one pairy las rle lener o olraining a gooo
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
in rle piesenr wlile rle orlei pairy las rle oisaovanrage o pio-
vioing a gooo in rle piesenr, ano (:) rlose in wlicl one pairy las
rle lener o olraining a gooo in rle piesenr wlile rle orlei pairy
ooes net suei any coiiesponoing oisaovanrage. Tlis secono class
o cieoir riansacrions is possille wlen a cieoiroi issues ouciaiy
meoia, rlis peison lenos wirlour ieally giving anyrling up. !oans
o rle isr rype (in wlicl rle lenoei acrually ienounces rle use o
lis money) involve commoditycredit wlile loans o ouciaiy meoia
involve circulation credit.
!oi all gooos, an alsolurely secuie ano immeoiarely ieoeem-
alle claim will inleiir rle maiker value o rle gooo irsel. !ow-
evei, wlar makes ouciaiy meoia special is rlar rley can incnitc/y
uncrion as money sulsrirures, since (unlike all orlei gooos)
nolooy evei is rle nal consumei o money piopei. Tleieoie,
claims ro ir can ciiculare in rle communiry wirlour evei leing
ieoeemeo, wlicl allows rle lanks ro issue ouciaiy meoia in rle
isr place.
. 0epes|ts as the 0r|q|a ef C|rca|at|ea Cre6|t
Tle issue o ouciaiy meoia is inrimarely connecreo wirl rle oe-
posir sysrem. A cusromei will oeposir acrual money wirl rle lank,
wlicl rlen is rle lasis upon wlicl ouciaiy meoia (i.e., unlackeo
claims ro money) aie issueo. Tle ciucial earuie in rlese opeia-
rions is rlar economically speaking, rle oiiginal oeposiroi is net
engageo in a cieoir riansacrion. !e is nor lenoing rle lank lis
money, lur is meiely oeposiring ir, lecause le srill ierains rle ull
economic use o lis money in rle piesenr. Tleieoie ly gianr-
ing new loans en tep o sucl oeposirs, rle lanks inciease rle
roral amounr o money in rle lioaoei sense. Tley aie nor meie
cieoir inreimeoiaiies, lur insreao aie gianring rle economic use
o money ro a new gioup, wirlour raking ir away iom rle oiiginal
gioup.
Cheptcr 1: Thc Busincss ej Benling 1p
;. Ihe 6raat|aq ef C|rca|at|ea Cre6|t
Tle specic merloo o issuance o ouciaiy meoia is iiielevanr
oi irs eecrs on rle value o money. Tle lank miglr (1) lireially
leno our rle oiiginal oeposirois money (wlile rle oiiginal oepos-
iroi srill lelieves le las ull ano immeoiare claim ro ir), (:) issue
orlei lank clienrs lanknores wlicl may le ieoeemeo wirl rle
oeposirois money, oi () gianr newloans in rle oimo clecklook
accounrs, wirl rle oeposirois money seiving as pair o rle ieseives
lelino rle new loan. |xo:i: A ull oesciiprion o rle accounr-
ing o iacrional-ieseive lanking is availalle in rle lecruie, Tle
Tleoiy o Cenrial Banking, ar: http://www.youtube.com/watch?
v=6HAEPSt_12U
]
Some wiireis riear rle expansion o lanks nore-issue as akin
ro an inciease in rle communirys oemano oi cieoir. Bur i rle
communiry riies ro loiiow moie, peilaps ly issuing moie bills of
exchange, rlen rle inreiesr iare renos ro go up. !n conriasr, rle
lank supp/ics cieoir: wlen ir issues moie nores, rle iare o inreiesr
(ar leasr inirially) goes oown.
6. ||6ac|ar Me6|a aa6 the Natare ef |a6|rect lxchaaqe
nly ly iecognizing rle unoamenral oisrincrion lerween nores
ano current accounts rlar aie eirlei (e) lackeo veisus (/) unlackeo
ly money, can rle economisr lope ro unoeisrano rle lioaoei iole
rlar ouciaiy meoia play in economic cycles. n rle orlei lano, ir
is also a misrake ro oeny ouciaiy meoias aliliry ro acilirare inoi-
iecr exclanges. \len someone sells a commooiry oi a lanknore,
ano rlen uses rle lanknore ro puiclase anorlei commooiry, rlis is
an inoiiecr exclange jusr as suiely as i rle peison lao useo money
piopei. ..
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
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Important Contributions
|n the beglnnlng of thls chapter, Mlses dlvldes banklng lnto two
categorles: the negotlatlonof credlt throughthe loanof other peo-
ples money, and the lssue of duclary medla. (Murray Pothbard,
ln hls work on banklng, classles 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 duclary
medla (l.e., deposlt banklng) that some earller economlsts had dls-
covered.
Contlnulng wlth the prevlous note, Mlses explalns hls settllng
on the terms commodlty credlt and clrculatlon credlt on pages
z6(6. Preclsely because he belleves the lssuance of duclary
medla play such a cruclal role ln the boom-bust cycle ln market
economles, Mlses ls deslgnlng hls theoretlcal edlce to hlghllght
the phenomenon.
..
Cheptcr 1: Thc Busincss ej Benling 11
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New Terminology
Banker: A peison wlo lenos our orlei peoples money.
Capitalist: A peison wlo lenos our lis oi lei own money.
Credit intermediaries: !nsrirurions rlar acr as mioolemen lerween
lenoeis ano loiioweis.
Golden rule (of bank lending): Marcling rle maruiiries o assers ano
lialiliries, so rlar rle lank is nor oepenoenr on rle aliliry
ro ioll ovei maruiing oelr. ! a lank ooes nor ollow rle
goloen iule, incieases in sloir-reim inreiesr iares can leao
ro oisasrei, wlen rle lank musr pay irs own cieoirois wlile
irs assers aie nor yer oue.
Commodity Credit: A loan gianreo rliougl rle ienunciarion o rle
use o piesenr gooos ly rle lenoei. Commooiry cieoir may
involve money ceiricares lur nor ouciaiy meoia.
Circulation Credit: A loan gianreo even rlougl rle lenoei ooes net
saciice rle use o piesenr gooos. Ciicularion cieoir involves
rle use o ouciaiy meoia.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairy ro a pay a xeo sum o money ro anorlei pairy ar
a specieo uruie oare oi upon oemano. A lill o exclange
is geneially rianseialle rliougl enooisemenr.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle aliliry ro wiire oiars oi wirloiawmoney upon
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
oemano. (Tooay a sranoaio clecking accounr woulo le an
example.)
Loan banking: Banking rliougl rle use o commooiry cieoir,
wleie rle lank ieceives loans iom one gioup o saveis in
oioei ro irsel make loans ro anorlei gioup o loiioweis.
Tle saveis oo nor consioei rlis money as pair o rleii casl
lalances ouiing rle reim o rle loan ro rle lank.
Deposit banking: Banking rliougl rle use o ciicularion cieoir,
wleie rle lank ieceives oeposirs inro cuiienr accounrs iom
one gioup o clienrs in oioei ro make loans ro anorlei gioup
o loiioweis. Tle oeposirois consioei rlis money ro le pair
o rleii casl lalances, even rlougl mucl o ir las leen lenr
our ro orleis.
..
Cheptcr 1: Thc Busincss ej Benling 1
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Study Questions
1. oes Mises iealize rlar mooein lanks peioimorlei opei-
arions lesioes rle rwo rypes o lanking le menrions?
(pp. :1:)
:. !xplain: A peison wlo las a rlousano loaves o lieao ar
lis immeoiare oisposal will nor oaie ro issue moie rlan a
rlousano rickers eacl o wlicl gives irs loloei rle iiglr
ro oemano ar any rime rle oeliveiy o a loa o lieao. !r is
orleiwise wirl money. (p. :)
. \ly ooes Mises say rlar ouciaiy meoia can rleieoie le
cieareo only ly lanks ano lankeis? (p. :p)
. !ow ooes rle issue o ouciaiy meoia aecr rle oljecrive
exclange value o money? (p. :8)
. !xplain: |Cieoir ciicularion] loans aie gianreo our o a
uno thet i net cxist /cjerc thc /eens vcrc grentc. (p. :1)
tuav:iv 1
Ikl lV0|0I|0N 0| ||00C|kk\ Ml0|k
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Chapter Outline
. Ihe Iwe Was ef |ssa|aq ||6ac|ar Me6|a
!iouciaiy meoia may le issueo ly lanks oi ly non-lanks (pii-
maiily rle goveinmenr). Banks can issue ouciaiy meoia eirlei
rliougl lanknores oi ly gianring oeposirs in a cuiienr accounr
(i.e., a mooein-oay clecking accounr). Banks riear rleii oursrano-
ing ouciaiy meoia as lialiliries on rleii lalance sleers, ano musr
loan oi oiiecrly invesr rlem wisely.
Coveinmenrs may also issue ouciaiy meoia sucl as convert-
ible Treasury notes ano roken coins. Coveinmenrs oren oo nor ser
asioe a cieoir uno our o rleii capiral ro covei rle incieaseo
olligarions. !nsreao goveinmenrs will pocker rle seigniorage as
income jusr as suiely as rax ievenue.
z. ||6ac|ar Me6|a aa6 the C|ear|aq !stem
Tle use o ouciaiy meoia can ieouce rle oemano oi money in
rle naiiowei sense. !oi example, in rle mooein !nireo Srares,
rle oemano ro lolo acrual !eoeial Reseive nores (gieen pieces
o papei wirl picruies o oeao piesioenrs) is mucl lowei, lecause
people can open clecking accounrs wirl commeicial lanks ano
1
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
wiire clecks oi use oelir caios (wleie rlese oeposirs aie pairly
ouciaiy meoia, lecause rley aie nor ully lackeo up ly casl in
rle vaulr).
!owevei, an enriiely oieienr plenomenon is rle ieoucrion
in rle oemano oi money in rle lioaoei senseincluoing money
piopei ano even money sulsrirures (incluoing ouciaiy meoia)
liouglr alour ly rle oevelopmenr o credit ano rle cleaiing sys-
rem. ! one pairy ro a riansacrion is willing ro oeei ieceiving pay-
menr, le las rlus gianreo cieoir. ! rle orlei pairy larei oeliveis
gooos oi peioims seivices sucl rlar rle oiiginal oelr is pairially
oi ully oser, only rle oieience neeos ro le serrleo ly acrual
money oi money sulsrirures. As moie sucl riansacrions aie incoi-
poiareo inro sucl aiiangemenrs, rle communirys oemano oi
money in rle lioaoei sense alls lelow wlar ir orleiwise woulo
lave leen.
. ||6ac|ar Me6|a |a 0emest|c Ira6e
So long as a counriy las a sralle legal iamewoik rlar peimirs rle
luiloing o riusr in issueis, rle use o cleaiing opeiarions ano ou-
ciaiy meoia can giow ro oominare riansacrions ano almosr com-
plerely oisplace rle use o money in rle naiiowei sense.
. ||6ac|ar Me6|a |a |ateraat|eaa| Ira6e
Tle piacrice o using claims ano counrei-claims in cleaiing opei-
arions ro ieouce rle neeo ro rianspoir money was o pairiculai
lener in inreinarional riaoe, lecause o rle longei oisrances ano
rime involveo. !owevei, ouciaiy meoia rlemselves aie srill lim-
ireo ly narional lounoaiies. !oi example, a pairiculai suppliei in
rle !nireo Srares miglr gianr cieoir ro a meiclanr in !iance, lur
Cheptcr 16: Thc Lte/utien ej Fiu.iery Mcie 1
rle claim on rle !iencl meiclanr woulo nor ciiculare iom lano
ro lano in rle same way rlar a lanknore in rle !nireo Srares (oi in
!iance) coulo. nly wirl rle oevelopmenr o a woilo lank, wirl
clienrele oiawn iom eveiy counriy, coulo ouciaiy meoia rian-
sceno narional lounoaiies. ..
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
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Technical Notes
n page :8 Mises wiires, |Bank ouciaiy meoia] aie
enreieo as lialiliries, ano rle issuing looy ooes nor iegaio
rle sum issueo as an inciease o irs income oi capiral, lur
as an inciease on rle oelir sioe o irs accounr, wlicl musr
le lalanceo ly a coiiesponoing inciease on rle cieoir sioe
i rle wlole riansacrion is nor ro guie as a loss. Tlis
way o oealing wirl ouciaiy meoia makes ir necessaiy
oi rle issuing looy ro iegaio rlem as pair o irs riao-
ing capiral ano nevei ro speno rlem on consumprion lur
always ro invesr rlem in lusiness. Tlis is a ciucial poinr
rlar newcomeis ro iacrional-ieseive lanking oren miss.
!ven rlougl sucl lankeis in a sense cieare money our
o rlin aii, rley canr simply open up a new accounr oi
s1oo,ooo ano rlen wiire clecks ro luy rlemselves spoirs
cais ano oesignei clorles. Tle ieason is rlar rle mei-
clanrs in rle communiry woulo rlen lave s1oo,ooo in
claims on rle acrual casl ieseives o rle lank, ano ulri-
marely rle lanks vaulr woulo iun our o rle genuine
money. \lar iacrional lankeis oo insreao is /een our rle
s1oo,ooo ro a piooucrive lusiness ar (say) peicenr inreiesr.
\len rle s1o,ooo is iepaio in a yeai, rle s1oo,ooo rlar
was inirially cieareo can le oesrioyeo (rliougl look-
keeping) ano rle s,ooo in inreiesr income can le saely
spenr wirlour oiaining rle lanks casl ieseives. Tlus
iacrional-ieseive lankeis cieare money our o rlin aii
net ro oiiecrly speno irwlicl woulo le incieoilly ieck-
less ano sloir-liveolur insreao ro cern intcrcst in.emc
iom ir.
Cheptcr 16: Thc Lte/utien ej Fiu.iery Mcie 1p
n page :p1 Mises iejecrs rle claim rlar !noia ano orlei
Asiaric counriies useo golo as a measuie o piices wlile
ieraining silvei as a meoium o exclange. !oi one rling,
rle mooein suljecrive value rleoiy explooes rle veiy
norion o money as a measuie, since value is nor an oljec-
rive piopeiry like lengrl oi weiglr rlar can le measuieo.
Yer o moie ielevance ro rlis passage, Mises is poinring
our rlar even in rle classical golo sranoaio counriies, peo-
ple iaiely useo acrual golo wlen luying gooos ano seivices.
!nsreao, rley employeo ./eims ro golo. Bur rlis is piecisely
wlar lappeneo in !noia, wlicl ieraineo silvei coins in cii-
cularion rlar coulo le ieoeemeo oi rle ocial money,
golo, ar a ceirain exclange iare. ..
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
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New Terminology
Convertible Treasury notes: Papei nores issueo ly rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in money upon oemano.
Seigniorage: Tle oieience lerween rle maiker value o money
ano rle cosr ro pioouce ir.
Credit: Tle aliliry ro ieceive piesenr gooos in exclange oi rle
piomise o oeliveiing (rypically a giearei numlei o ) uruie
gooos.
..
Cheptcr 16: Thc Lte/utien ej Fiu.iery Mcie 11
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Study Questions
1. !xplain: To complere |a] riansacrion . . . ly ull oi pairial
cancellarion o counrei-claims oeis impoiranr aovanrages
in compaiison wirl oiiecr exclange: all rle ieeoom con-
necreo wirl rle use o money is comlineo wirl rle recl-
nical simpliciry rlar claiacreiizes oiiecr exclange riansac-
rions. (p. :8:)
:. \lar ooes Mises rlink is rle impoirance o cieoir oi rle
moneraiy sysrem? (p. :8:)
. !xplain: Money in rlese cases |o inreinarional cleaiing
opeiarions] is srill a meoium o exclange, lur irs employ-
menr in rlis capaciry is inoepenoenr o irs plysical exis-
rence. !se is maoe o money, lur nor physi.e/ use o acru-
ally exisring money oi money sulsrirures. Money wlicl
is nor piesenr peioims an economic uncrion, ir las irs
eecr solely ly ieason o rle possililiry o irs leing e//c ro
le piesenr. (p. :8)
. oes Mises classiy lills o exclange as ouciaiy meoia?
(pp. :88)
. ! a lyporlerical woilo lank lao oeposirs ano nores rlar
weie lackeo up 1oo peicenr ly money on ieseive, coulo ir
economize on money paymenrs? (p. :p)
tuav:iv 1
||00C|kk\ Ml0|k kN0
Ikl 0lMkN0 |0k M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
! laloi ano orlei iesouices aie useo ro exriacr moie golo iom
mines, ano rlis aooirional golo goes inro rle casl lalances o peo-
ple in rle communiry, rlen iom a social poinr o view rle laloi
ano orlei iesouices lave leen wasreo. Tle quanriry o ieal our-
pur (pounos o sreak, laiiels o ciuoe oil, erc.) pioouceo pei pei-
son ooesnr iise, lur meiely rle pri.cs o rlese irems quoreo in golo
oi silvei.
Tle oevelopmenr o ouciaiy meoia kepr rle oljecrive ex-
clange value o money lowei rlan ir orleiwise woulo lave leen,
ano rleiely avoioeo a laige oiveision o iesouices inro mining
moie o rle piecious merals oi casl loloings.
Some wiireis aigue rlar rle paymenr sysrem in an aovanceo
maiker economy is elasric ano iesponos ro rle neeos o com-
meice, iarlei rlan rle acrual srock o money in rle naiiowei
sense. Alrlougl rle exrension o rle cleaiing sysrem ecs ieouce
rle oemano oi money in rle lioaoei sense, rleie is no ieason rlar
irs oevelopmenr sloulo le ielareo ro rle oemano oi money. !r is
an inoepenoenr plenomenon rlar may eirlei sriengrlen oi coun-
reilalance clanges in rle oemano oi money oiiginaring iom
orlei causes.
Many wiireis (sucl as rlose o rle Banking School) aigue rlar
rle lanks oo nor lave rle powei ro inoepenoenrly inciease rle
1
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
quanriry o ouciaiy meoia. \lar rlese wiireis ail ro unoeisrano
is rlar rle oemano oi loans oepenos on rle iare o inreiesr. !r
makes no sense ro speak o lowmucl money rle lanks cusromeis
wisl ro loiiow, wirlour speciying a iare o inreiesr. ! rle lanks
wanr ro issue ouciaiy meoia, rley musr lowei rle maiker iare
lelow rle natural rate of interest.
Businesses seek loans iom rle lanks lecause rley oesiie cap-
iral, rley simply wanr capiral in thc jerm ej mency, so rlar rley
can convenienrly acquiie rle plysical capiral gooos rlar rley ulri-
marely oesiie oi rleii opeiarions. couise, rle meie issuance o
ouciaiy meoia ooes nor inciease rle amounr o riacrois, eirilizei,
oi powei rools. Tle only way rle lanks can piovioe rlese gooos
ro rleii clienrs is rliougl ieoisriilurion o puiclasing powei away
iom memleis o rle communiry wlo oo nor ieceive rle inux o
rle newly cieareo money.
Cheptcr 1: Fiu.iery Mcie en thc Dcmen jer Mency 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe |aaeace ef ||6ac|ar Me6|a ea the 0emaa6 fer Meae
|a the Narrewer !ease
!n one sense, rle employmenr o rle piecious merals (oi any orlei
useul commooiry) ro enlaige rle srock o money is wasreul. !
laloi ano orlei iesouices aie useo ro exriacr moie golo iommines,
ano rlis aooirional golo goes net inro inousriial oi commeicial uses
(sucl as oi oenral llings oi jeweliy), lur insreao incieases rle
casl lalances o people in rle communiry, rlen ioma social poinr
o view rle laloi ano orlei iesouices lave leen wasreo. !ncieas-
ing rle quanriry o money may ieoisriilure exisring wealrl ro make
some inoiviouals iiclei, lur only ar rle expense o making orleis
(wlo aie lasr ro ieceive rle newmoney) pooiei. Tle communiry as
a wlole ooesnr aclieve a liglei sranoaio o living, simply lecause
people lolo moie golo oi silvei in rleii casl lalances. Tle quan-
riry o ieal ourpur (pounos o sreak, laiiels o ciuoe oil, erc.)
pioouceo pei peison ooesnr iise, lur meiely rle pri.cs o rlese
irems quoreo in golo oi silvei.
Tle oevelopmenr o ouciaiy meoia ieouces rle oemano ro
lolo money in rle naiiowei sense. !n a communiry using golo
as commooiry money, a peison wlo lolos (aiiriglr ano insranrly
ieoeemalle) claims ro golo, wlicl aie accepreo in commeice ly
eveiyone in rle communiry, ooesnr neeo ro caiiy as mucl e.tue/
golo on a oay-ro-oay lasis. !n rlis sense rle wioespieao use o ou-
ciaiy meoia economizes onrle amounr o meral rlar musr le allo-
careo inro rle uncrion o seiving as rle meoiumo exclange, moie
golo is ieeo up ro le useo in jeweliy oi inousriial applicarions.
\eie ir nor oi rle simulraneous oevelopmenr o ouciaiy
meoia, rle inrensicarion o rle oivision o laloi as rle woilo
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
lecame one gianr inregiareo maiker woulo lave leo ro a slaip
inciease in rle oljecrive exclange value o money. !n orlei woios,
as moie people aiouno rle woilo lecame pair o rle glolal maiker
wlicl useo golo as rle inreinarional money, moie people woulo
lave riieo ro olrain golo as pair o rleii casl loloings. ! acrual
golo lao ro sarisy rlis luge giowrl in oemano, piices (quoreo in
golo) woulo lave allen ano rle owneis o golo mines woulo lave
inrensieo rleii exriacrion eoirs. Bur rle simulraneous oevelop-
menr o ouciaiy meoia counreilalanceo rlis renoency, so rlar
rle puiclasing powei o a unir o golo oio nor iise as mucl as ir
orleiwise woulo lave.
z. Ihe ||actaat|eas |a the 0emaa6 fer Meae
Some o rle ucruarions in rle oemano oi money aie quire pie-
oicralle. An inciease in popularion ano rle spieao o rle money
economy inciease rle oemano oi money. Tle oemano oi money
clanges ouiing loom ano lusr peiioos. Ano even in a rypical yeai,
rleie aie cyclical parreins laseo on agiiculruie ano rle paymenr
o woikeis.
. Ihe l|ast|c|t ef the !stemef kec|preca| Caace||at|ea
Some wiireis aigue rlar rle paymenr sysrem in an aovanceo mai-
ker economy is elasric ano iesponos ro rle neeos o commeice,
iarlei rlan rle acrual srock o money in rle naiiowei sense. Tle
quanriry o money is saio ro lave lirrle inuence on rle oljecrive
exclange value o money, lecause (say) an inciease in rle oemano
oi money will auromarically le counreilalanceo ly orlei oices.
Tlese claims aie oren oiculr ro evaluare lecause rley ail ro
make rle ciucial oisrincrion lerween rle exrension o rle cleaiing
Cheptcr 1: Fiu.iery Mcie en thc Dcmen jer Mency 1
sysrem, veisus rle incieaseo use o ouciaiy meoia. Alrlougl rle
exrension o rle cleaiing sysremecs ieouce rle oemano oi money
in rle lioaoei sense, rleie is no ieason rlar irs oevelopmenr sloulo
le ielareo ro rle oemano oi money. !r is an inoepenoenr ple-
nomenon rlar may eirlei sriengrlen oi counreilalance clanges
in rle oemano oi money oiiginaring iom orlei causes.
. Ihe l|ast|c|t ef a Cre6|t C|rca|at|ea 8ase6 ea 8|||s,
lspec|a|| ea Cemme6|t 8|||s
Many wiireis (sucl as rlose o rle Banking School) aigue rlar rle
lanks oo nor lave rle powei ro inoepenoenrly inciease rle quan-
riry o ouciaiy meoia. ! lusiness neeos iequiie moie riansacrions,
rlen somelow oi orlei, lusiness will ger ireirlei iom lanks
issuing moie ouciaiy meoia, oi iom lusinesses oeveloping recl-
niques ro economize on rle use o money. n rle orlei lano (so
rle aigumenr conrinues), i rle lanks riy ro issue moie ouciaiy
meoia rlan rle lusiness communiry oesiies, rlese excess nores will
come owing lack ro rle lanks.
\lar rlese wiireis ail ro unoeisrano is rlar rle oemano oi
loans oepenos on rle iare o inreiesr. !r makes no sense ro speak o
low mucl money rle lanks cusromeis wisl ro loiiow, wirlour
speciying a iare o inreiesr. ! rle lanks wanr ro issue ouciaiy
meoia, rley musr lowei rle maiker iare lelow rle natural rate of
interest.
;. Ihe !|qa|caace ef the lxc|as|e lmp|emeat ef 8|||s as
Ceer fer ||6ac|ar Me6|a
Tle Ceiman Bank Acr o 18 olloweo rle amous Peels Act in
imposing iequiiemenrs on rle cover rlar lanks coulo accepr wlen
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
issuing newloans in excess o rleii golo oeposirs. Tle iequiiemenr
was signicanr net lecause ir somelowrieo rle expansion o cieoir
ro rle oesiie o rle communiry oi moie money. Rarlei, ir was
signicanr lecause ir placeo an olsracle in rle issuance o ouciaiy
meoia, keeping rle quanriry o money in rle lioaoei sense lowei
rlan ir orleiwise woulo lave leen.
6. Ihe |er|e6|ca| k|se aa6 |a|| |a the lxteat te Wh|ch 8aak
Cre6|t |s kea|s|t|eae6
Businesses seek loans iom rle lanks lecause rley oesiie capiral,
rley simply wanr capiral in thc jerm ej mency, so rlar rley can con-
venienrly acquiie rle plysical capiral gooos rlar rley ulrimarely
oesiie oi rleii opeiarions. couise, rle meie issuance o ou-
ciaiy meoia ooes nor inciease rle amounr o riacrois, eirilizei, oi
powei rools. Tle only way rle lanks can piovioe rlese gooos ro
rleii clienrs is rliougl ieoisriilurion o puiclasing powei away
iom memleis o rle communiry wlo oo nor ieceive rle inux o
rle newly cieareo money.
). Ihe |aaeace ef ||6ac|ar Me6|a ea ||actaat|eas |a the
0|[ect|e lxchaaqe Va|ae ef Meae
As wirl rle exrension o cleaiing opeiarions, rleie is no ieason
rlar rle expansion oi conriacrion o ouciaiy meoia sloulo mii-
ioi clanges in rle oemano ro lolo money, rleie is no auromaric
meclanism ly wlicl rle oljecrive exclange value o money is sra-
lilizeo. Tlus rle insiglrs o rle quanriry rleoiy aie uplelo.
..
Cheptcr 1: Fiu.iery Mcie en thc Dcmen jer Mency 1p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
An example will claiiy rle reiminology ano aigumenrs
iunning rliouglour rlis ano eailiei clapreis. Suppose a
man asks lis lairenoei i le can iun a ral, meaning rlar
le will olrain oiinks in rle piesenr lur will pay money
oi rlem larei (peilaps ar rle eno o rle monrl). Tle
lairenoei agiees, saying rle man can lave up ro s1oo in
oiinks wirlour laving ro pay oi rlem upionr. By ooing
so, rle lairenoei las exrenoeo .rcit ro rle man. !ow-
evei, rle quanriry o mency in rle mans possession lasnr
incieaseo, lecause rle man ooesnr lave any rianseiialle
claim (issueo ly rle lairenoei) rlar orleis in rle commu-
niry woulo accepr. !n conriasr, i rle man goes ro lis local
lank ano applies oi a s1oo loan (ro le paio lack ar rle
eno o rle monrl), rlen in rlis case roo rle man ieceives
an exrension o cieoir, lur le e/se ieceives an aooirion ro
lis casl lalances. \lerlei rle lank loan consisrs o a new
clecking accounr (wirl s1oo as rle inirial lalance), acrual
money, oi nores issueo ly rle lank, rlese woulo all le
classieo as money in rle lioaoei sense. Tle man coulo
use rlem ro luy anyrling le wanreo, incluoing oiinks ar
rle lai. !inally, ro see rle limireo iole o cleaiing sysrems,
ieveir ro rle oiiginal assumprion, wleie rle mans cieoir
consisrs o a ral issueo ly rle lairenoei wirl a limir o
s1oo. ! rle man wanreo ro use rlis cieoir net ro luy alco-
lolic oiinks, lur iarlei ro luy (say) a paii o sloes, le
woulo lave ro no a sloe sellei wlo also wanreo ro luy
oiinks iom rle pairiculai lai in quesrion. Tlen ir miglr
le possille ro aiiange a oeal wleiely rle man acquiies
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
rle sloes, in exclange oi relling rle lairenoei ro pur rle
sloe selleis oiinks on lis own ral (iarlei rlan claiging
rle sloe sellei oi rlem).
Mises concluoes lis oiscussion o secrion on page 1:
ly saying,
|
A
]
ll o rlis is riue only unoei rle assump-
rion rlar all lanks issue ouciaiy meoia accoioing ro uni-
oim piinciples, oi rlar rleie is only one lank rlar issues
ouciaiy meoia. !n rle secrion, Mises lao ciiricizeo rle
wiireis o rle Banking Sclool wlo aigueo rlar rle lanks
coulonr ger rle communiry ro accepr exria issues o ou-
ciaiy meoia, i rle communiry oionr wanr ro lolo rlem.
Mises oljecreo rlar rle oemano oi rle aooirional loans
coulo le inuenceo ly rle iare o inreiesr rle lanks
claigeo, ano lence rle Banking Sclools views weie mis-
raken. So long as rley aie willing ro sucienrly lowei rle
iare o inreiesr lelow rle naruial iare, rle lanks can con-
vince rle communiry ro accepr any amounr o new ou-
ciaiy meoia. !owevei, Mises ooes net mean rlar an inoi-
vioual lank las no clecks on irs issue. ! any single lank
unilareially loweis irs inreiesr iare ano issues moie ou-
ciaiy meoia (compaieo ro rle policies o irs comperirois),
rlen evenrually rlose nores will all inro rle lanos o peo-
ple wlo aie nor clienrs o rle expanoing lank. \len rlese
people oeposir rle lanks newly issueo nores wirl rleii
own lanks (wlicl aie comperirois), rlese nores will le
piesenreo oi ieoemprion in money in rle naiiowei sense.
Tlus rle lone lank engageo in an expansionaiy policy will
soon see irs ieseives o money piopei owinole, ano will
lave ro alanoon irs expeiimenr. Yer rlis meclanism is nor
wlar rle Banking Sclool rleoiisrs lao in mino wlen rley
saio lanks coulonr issue moie nores rlan rle neeos o rle
communiry waiianreo.
..
Cheptcr 1: Fiu.iery Mcie en thc Dcmen jer Mency 11
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Banking School: An !nglisl sclool o rlouglr wlicl aigueo rlar
rle lanks weie incapalle o inoepenoenrly alreiing rle iare
o inreiesr oi rle puiclasing powei o money, lecause rle
maiker woulo use cleaiing opeiarions, lills o exclange, ano
orlei reclniques ro ieceive rle cieoir ir oemanoeo oi lusi-
ness puiposes.
Currency School: An !nglisl sclool o rlouglr wlicl aigueo rlar
rle lanks causeo economic ciises rliougl rle expansion
ano conriacrion o cieoir. !owevei, rle Cuiiency Sclool
rlouglr rle suppiession o rle issue o ouciaiy meoia in
rle oim o lanknores (wlicl was cooieo in Peels Acr)
woulo solve rle piollem, lecause irs memleis eiioneously
excluoeo oemano (oi cuiienr accounr) oeposirs iom rleii
analysis.
(Wicksellian) natural rate of interest: evelopeo ly economisr Knur
\icksell, rle lyporlerical iare o inreiesr rlar woulo occui
i gooos weie riaoeo oiiecrly againsr eacl orlei wirlour rle
use o money.
Peels Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei o issuing new nores away iom piivare
lanks ano vesreo ir complerely wirl rle Bank o !nglano,
wlicl irsel was iequiieo ro mainrain 1oo peicenr merallic
lacking oi any new nores rlar ir issueo. !owevei, rle Acr
ciucially oio net impose sucl a iesriicrion on rle exrension
o oeposirs, meaning rlar piivare lanks coulo cieare moie
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
ouciaiy meoia ly gianring loans (nor lackeo ly golo) ro
rleii cusromeis.
Cover (of note issue): Assers lacking rle issue o new lanknores.
epenoing on rle iegularions, a lank miglr issue ouciaiy
meoia nor lackeo ly money irsel, lur lackeo ly anorlei
asser sucl as a commooiry lill.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneially, a measuie o a ims aliliry ro quickly ruin some
o irs assers inro casl in oioei ro nance an expansion.
Fixed capital: Assers emlooieo in ouialle invesrmenrs sucl as ac-
roiies ano specializeo equipmenr rlar will le useo ovei a long
peiioo.
..
Cheptcr 1: Fiu.iery Mcie en thc Dcmen jer Mency 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was Aoam Smirls analogy ro explain rle oiawlack
o using rle piecious merals as money? (p. :p8)
:. ! ar oi cieoir money is employeo, ooes ir srill make sense
ro use ouciaiy meoia ro economize on rle use o money
in rle naiiowei sense? (pp. :ppoo)
. \ly woulo popularion giowrl inuence rle oemano ro
lolo money? (pp. ooo1)
. !xplain: Tle oemano oi money ano money sulsrirures
rlar is expiesseo on rle loan maiker is in rle lasr iesoir a
oemano oi capiral gooos oi, wlen consumprion cieoir is
involveo, oi consumprion gooos. (p. o)
. \lo leais rle cosr o ciearing capiral oi loiioweis o
loans gianreo in ouciaiy meoia? (p. 1)
tuav:iv 18
Ikl kl0lM|I|0N 0| ||00C|kk\ Ml0|k
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle conoence in a lanks aliliry ro ieoeem irs ouciaiy meoia is
an all-oi-norling pioposirion: i a poirion o rle communiry pan-
ics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. By rleii
veiy naruie, ouciaiy meoia cannor all le lonoieo ly rle lank
ar once. Consequenrly, some wiireis suggesr an ouriiglr piolili-
rion on rle piacrice. !owevei, lisroiically rlis iequiiemenr woulo
lave leo ro a mucl laigei oiveision o iesouices inro rle pioouc-
rion o rle piecious merals as rle oemano oi money incieaseo.
A lank opeiaring in a comperirive enviionmenr can only issue
as mucl ouciaiy meoia as irs own cusromeis wisl ro lolo, oi
riansacrions among rlemselves. \lenevei a lanks cusromei seeks
ro oo lusiness wirl someone oursioe rle clienrele o rle lank,
rle cusromei musr conveir lis claims inro money in rle naiiowei
sense, lecause rle orlei peison will nor wisl ro accepr rle lanks
piomises ro pay.
Solvency means rlar an insrirurion (sucl as a lank) coulo slur
oown, sell oall o irs assers, ano iaise ar leasr enougl money ro pay
o all o irs cieoirois. Liquidity is a sriongei conoirion, meaning
rlar rle insrirurions assers oelivei a cash ow allowing ir ro pay
irs lialiliries en timc. ! a im is liquio, ir is solvenr, lur ir miglr
le solvenr wlile illiquio. Banks issuing ouciaiy meoia aie always
illiquio.
1
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
Somerimes legislarion, lur always pullic opinion, compels rle
lanks ro give pieeience ro sloir-reimiarlei rlan long-reimloans.
Tlis is a quire valio pieeience, lackeo up ly cenruiies o expe-
iience, simply lecause ir limirs a lanks aliliry ro issue ouciaiy
meoia.
Cheptcr 1S: Thc Rccmptien ej Fiu.iery Mcie 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe Necess|t fer Cemp|ete la|a|eace 8etweea Meae
aa6 Meae !a|st|tates
So long as some people lelieve rlar a claim ro money issueo ly
a pairiculai insrirurion is alsolurely ielialle ano can le ieoeemeo
upon oemano, rlese people may pass sucl claims among rlem-
selves as i rley weie money. Tlis is wlar makes rlem money
sulsrirures. !owevei, rle issuing insrirurion musr always keep a
ieseive uno o money in rle naiiowei sense ro ieoeem rle claims
wlenevei rley aie piesenreo, in oioei ro mainrain rlis riusr. Sucl
ieoemprions will le iequesreo wlenevei rle lanks 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 oi money in rle naiiowei sense.
z. Ihe ketara ef ||6ac|ar Me6|a te the |ssaer ea kcceaat ef
|ack ef Cea6eace ea the |art ef the ke|6ers
Tle conoence in a lanks aliliry ro ieoeem irs ouciaiy meoia
is an all-oi-norling pioposirion: i a poirion o rle communiry
panics ano iusles ro ieoeem rleii claims, rlen ctcryenc ooes. By
rleii veiy naruie, ouciaiy meoia cannor all le lonoieo ly rle
lank ar once. `o marrei low wisely a lank manages irs assers, ir
will nor le alle ro pay our money in rle naiiowei sense oi all
o irs oursranoing claims, i cusromeis slow up en masse ano oe-
mano ieoemprionassuming rle lank las leen issuing ouciaiy
meoia.
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
. Ihe Case kqa|ast the |ssae ef ||6ac|ar Me6|a
Because o rle inreinal conriaoicrion o rle naruie o ouciaiy
meoiawlicl ienoeis eveiy issuing insrirurion lialle ro iuin
some wiireis suggesr an ouriiglr piolilirion on rle piacrice. !ow-
evei, lisroiically rlis iequiiemenr woulo lave leo ro a mucl laigei
oiveision o iesouices inro rle piooucrion o rle piecious merals
as rle oemano oi money incieaseo. Tle lanks coulo suivive even
i rley weie legally iequiieo ro mainrain 1oo peicenr ieseives cov-
eiing all nore issues ano oeposirs, ir is nor consioeiarion oi rle
piacrice o lanking rlar leo legislarois ro roleiare ouciaiy meoia.
Rarlei, ir was rle oesiie ro avoio a laige inciease in rle oljecrive
exclange value o money (i.e., a geneial all in piices o gooos ano
seivices).
. Ihe ke6empt|ea |aa6
A lank opeiaring in a comperirive enviionmenrwleie irs iivals
may puisue oieienr policies ano wleie irs own clienrele is only a
iacrion o rle wlole communiry using rle same moneycan only
issue as mucl ouciaiy meoia as irs own cusromeis wisl ro lolo,
oi riansacrions among rlemselves. \lenevei a lanks cusromei
seeks ro oo lusiness wirl someone oursioe rle clienrele o rle lank,
rle cusromei musr conveir lis claims (wlerlei in rle oimo nores
oi a clecklook oeposir) inro money in rle naiiowei sense, lecause
rle orlei peison will nor wisl ro accepr rle lanks piomises ro pay.
;. Ihe !e

ca||e6 8aak|aq Ipe ef Ceer fer ||6ac|ar Me6|a


Solvency means rlar an insrirurion (sucl as a lank) coulo slur oown,
sell o all o irs assers, ano iaise ar leasr enougl money ro pay o
all o irs cieoirois. Liquidity is a sriongei conoirion, meaning rlar
Cheptcr 1S: Thc Rccmptien ej Fiu.iery Mcie 1p
rle insrirurions assers oelivei a cashowallowing ir ro pay irs lialil-
iries en timc. ! a im is liquio, ir is solvenr, lur ir miglr le solvenr
wlile illiquio.
Some wiireis suggesr rlar piuoenr lanks will invesr in sloir-
reim assers, in oioei ro iemain liquio. Yer ly rleii veiy naruie,
lanks issuing ouciaiy meoia aie illiquio: rleii lialiliries aie imme-
oiarely oue i piesenreo, wlile rleii assers aie necessaiily o longei
ouiarion. Tle lesr sucl lanks can sriive oi is solvency.
6. Ihe !|qa|caace ef !hertIermCeer
Somerimes legislarion, lur always pullic opinion, compels rle
lanks ro give pieeience ro sloir-reim iarlei rlan long-reim
loans. Tlis is a quire valio pieeience, lackeo up ly cenruiies
o expeiience. !owevei, rle explanarion oi irs wisoom is net
rlar ir allows rle lanks ro ieoeem ouciaiy meoia in rle evenr
o a panicrle lanks asser maruiiries aie iiielevanr i eveiyone
slows up, oemanoing ieoemprion. Tle acrual lener iom ocus-
ing lank loans on sloir-reim invesrmenrs is simply rlar rle con-
sriainr clecks rle lanks aliliry ro issue ouciaiy meoia.
). Ihe !ecar|t ef the |aestmeats ef the Cre6|t

|ssa|aq 8aaks
Tleie is similai conusion wlen ir comes ro pioposals seeking
ro guaianree rle (evenrual) ieoemprion o all ouciaiy meoia ly
means o ieseive unos consisring o illiquio assers (sucl as moir-
gages). !ven i rle pullic is ceirain rlar rley will le ctcntue//y paio
in money (in rle naiiowei sense) oi rle claims ro money rlar rley
cuiienrly lolo, even so, i rleie is any ooulr alour rle immcie.y
o rle paymenr, rlen rle claims will no longei le money sulsri-
rures. !nsreao, rle pullic will rake inro accounr rle oelay leoie
1o Stuy Cuic te Thc Thcery ej Mency en Crcit
ieceiving paymenr, ano sucl claims will riaoe ar a oiscounr ro rle
money irsel. (`ore rlar i rle claims conrinue ro ciiculare as gen-
eially accepreo meoia o exclange, even rlougl eveiyone knows
rlar ieoemprion ar lesr will occui arei some oelay, rlen rle claims
will lave lecome cieoir money.)
. |ere|qa 8|||s ef lxchaaqe as a Cempeaeat ef the
ke6empt|ea |aa6
Alank cannor inciease irs issue o money sulsrirures (consisring o
lorl money ceiricares ano ouciaiy meoia) leyono rle oemano
o irs own clienrele, oi use in rleii oealings wirl eacl orlei. !ow-
evei, ro rle exrenr rlar somerimes irs clienrs neeo ro exclange rleii
money sulsrirures wlen oealing wirl jercign cirizens, rle lank las
rle oprion o keeping some o irs ieseive uno in rle oim o jer-
cign money sulsrirures, as opposeo ro money in rle naiiowei sense.
(Tlis is lecause rle oieigneis wirl wlom rle lanks clienrs wisl
ro oo lusiness, will accepr money sulsrirures issueo ly insrirurions
iom rleii iespecrive counriies.) Yer rlis piacrice means rlar rle
oiiginal lanks ieseive uno las a smallei piopoirion o money
in rle naiiowei sense, ano lence rlar irs own money sulsrirures
consisr o a liglei iacrion o ouciaiy meoia (veisus money cei-
ricares).
..
Cheptcr 1S: Thc Rccmptien ej Fiu.iery Mcie 11
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
!n mooein rimes, one o rle majoi conrioveisies wirlin
rle Ausriian Sclool conceins rle legirimacy o iacrional
ieseive lanking. Some Ausriians ollow Muiiay Rorl-
laio wlo aigueo rlar lank issuance o ouciaiy meoia
leaos ro rle loom-lusr cycle ano is inleienrly iauou-
lenrakin ro a waielouse managei ienring our rle gooos
rlar weie supposeoly placeo wirl lim oi saekeeping.
rlei Ausriians sucl as Ceoige Selgin ano Sreve !oi-
wirz call rleii posirion free banking ano lelieve rlar
rleie is no ieason oi lanks ro necessaiily keep 1oo pei-
cenr ieseives o money in rle naiiowei sense, in oioei
ro ully covei all oursranoing cusromei oeposirs. Tle iee
lankeis aigue rlar maiker oices will oereimine rle piopei
iario o money ceiricares ro ouciaiy meoia in a com-
peririve lanking sysrem. (Viirually all mooein Ausriians
agiee rlar goveinmenr-sponsoieo .cntre/ /enling ano et
.urrcn.y aie lorl economically oesriucrive ano moially ille-
girimare. Tle oispure conceins rle piopei piacrice o pii-
vare lanks opeiaring in a laissez-aiie enviionmenr.)
Conrinuing wirl rle alove nore, lorl gioups poinr ro pas-
sages in Misess wiirings ro leno cieoence ro rleii posirion.
!ven wirlin rlis veiy claprei, Mises oeis sraremenrs
rlarvieweo in isolarionwoulo seem ro oenirively sioe
wirl one camp veisus rle orlei. (Two o rlese quorarions
aie rle opening selecrions oi rle sruoy quesrions lelow.)
Alrlougl Mises agiees wirl rle Rorllaioian, 1oo-peicenr-
ieseive camp rlar rleie is a paiaoox in rle veiy naruie o
wlar ouciaiy meoia claim ro le, on rle orlei lano le
1: Stuy Cuic te Thc Thcery ej Mency en Crcit
also agiees wirl rle iee lankeis rlar rle lisroiical oevel-
opmenr o ouciaiy meoia economizeo on iesouices (rlar
woulo lave orleiwise gone inro rle socially wasreul pio-
oucrion o moie golo ano silvei oi moneraiy puiposes).
Tlus Mises ooes nor cleaily all inro one camp oi rle orlei.
( couise Misess own view woulonr serrle rle mooein
oispure: le coulo lave leen simply misraken, iegaioless o
lis posirion.)
..
Cheptcr 1S: Thc Rccmptien ej Fiu.iery Mcie 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Free banking (among modern Austrians): Tle oocriine loloing rlar
a iee maiker in lanking will pick rle oprimal iacrion o
ieseives, wlicl may le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue o ouciaiy meoia
pei se causes rle lusiness cycle, only rlar excess quanriries
o ouciaiy meoia oo, ano rlar sucl an ourcome is almosr
always associareo wirl goveinmenr-suppoireo issues o ou-
ciaiy meoia.
Solvency: Tle siruarion in wlicl rle maiker value o an insriru-
rions assers exceeos irs lialiliries.
Liquidity: Tle siruarion in wlicl an insrirurions assers will oelivei
a casl owallowing ir ro pay irs lialiliries on rime. (All liquio
enreipiises aie also solvenr, lur nor necessaiily vice veisa.)
Cash ow: Tle srieam o money paymenrs ovei rime oue ro an
asser oi collecrion o assers.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial. ..
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: Tlus rleie lies an iiiesolvalle conriaoicrion in
rle naruie o ouciaiy meoia. Tleii equivalence ro money
oepenos on rle piomise rlar rley will ar any rime le
conveireo inro money ar rle oemano o rle peison enri-
rleo ro rlem ano on rle acr rlar piopei piecaurions aie
raken ro make rlis piomise eecrive. Burano rlis is like-
wise involveo in rle naruie o ouciaiy meoiawlar is
piomiseo is an impossililiry in so ai as rle lank is nevei
alle ro keep irs loans peiecrly liquio. (p. ::)
:. !xplain: Tle issue o ouciaiy meoia las maoe ir pos-
sille ro avoio rle convulsions rlar woulo le involveo in
an inciease in rle oljecrive exclange value o money, ano
ieouceo rle cosr o rle moneraiy appaiarus. (p. :)
. \len Mises says o coins rlar rleii smoorl aces rell no
rales o rle merloos ly wlicl rley lave leen acquiieo,
is le making an aigumenr oi oi againsr rle possililiry
o cusromeis paying lanks oi piovioing rlem wirl (ully-
lackeo) oeposir ano clecklook seivices? (p. :)
. \ly ooes Mises say rlar a single lank wirl no comperi-
rois, oi an inousriy o lanks opeiaring wirl unioim poli-
cies, woulo suei no limirarions on rleii aliliry ro issue
ouciaiy meoia? (pp. ::)
. !xplain: \lerlei rle assers o a cieoir-issuing lank con-
sisr o sloir-reim lills oi o hypothecary loans iemains a
marrei o inoieience in rle case o a geneial iun. (p. )
tuav:iv 1p
M0Nl\, Ckl0|I, kN0 |NIlkl!I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. 0a the Natare ef the |re||em
Interest acciues as rle oieience lerween wlar a piooucei pays
upionr oi inpurs veisus rle roral ievenue le ieceives oi rle pioo-
ucr (oown rle ioao). !p rill now in rle look, we lave sruoieo rle
oices rlar can clange rle exclange iario lerween money ano con-
sumei gooos, oi wlar aie calleo goods of the rst order. `ow we
will invesrigare wlerlei clanges in rle supply o ano oemano oi
money can aecr rle money-piices o goods of higher orders (i.e.,
piooucei gooos) ro a oieienr exrenr.
Tooke, !ullairon, ano orlei memleis o rle Banking Sclool
rlouglr rlar rle lanks lao no powei ro inuence piices, lecause
any excess issue o ouciaiy meoia woulo le immeoiarely ieruineo
ro rlem. Yer !oio veisrone, Toiiens, ano orlei memleis o rle
Cuiiency Sclool rlouglr orleiwise. Tley coiiecrly iecognizeo
rlar ly loweiing rle iare o inreiesr, rle lanks coulo inouce rle
pullic ro accepr moie ouciaiy meoia. Tlis is rle meclanism
rliougl wlicl lank cieoir policy can inuence rle puiclasing
powei o money ano rle iare o inreiesr.
1
1 Stuy Cuic te Thc Thcery ej Mency en Crcit
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 o ano
oemano oi money can inuence rle iare o inreiesr. !iisr, in rle
case o merallic cuiiency, sucl vaiiarions can irc.t/y aecr rle iare
o inreiesr ly oiiecrly aecring rle subsistence fund. !oi example,
a all in rle oemano ro lolo golo as money, will ielease golo inro
inousriial puiposes ano rleiely make rle communiry wealrliei,
in rle same sense as i rle amounr o wlear sroieo in silos lao
incieaseo.
Vaiiarions in rle srock o ano oemano oi money can inuence
rle iare o inreiesr inirc.t/y ano in rle long iun, ly peimanenrly
clanging rle oisriilurion o piopeiry ano income. !oi example,
a ieoucrion in rle srock o money coulo ieoisriilure wealrl inro
rle lanos o cieoirois, wlo reno ro save moie. Tlus rle iare o
inreiesr woulo le peimanenrly lowei lecause rle oveiall iare o
saving woulo lave incieaseo.
!inally, vaiiarions can inuence rle iare o inreiesr in rle sloir
iun as piices aojusr ro rle new iealiries o rle srock o ano oemano
oi money. \len piices aie geneially iising, rle iare o inrei-
esr renos ro le liglei, as enriepieneuis aie willing ano alle ro
oei moie ro loiiow money. (`owaoays rlis is calleo a purchas-
ing power oi ination premium in rle conriacrual iare o inreiesr.)
\len piices aie alling, rle iare o inreiesr renos ro le lowei.
. Ihe Ceaaex|ea 8etweea the la||||r|amkate aa6 the
Meae kate ef |aterest
\len rle lanks issue moie ouciaiy meoia, rle immeoiare iesulr
is a ieoucrion in rle iare o inreiesr. Because rle lanks rypically
Cheptcr 1: Mency, Crcit, en ntcrcst 1
invesr rle newissue rlemselves, oi leno ir ro lusinesses oi pioouc-
rive invesrmenr, rle sulsisrence uno renos ro inciease ano rle iare
o inreiesr will iemain pcrmencnt/y lowei rlan rle oiiginal level
(rlougl nor as lowas ir was arei irs inirial oiop). !owevei, rleie is
no quanrirarive ielarionslip lerween rle amounr o new ouciaiy
meoia issueo, ano rle all in rle inreiesr iare. !noeeo, no marrei
low mucl new money rle lanks cieare ano leno our, rley will
nevei oice rle conriacrual iare o inreiesr lelow zeio peicenr.
Tle giaruirous naruie o cieoir ieeis ro rle acr rlar rle lanks
can pusl oown rle iare o inreiesr appaienrly ar will. Aie rleie any
oices renoing ro ieesrallisl rle naruial piemiumo piesenr veisus
uruie gooos? \icksell aigueo rlar i rle lanks pusl rle Money
Rare o !nreiesr lelowrle `aruial Rare o !nreiesr, rlar oices will
evenrually iesroie rle Money Rare lack ro rle `aruial Rare. Bur
lis aigumenr oi wly rlis sloulo occui is unsarisacroiy.
. Ihe |aaeace ef the |aterest |e||c ef the Cre6|t

|ssa|aq
8aaks ea |re6act|ea
As Bolm-Baweik explaineo |see Teclnical `ores], rle iare o
inreiesr goveins rle rime oi wlicl iesouices aie rieo up in pio-
oucrion piocesses. Tle lowei rle iare o inreiesr, rle longei rle
piocesses rlar enriepieneuis will selecr. !n equililiium, rle money
iare o inreiesr equals rle naruial iare, ano enriepieneuis invesr
iesouices in piocesses sucl rlar rleii iuirs (consumprion gooos)
aie complereo jusr as rle availalle savings (sulsisrence uno) is
exlausreo. !r is reclnically possille ro lengrlen rle sriucruie o
piooucrion, lur wirlour aooirional savings, rle sulsisrence uno
will nor le alle ro eeo rle woikeis wlile rley laloi in rle longei
piocesses.
\len rle lanks lowei rle money iare o inreiesr ly issu-
ing ouciaiy meoia, rley inouce enriepieneuis ro acr as i rle
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
sulsisrence uno lao ieally giown (wlen in acr ir las nor).
!nriepieneuis loiiow money ar rle lowei iares, liie woikeis,
ano riy ro lio away iesouices iom orleis ro legin longei-reim
piocesses. A geneial loom peiioo ensues, wleie mosr people eel
piospeious.
Yer lecause rle issue o ouciaiy meoia ooesnr acrually make
sociery iiclei, rle loom musr necessaiily come ro an eno. Tleie
aie plysically nor enougl savings ro caiiy sociery oiwaio, unril
rle rime wlen rle new (longei) piocesses yielo rleii nal con-
sumprion gooos. A lusr (wlar we now call a iecession) sers in. As
rle ourpur o consumprion gooos oeclines, rleii piices iise. Realiz-
ing rleii eiiois, rle enriepieneuis oisconrinue rlose piojecrs rlar
weie only appaienrly pioralle, lecause o rle alse inreiesr iare.
Tle piices o piooucei gooos all, ano rle money iare o inreiesr
ieruins ro rle naruial iare.
;. Cre6|t aa6 lceaem|c Cr|ses
!n piacrice, rle lusr occuis wlen rle lanks slow oown rleii issue
o uirlei ouciaiy meoia, rleiely allowing rle money iare ro iise
rowaio irs piopei level. Yer even i rle lanks srulloinly riieo ro
lolo rle money iare oown, evenrually rley woulo ail. Tle giow-
ing expansion o rle quanriry o money in rle lioaoei sense oiives
piices liglei ano liglei, ano lenoeis insisr on giearei ano giearei
piemiums in rle conriacrual iare o inreiesr. Tle longei rle lanks
lolo rle money iare lelow rle naruial iare, rle woise is rle even-
rual ciisis.
..
Cheptcr 1: Mency, Crcit, en ntcrcst 1p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
!ugen von Bolm-Baweik was a successoi o Mengei ano a
pieoecessoi o Mises in rle oevelopmenr o Ausriian eco-
nomics. ne o Bolm-Baweiks giear conriilurions was
ro explain rle capiralisrs inreiesr income as a piemium
given ro piesenr veisus uruie gooos. !oi example, sup-
pose consumeis woulo pay so oi a maruie Cliisrmas
riee, lur woulo only pay so oi an aiiriglr claim guai-
anreeing rlem a maruie Cliisrmas riee ro le oeliveieo
in rwelve monrls. ! rlese weie rle nal piices as oerei-
mineo ly consumeis suljecrive pieeiences, rlen rle mai-
ker piice oi an immeturc rieeone rlar neeoeo anorlei
yeai ro ully oevelopwoulo le so as well. Assuming
norling else clangeo, a capiralisr wlo invesreo so in
sucl a riee coulo wair one yeai, rlen sell rle maruie
veision oi so, nerring a : peicenr annual ieruin on
lis capiral. Tlus Bolm-Baweik explaineo rle aliliry ro
eain inreiesr ovei rime as oue ro rle unoeilying suljec-
rive pieeience oi piesenr veisus uruie gooos. A capi-
ralisr wlo luys acrois o piooucrion invesrs in uruie
gooos wlicl rlen giow in maiker value as rley iipen inro
piesenr gooos. Also nore rlar rle reim iipen is nor
ieseiveo oi agiiculruial piooucrs: Bolm-Baweik woulo
say rlar a capiralisr can invesr (say) s1oo,ooo in lumlei,
slingles, laloi, ano orlei inpurs wlicl iepiesenr a uruie
louse. vei rle monrls, as rle louse is luilr, rle gooos-
in-piocess giaoually lecome a piesenr louse, ano lence
commano a liglei maiker value rlan rle inirial s1oo,ooo
invesrmenr.
18o Stuy Cuic te Thc Thcery ej Mency en Crcit
!n explaining rle loom ano lusr cycle, Mises ielies on
Bolm-Baweiks capiral rleoiy. Bolm-Baweik vieweo rle
use o capiral gooos as a iounoalour way o sarisying
goals. !oi example, i someone wanrs ro ger coconurs iom
riee liancles, a oiiecr appioacl is ro climl rle riee ano
gial rlem wirl lis laie lanos. Yer a moie iounoalour
(ano plysically piooucrive) appioacl is ro speno some rime
garleiing sricks ano vines, in oioei ro consriucr a long pole.
Tlen wirl rlis capiral gooo, rle peison can knock oown
ai moie coconurs pei loui o lis laloi. Tle riaoeo rlen
is lerween gerring moie plysical ourpur pei unir o laloi,
veisus gerring rle coconurs soonei iarlei rlan larei. (!
rle peison is iavenous ano wanrs ro ear a ew coconurs as
quickly as possille, le will jusr climl rle riee iarlei rlan
seaicl oi sricks.) Bolm-Baweik aigueo rlar rle iare o
inreiesr ieecreo rle communirys pieeiences oi rle rim-
ing o consumprion as well as rle reclnical oppoiruniries
oi incieaseo ourpur iesulring iom uirlei lengrlening
(oi making moie iounoalour) rle merloos o piooucrion.
! some people in rle communiry saveo moie (ly srock-
piling coconurs, say), rlen rle woikeis woulo le alle ro
ear wlile piooucrion slireo our o riee-climling ano inro
pole-piooucrion. Tle savings woulo lave augmenreo rle
sulsisrence uno ro rioe eveiyone ovei unril rle liglei our-
pur o rle moie iounoalour piocesses came online. Tle
iare o inreiesr in rlis scenaiio woulo peimanenrly oecline,
ano sociery woulo aovance ro a peimanenrly liglei sran-
oaio o living, as woikeis coulo garlei moie coconurs pei
loui wirl rle use o rleii new rools.
..
Cheptcr 1: Mency, Crcit, en ntcrcst 181
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Interest: !ncome acciuing ro rle ownei o uruie gooos as rley
maruie inro piesenr gooos, oue ro rle liglei valuarion
placeo on piesenr veisus uruie gooos.
Goods of the rst order: Consumei gooos.
Goods of higher orders: Cooos useo ro pioouce consumei gooos.
(Acapiral gooo useo ro pioouce a consumei gooo is a secono-
oioei gooo. A capiral gooo useo ro pioouce a secono-oioei
gooo is a rliio-oioei gooo, erc.)
Subsistence fund: A concepr useo ly Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave isr accumulareo, in oioei
ro eeo ano orleiwise suppoir rle woikeis as rley engage in
rime-consuming piooucrion piocesses.
Purchasing power/ination premium: An inciease in rle conriac-
rual iare o inreiesr oue ro rle expecreo iise in piices. ..
18: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar is rle piollem, rle naruie o wlicl is ourlineo in
secrion 1? (pp. p)
:. \ly miglr rle oisriilurion o income ano piopeiry alrei
rle long-iun iare o inreiesr? (p. )
. ! rle Money Rare o !nreiesr is pusleo lelow rle `aruial
Rare o !nreiesr (oi moie accuiarely, rle noimal iare o
inreiesr), wlar lappens ro commooiry piices, accoioing ro
\icksell? (p. )
. \lar aie rle rwo main meclanisms ly wlicl rle money
iare o inreiesr iises lack ro rle naruial iare, arei laving
leen pusleo oown ly rle lanks? (pp. :)
. !xplain: Ceirainly, rle lanks woulo le alle ro pestpenc rle
collapse, lur neveirleless . . . rle momenr musr evenrually
come wlen no uirlei exrension o rle ciicularion o ou-
ciaiy meoia is possille. Tlen rle carasriople occuis. . . .
(p. )
tuav:iv :o
|k08|lM! 0| Ckl0|I |0||C\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle goveinmenrs o !uiope ano Ameiica lave leen guioeo ly rle
ioea rlar rle naruial oesiie o rle lanks ro issue ouciaiy meoia
musr le cleckeo, in oioei ro avoio economic ciises. !owevei, rlis
goal conicrs wirl rle orlei oesiies oi low inreiesr iares ano ligl
selling piices.
Peels Bank Acr
|
Bank Clairei Acr 18
]
rook rle powei o
issuing new nores away iom piivare lanks ano vesreo ir com-
plerely wirl rle Bank o !nglano, wlicl irsel was iequiieo ro
mainrain 1oo peicenr merallic lacking oi any new nores rlar ir
issueo. !owevei, rle Acr ciucially oio net impose sucl a iesriicrion
on rle exrension o oeposirs. Peels Acr rlus conraineo a saery
valve rlar pievenreo a slaip iise in rle oljecrive exclange value
o money, lur ar rle same rime ir aileo ro eliminare economic
ciises lecause ir eiioneously rlouglr rley weie oue exclusively ro
unlackeo netcs.
Tle oegiaoarion o rle classical golo sranoaio was alieaoy well
unoeiway /cjerc rle ourlieak o \oilo \ai !. !iisr, cirizens ceaseo
using golo in eveiyoay riansacrions, ano rle acrual golo was srock-
pileo in rle vaulrs o eacl counriys cenrial lank, wlicl issueo
papei nores insreao. Tlen rle golo was even uirlei concenriareo
inro rle cenrial lanks o jusr a ew majoi counriies, so rlar nor
even rle cenrial lanks (o mosr counriies) lao golo in rleii vaulrs.
Alrlougl ir woulo lave unoesiialle oearionaiy consequences, a
18
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
riansirion lack ro an acrual golo cuiiencyin wlicl people useo
genuine golo coins in oaily puiclasesis rle only iealisric cleck
on goveinmenr-sponsoieo inarion.
Tle oiiginal rarisr aigumenrs oi iegularing rle issue o com-
pering nores ly piivare lanks oo nor look neaily as compelling
arei rle expeiience o Ceiman lypeiinarion. Tle allegeo evils
o a iee maiker in lanking aie norling compaieo ro rle acrual
evils unoei a goveinmenr monopoly o rle cuiiency.
People musr cloose lerween a ar sysrem iegulareo ly inoex
numleis o piices, oi a ieruin ro an acrual golo cuiiency. !n oioei
ro pievenr iecuiiing economic ciises, rle alsolure piolilirion o
rle uirlei issuance o ouciaiy meoia is necessaiy. ! lanks con-
rinue wirl rle aliliry ro issue ouciaiy meoia, ir leaves open rle
oesriucrion o rle enriie moneraiy sysrem, as a cooioinareo pol-
icy o expansionpeilaps unoei a \oilo Bankwoulo lave no
clecks on irs inarionaiy porenrial.
Cheptcr :o: Pre//cms ej Crcit Pe/i.y 18
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
|. |kl|kI0k\ klMkkK
. Ihe Cea|ct ef Cre6|t |e||c|es
Since rle rime o rle Cuiiency Sclool, rle goveinmenrs o !uiope
ano Ameiica lave leen guioeo ly rle ioea rlar rle naruial oesiie
o rle lanks ro issue ouciaiy meoia musr le cleckeo, in oioei ro
avoio economic ciises. !owevei, rlis goal conicrs wirl rle orlei
oesiies ro osrei cleap money ano ieasonalle piices, i.e., low
inreiesr iares ano ligl piices oi ceirain pioouceis.
||. |k08|lM! 0| Ckl0|I |0||C\ 8l|0kl Ikl Wkk
z. |ee|s kct
Peels Bank Acr
|
Bank Clairei Acr 18
]
rook rle powei o issuing
new nores away iom piivare lanks ano vesreo ir complerely wirl
rle Bank o !nglano, wlicl irsel was iequiieo ro mainrain 1oo pei-
cenr merallic lacking oi any new nores rlar ir issueo. !owevei,
rle Acr ciucially oio net impose sucl a iesriicrion on rle exren-
sion o oeposirs. !n orlei woios, piivare lanks coulo cieare moie
ouciaiy meoia ly gianring loans (nor lackeo ly golo) ro rleii
cusromeis, rlus loweiing rle iare o inreiesr ano expanoing rle
srock o money in rle lioaoei sense. !n rlis way, Peels Acr con-
raineo a saery valve rlar pievenreo a slaip iise in rle oljecrive
exclange value o money (i.e., alling piices o gooos ano seivices),
18 Stuy Cuic te Thc Thcery ej Mency en Crcit
lur ar rle same rime ir aileo ro eliminare economic ciises lecause
ir eiioneously rlouglr rley weie oue exclusively ro unlackeo netcs.
. Ihe Natare ef 0|sceaat |e||c
Many wiireis, as well as rle geneial pullic, oo nor unoeisrano rle
ieal economic oices lelino movemenrs in inreiesr iares, insreao
rley view incieases in inreiesr iares as ailiriaiy ano unnecessaiy
consriainrs on rle communirys piospeiiry. !oi example, ir is in rle
naruie o lanking rlar an inoivioual lank musr iaise rle inreiesr
iare ir claiges on new loans, i irs ieseives o money in rle nai-
iowei sense aie leing oiaineo lecause ir las issueo moie ouciaiy
meoia rlan irs comperirois. Tlis lelavioi woulo occui wlerlei
oi nor goveinmenr oi cenrial lank iules iequiieo ir.
\len ir comes ro inreinarional movemenrs o capiral, people
also ail ro unoeisrano rlar oomesric inreiesr iares musr ieecr con-
oirions in rle woilo maiker. Tleie is norling moie mysreiious in
oieign evenrs alreiing oomesric inreiesr iares, rlan (say) a oieign
ciop ailuie iaising oomesric iuir piices.
. Ihe 6e|6|rem|am|e||c
Tle Bank o !iance implemenreo a well-known golo-piemium
policy, in wlicl ir claigeo a piemium (somewleie in rle iange o
o. ro o.8 peicenr) on iequesrs ro exclange iancs oi golo, i rle
golo weie going ro le invesreo alioao seeking a liglei ieruin.
Tle puipose o rle policy was ro wioen rle gap ly wlicl rle
Bank o !iance coulo mainrain a lowei oiscounr iare rlan pie-
vaileo in orlei counriies. Tle policy linoeieo capiral ourows en
inows, ano linoeieo rle ull incoipoiarion o !iance inro rle
woilo maiker. Tle only way ro riuly insulare Bank policy iom
rle iesr o rle woilo maiker woulo le ro leave rle golo sranoaio
Cheptcr :o: Pre//cms ej Crcit Pe/i.y 18
enriiely, aoopring cieoir money oi ar money ano rleiely suei-
ing inarion.
;. !stems !|m||ar te the 6e|6|rem|am|e||c
Cenrial lanks lave aoopreo orlei reclniques ro linoei rle expoir
o golo. !oi example, rley miglr nor suiienoei golo ro expoireis
in rle mosr convenienr oim, oi rley miglr give woin-our coins
rlar lao sliglrly less meral conrenr rlan rle coins inrenoeo oi
oomesric use.
6. Ihe Nea

!at|sfact|ea ef the !e

ca||e6 |||eq|t|mate
0emaa6 fer Meae
Arremprs ro only piovioe golo oi expoir wlen rle puipose is
legirimare woulo ail ro aclieve rleii oljecrive in rle long-
reim, as specularois woulo no orlei means ro aclieve rle same
eno. Moieovei, rleie is a wlole specrium o inreimeoiare cases
lerween legirimare oemanos oi commooiry impoirarion ano
illegirimare specularion on oieign invesrmenrs. !oi example,
wlar i a oieign company wanreo ro wirloiaw oeposirs rlar ir lao
pieviously invesreo in a counriy? \oulo rle aurloiiries peimir a
loss o golo in rlis ciicumsrance?
). 0ther Measares fer !treaqthea|aq the !teck ef Meta| ke|6
| the Ceatra| 8aaks

ef

|ssae
\lile cenrial lanks-o-issue aoopreo policies ro iaise rle upper
gold point ano rlus oiscouiage rle expoir o golo, ar rle same
rime many aoopreo policies ro ieouce rle lower goldpoint ano rlus
encouiage impoirs o golo. Tle rwo sers o policies laigely oser
188 Stuy Cuic te Thc Thcery ej Mency en Crcit
eacl orlei, so rlar rle acrual gap lerween rle golo poinrs oio nor
clange as mucl as miglr lave leen supposeo.
. Ihe |remet|ea ef Cheae aa6 C|ear|aq Iraasact|eas as a
Meaas ef ke6ac|aq the kate ef 0|sceaat
!n Ceimany leoie rle isr \oilo \ai, rleie was an eoir ro
ieouce rle Ceiman peoples eveiyoay use o golo, ano ieplace
ir wirl rle use o cleck ano cleaiing riansacrions. Tlis woulo
allegeoly allow rle Reiclslank ro lolo a laigei ieseive o meral,
ano keep a lowei oiscounr iare. !owevei, rleie is no necessaiy
connecrion lerween rle long-iun iare o inreiesr ano rle quanriry
o ouciaiy meoia.
|||. |k08|lM! 0| Ckl0|I |0||C\ |N Ikl |lk|00
|MMl0|kIl|\ k|Ilk Ikl Wkk
. Ihe 6e|6lxchaaqe !taa6ar6
uiing rle \oilo \ai !, rle majoi poweis (excepr rle !nireo
Srares) explicirly suspenoeo rle golo sranoaio. !owevei, rle oegia-
oarion o rle classical golo sranoaio was alieaoy well unoeiway
/cjerc rle ourlieak o wai. !iisr, cirizens ceaseo using golo in eveiy-
oay riansacrions, ano rle acrual golo was srockpileo in rle vaulrs
o eacl counriys cenrial lank, wlicl issueo papei nores insreao.
Tlen rle golo was even uirlei concenriareo inro rle cenrial lanks
o jusr a ew majoi counriies, so rlar nor even rle cenrial lanks
(o mosr counriies) lao golo in rleii vaulrs. !nsreao, rley roo lao
papei claims enrirling rlem ro rle golo rlar was sroieo elsewleie.
!n rlis way, viirually rle enriie woilo lecame accusromeo ro
using papei as rleii money, wlicl lao a moie ano moie renuous
Cheptcr :o: Pre//cms ej Crcit Pe/i.y 18p
link ro golo. As o 1p:, rle woilo piice o golo was oominareo ly
rle acrions o rle !nireo Srares goveinmenr. Yer sucl an ourcome
is rle anrirlesis o rle wlole iarionale oi rle golo sranoaio: ro
keep polirical inreieience our o money.
e. k ketara te a 6e|6 Carreac
Alrlougl ir woulo lave unoesiialle oearionaiy consequences, a
riansirion lack ro an acrual golo cuiiencyin wlicl people useo
genuine golo coins in oaily puiclasesis rle only iealisric cleck
on goveinmenr-sponsoieo inarion. !ao rle cirizens o rle giear
poweis leen using golo on rle eve o \oilo \ai !, ir woulo lave
leen mucl moie oiculr oi rleii goveinmenrs ro iun rle piinr-
ing piesses ro pay oi aimamenrs.
. Ihe |re||emef the |ree6emef the 8aaks
Tle oiiginal rarisr aigumenrs oi iegularing rle issue o comper-
ing nores ly piivare lanks oo nor look neaily as compelling arei
rle expeiience o Ceiman lypeiinarion. Tle allegeo evils o a
iee maiker in lanking aie norling compaieo ro rle acrual evils
unoei a goveinmenr monopoly o rle cuiiency.
z. ||shers |repesa| fer a Cemme6|t !taa6ar6
Tle amous Ameiican economisr !iving !islei pioposeo rlar
inoex numleis woulo riack an aveiage o commooiry piices, so
rlar rle oollai irsel coulo le oeneo as a vaiialle weiglr o golo
rlar possesseo consranr puiclasing powei in reims o rle com-
mooiries in rle inoex.
Tleie aie seveial piollems wirl !isleis pioposal. !iisr, rle
vaiious inoex numleis aie ailiriaiy, rleie is no scienric way ro
1po Stuy Cuic te Thc Thcery ej Mency en Crcit
measuie rle riue clange in rle puiclasing powei o golo iom
monrl ro monrl. Anorlei piollem is rlar rle maiker alieaoy
las reclniques oi lanoling clanges in rle puiclasing powei o
money, !isleis pioposal woulo simply leao ro an aojusrmenr o
rle reclniques. !inally, even ignoiing rle orlei piollems, !isleis
pioposal woulo nor counreiacr rle icrcntie/ impacr rlar inarion
las as ir unevenly spieaos rliougl rle economy. ! rle piice inoex
incieases ly 1 peicenr in a ceirain monrl, rlis is lecause some
piices incieaseo ly moie rlan 1 peicenr, wlile orleis incieaseo
ly less.
. Ihe 8as|c 0aest|eas ef |atare Carreac |e||c
People musr cloose lerween a ar sysremiegulareo ly inoex num-
leis o piices, oi a ieruin ro an acrual golo cuiiency. !n oioei ro
pievenr iecuiiing economic ciises, rle alsolure piolilirion o rle
uirlei issuance o ouciaiy meoia is necessaiy. (Sucl a piolili-
rion musr go leyono Peels Acr, ano incluoe lank oeposirs as well
as nores, oi economically rle rwo aie equivalenr.) ! lanks con-
rinue wirl rle aliliry ro issue ouciaiy meoia, ir leaves open rle
oesriucrion o rle enriie moneraiy sysrem, as a cooioinareo pol-
icy o expansionpeilaps unoei a \oilo Bankwoulo lave no
clecks on irs inarionaiy porenrial.
nly ly ieeing money ano lanking iom polirical inuence
can people avoio economic ciises wlile mainraining rle liglesr
possille sraliliry o rle puiclasing powei o money.
..
Cheptcr :o: Pre//cms ej Crcit Pe/i.y 1p1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
n pages 8:, Mises oesciiles rle golo-piemium pol-
icy implemenreo ly rle Bank o !iance. !n rle alsence o
sucl a piemium, invesrois woulonr oisringuisl lerween
oomesric ano oieign invesrmenrs (excepr peilaps oi a
sliglr psyclological pieeience oi rle oimei), ano woulo
pur rleii capiral wleie ir woulo eain rle liglesr ieruin. !
rle Bank o !nglanos oiscounr iare weie liglei rlan rle
Bank o !iances, rlen !iencl invesrois woulo ruin rleii
iancs in oi golo, use rle golo ro luy lonos in !nglano,
rlen conveir rle golo lack inro iancs arei eaining rleii
inreiesr. Tle iesulr woulo le a liglei iare o ieruin (mea-
suieo in iancs) rlan i rle invesrois lao lenr rle money
in !iance. !owevei, i ruining iancs inro golo involves
paymenr o a (small) piemium ro rle Bank o !iance, rlen
invesrois woulo only aoopr rle alove sriaregy i rle oiei-
ence in inreiesr iares weie sucienrly laige. Tleieoie, rle
golo-piemiumpolicy gave rle Bank o !iance a wioei mai-
gin ro keep inreiesr iares ielarively low, leoie sueiing
iom an ourow o golo.
n page p8, Mises poinrs our rlar mosr aigumenrs ciiri-
cizing rle opeiarion o a piivare, comperirive lanking sys-
rem weie rloiouglly unsouno. Tle one legirimare aigu-
menr came iom rle Cuiiency Sclool, wlicl (coiiecrly)
poinreo our rlar i piivare lanks issueo nores in excess
o rleii golo ieseives (i.e., ouciaiy meoia), rlis coulo
cause economic ciises. !ionically, rlis oangei only exisrs
wlen rle lanks all opeiare unoei a unioim oiscounr pol-
icyrley musr all inare in unison, oi else rle lank rlar is
1p: Stuy Cuic te Thc Thcery ej Mency en Crcit
rle mosr aggiessive will lave irs ouciaiy meoia ieruineo
ro ir (rliougl cleaiing opeiarions), ano ir will quickly lose
irs golo ieseive ro irs comperirois. Yer somelow, rlese
olseivarions leo ro rle call ro alolisl comperirive lan-
knore issue ano ieplace ir wirl a goveinmenr monopoly.
As Mises says, `ow rle monopolizarion o rle lanks-
o-issue in eacl sepaiare counriy ooes nor meiely ail ro
oppose any linoiance o rlis unioimiry o pioceouie, ir
mareiially acilirares ir.
..
Cheptcr :o: Pre//cms ej Crcit Pe/i.y 1p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice o golo (quoreo in a counriys cuiiency) alove wlicl
ir is pioralleincluoing all cosrs o rianspoir, ie-coinage,
erc.oi oieigneis ro exclange rle oomesric cuiiency oi
golo (ar rle ocial ieoemprion iare, wlicl is lelow rle cui-
ienr maiker piice), ano lave rle golo slippeo our o rle oiig-
inal counriy.
Lower gold point: !noei rle golo sranoaio, rle minimum maiker
piice o golo (quoreo in a counriys cuiiency) lenearl wlicl
ir is pioralleincluoing all cosrs o rianspoir, ie-coinage,
erc.oi cirizens ro impoir golo ano exclange ir wirl rle
aurloiiries ar rle ocial ieoemprion iare oi rle oomesric
cuiiency. ..
1p Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was rle rleoierical eiioi o rle Cuiiency Sclool,
ano wly was rlis misrake an aovanrage wirl iespecr ro
rle implemenrarion o Peels Acr? (pp. po)
:. * \len Mises claims rlar a sole lank, engaging in a moie
inarionaiy policy rlan irs comperirois, woulo enoangei
irs solvency (p. ), is rlar consisrenr wirl lis oenirion
o rle reim (veisus liquioiry) on page 1?
. !xplain: Tle lanks woulo srill lave ro lave a oiscounr
policy even i rleie weie no legislarive iegularion o rle
nore covei. (p. )
. !ow oio !iances golo-piemium policy linoei lorl rle
ourow en inow o capiral? (p. 8:)
. !xplain: Tleie is only one oangei rlar is peculiai ro rle
issue o nores, rlar o irs leing ieleaseo iom rle common-
law olligarion unoei wlicl eveiylooy wlo enreis inro a
commirmenr is sriicrly iequiieo ro ulll ir ar all rimes ano
in all places. Tlis oangei is innirely giearei ano moie
rliearening unoei a sysrem o monopoly. (p. pp)
..
vav: iv
M0NlIkk\ klC0N!Ik0CI|0N
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
tuav:iv :1
Ikl |k|NC|||l 0| !00N0 M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe C|ass|ca| |6ea ef !eaa6 Meae
Tle piinciple o souno money musr le placeo in rle conrexr o
rle lioaoei, classical lileial piogiam o conraining goveinmenr
ryianny. Jusr as a consrirurion oi a lill o iiglrs woulo le aoopreo,
in liglr o lisroiical aluses o civil lileiries, in rle same way rle
classical lileials o rle ninereenrl cenruiy wanreo ro pievenr gov-
einmenrs iom wiecking cuiiencies as lao occuiieo rliouglour
lisroiy.
Souno money involves a merallic sranoaio, wirl all rokens ano
papei nores leing ieoeemalle in rle merallic money upon oemano.
!n piacrice, rlis las meanr golo since rle lare ninereenrl cenruiy.
Alrlougl rleii ioeas weie coiiecr, rle classical lileials oio nor
aoequarely oeeno rle golo sranoaio iomirs ciirics, ano rle pullic
ell sway ro eiioneous inarionaiy oocriines.
z. Ihe V|rtaes aa6 k||eqe6 !hertcem|aqs ef the 6e|6 !taa6ar6
!r is riue rlar rle pullic geneially welcomes inarionism as op-
poseo ro rle oirloooxy o rle golo sranoaio, lur only lecause
rley misunoeisrano rle riue siruarion. Pioouceis welcome ligl
1p
1p8 Stuy Cuic te Thc Thcery ej Mency en Crcit
piices wlen ir is rleii own piices in quesrion, lur rley oonr wel-
come incieasing piices in rle irems rley rlemselves musr puiclase.
!narion can only give even rle appeaiance o piospeiiry, in siru-
arions wleie rle majoiiry oonr iecognize wlar is lappening. !oi
rlis ieason, inarionism cannor le a lasring economic policy.
Conriaiy ro irs ciirics, rle golo sranoaio oio nor collapse.
Rarlei, ir was sysremarically ano inrenrionally oesrioyeo ly gov-
einmenrs lenr on inarion. Tlose wiireis wlo llame rle iules
o rle golo sranoaio game oi keeping inreiesr iares ligl, oo nor
unoeisrano rle uncrion o inreiesr iares ano lowcieoir expansion
causes economic looms ano lusrs.
. Ihe |a||lmp|emeat 0ectr|ae
An employei will only liie a man i le is piooucrive enougl ro
jusriy rle wage le expecrs ro le paio. ! rle employei woulo lose
money ly liiing rle man, le will iemain unemployeo. \len gov-
einmenr policies ano unions use coeicion ro lolo wage iares alove
rle maiker-cleaiing level, institutional unemployment iesulrs.
!n rlis serring, ir is riue rlar moneraiy inarion may cause com-
mooiry piices ro iise asrei rlan wage iares. Tlis will oeciease
rle unemploymenr iare, lur only lecause ir eecrively loweis rle
woikeis real wages. nce rle laloi unions iealize wlar is lappen-
ing, rley will legin oemanoing auromaric wage incieases rieo ro
rle cosr o living. Tlen rle appaienr leners o inarion (in
ieoucing unemploymenr) will oisappeai.
. Ihe lmerqeac krqameat |a |aer ef |aat|ea
Some wiireis conceoe rle negarive eecrs o inarion, lur aigue
rlar in ceirain emeigency siruarions, ir is rle only merloo ly wlicl
Cheptcr :1: Thc Prin.ip/c ej Seun Mency 1pp
goveinmenrs can caiiy our viral rasks. Yer inarion pei se ooes nor
inciease rle plysical ano luman iesouices ar a counriys oisposal.
! an apologisr oi inarion claims rlar ir is rle only way ro nance
a wai, le is aomirring rlar rle pullic woulo nor agiee wirl rle
goveinmenrs wai expenoiruies i ir ully unoeisrooo rle saciice
rley woulo enrail. ..
:oo Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Contributions
On pages (zoz: 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 Mlsess 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) benets to
themselves of lnatlon, 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 o gold, they
employed pollcemen, customs guards, penal courts, prlsons, ln
some countrles even executloners. |n Mlsess vlew, governments
actlvely combat the publlcs preference for a sound commodlty
money. Contrary to the clalms of the lnatlonlsts, malntenance of
a commodlty money doesnt 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 (zz6, 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 lnatlon. Says dlscusslon(whlch later came to
be summarlzed as Says Law) explalned that ultlmately, the gro-
cers customers earned the purchaslng power to demand hls prod-
ucts by rst supplylng thelr own goods and servlces. As an econ-
omy grew over tlme, the varlous sectors lncreased thelr output
..
Cheptcr :1: Thc Prin.ip/c ej Seun Mency :o1
across the board. Say argued that relatlve prlces would ad[ust
to malntaln the proper balance among the sectors, but there was
not a danger that the economy as a whole could produce a gen-
eral glut that could only be remedled by an expanslon of the
stock of money. ..
:o: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Institutional unemployment: Tle siruarion wleie woikeis aie qual-
ieo ano willing ro accepr jols ar pievailing wage iares, yer
cannor no employeis ro liie rlem.
Real wages: \age iares ielarive ro rle piices o gooos ano seivices.
..
Cheptcr :1: Thc Prin.ip/c ej Seun Mency :o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. \lar was rle seiious llunoei o rle ninereenrl-cenruiy
aovocares o rle golo sranoaio? (p. 1)
:. \lar connecrion ooes Mises make lerween rle golo sran-
oaio ano iepiesenrarive goveinmenr? (p. 1)
. !ow oio goveinmenrs manage ro alanoon rle golo sran-
oaio? (p. :o)
. \lar is rle only ecacious way ro iaise ieal wage iares?
(p. :)
. \lars wiong wirl rle emeigency aigumenr in avoi o
inarion? (pp. ::8)
tuav:iv ::
C0NIlM|0kkk\ C0kklNC\ !\!IlM!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Ihe |aex|||e 6e|6 !taa6ar6
!noei lorl rle classical gold standard ano rle gold-exchange stan-
dardas rley lao exisreo leoie \oilo \ai !eacl narions cui-
iency unir was legally rieo ro an inexille (i.e., consranr) exclange
iare againsr golo. Tle oieience lerween rle rwo sysrems was one
o oegiee. !noei rle classical golo sranoaio, cirizens wirlin eacl
counriy caiiieo acrual golo coins ano useo rlem in eveiyoay rians-
acrions. Anylooy coulo exclange golo oi narional nores ano vice
veisa wirlour oelay. !arei, unoei rle golo-exclange sranoaio, cir-
izens only useo rle goveinmenrs papei nores ano roken coins in
oomesric commeice. !owevei, rle cenrial lanks o rle woilo srill
exclangeo rleii iespecrive cuiiencies againsr golo ar rle ocial
(ano inexille) iares.
z. Ihe ||ex|||e !taa6ar6
Tle exible standard aiose lerween rle woilo wais our o rle pie-
wai golo exclange sranoaio. !eie rleie was no legal ieoemprion
iequiiemenr, locking in a xeo exclange iare o golo againsr rle
narional cuiiency. !nsreao, an agency (sucl as rle cenrial lank)
:o
:o Stuy Cuic te Thc Thcery ej Mency en Crcit
woulo le given rle aurloiiry ro peg rle cuiiency ro golo ar a iare
rlar coulo le suljecr ro a suooen clange. ! rle oiop in rle cui-
iency againsr golo was seveie enougl, rle evenr woulo le calleo a
devaluation.
. Ihe |ree|

Vac|||at|aq Carreac
A freely-vacillating currency is one wirl no ocial peg ro golo ar
all. Tle cuiiency is a cieoir oi ar money, lelo on accounr o
irs expecreo uruie puiclasing powei. ! rle goveinmenr exeicises
iesriainr, sucl a moneyeven rlougl ir is a lao cuiiencycan
peisisr.
. Ihe |||as|e !taa6ar6
Somerimes a goveinmenr will announce a (vaiialle) peg ro irs cui-
iency, yer rlis isnr a exille sranoaio. Tle goveinmenr enoices
rle peg rliougl penalries ano conscarion, nor rliougl ieoemp-
rion ar rle ocial iare. Tle illusive standard is rlus a oim o piice
conriol, ano leaos ro a sloirage in rle oieign exclange maiker.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :o
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
As Mises explaineo eailiei in rle look (pp. 18o8), ex-
clange iares aojusr on an unlampeieo maiker unril rleie
is no aovanrage ro luying a commooiry in one cuiiency
ano immeoiarely selling ir in anorlei cuiiency. Yer unoei
an illusive sranoaio, rle goveinmenr o a counriy acrively
inreieies wirl rlis piocess, oren ro keep rle piice o
irs own cuiiency alove rle maiker-cleaiing piice rlar
woulo aclieve puiclasing powei paiiry. !n Misess exam-
ple (p. ), rle maiker cleais wlen one oollai riaoes oi
1oo Ruiiranian iuis. ! a laiiel o oil (say) sells oi s1oo in
rle !nireo Srares, ano oi 1o,ooo iuis in Ruiirania, rleie
is no ailiriage oppoiruniry ar rle coiiecr exclange iare.
!owevei, i rle Ruiiranian goveinmenr announces rlar ir
will pur people in piison wlo pay moie rlan o iuis oi
one oollai, rlen rle exclange iare will iise ro rle airi-
cial piice (ar leasr wirlin rle loioeis o Ruiirania). Ar rle
newexclange iare, oil puiclaseo alioao will nowonly cosr
,ooo iuis pei laiiel, compaieo ro rle oomesric piice o
1o,ooo iuis. Ruiiranian ieneis will rlus riy ro sell rleii
iuis againsr oollais, in oioei ro luy oil ano impoir ir. !ow-
evei, oieigneis will nor wanr ro sell many oollais oi iuis
ar rle iario o 1-ro-o, lecause rle acrual maiker iario is
1-ro-1oo. Consequenrly rle Ruiiranian ieneis will com-
plain rlar rley canr no oollais ro nance rleii oesiieo
impoirs. Tleie is an appaienr sloirage o oollais.
Arei explaining rle meclanics o foreign-exchange con-
trols, Mises on page classies rlem as a oevice oi
rle viirual expiopiiarion o oieign invesrmenrs. !e las
:o8 Stuy Cuic te Thc Thcery ej Mency en Crcit
in mino a scenaiio sucl as rle ollowing: Suppose a !.S.
capiralisr invesrs s1 million luiloing a acroiy in Ruiira-
nia. Ar rle oiiginal, maiker-oereimineo exclange iare, rle
capiralisr sells lis s1 million oi 1oo million iuis, ano uses
rle cuiiency ro luy mareiials, liie woikeis, erc. in Ruii-
rania ro ser up rle acroiy. !veiy yeai rle acroiy eains a
ner income o million iuis. Tle oieign ownei woulo
lave lis local agenrs sell rle million iuis in rle oieign
exclange maiker, conveiring rlem ro so,ooo, ano wiiing
rle money lack ro lis lank accounr in rle !nireo Srares.
Tlus iom eirlei rle viewpoinr o rle acroiy managei
(ieckoning in iuis) oi iom rle oieign invesroi (ieckon-
ing in oollais), rle iare o ieruin on rle invesreo capiral is
ve peicenr pei yeai. !owevei, wlen rle Ruiiranian gov-
einmenr imposes oieign-exclange conriols ano sers a new
piice o s1 oi o iuis (insreao o 1oo), rle maiker oi ool-
lais oiies up. `ow wlen rle acroiy eains irs usual mil-
lion iuis, rle Ameiican invesroi canr ger rle money our o
rle counriy. !rs riue rlar ocially speaking, lis million
iuis is now woirl s1oo,ooo, ooulle rle pievious amounr.
Bur rlis is lirrle consolarion, since no one wirl oollais will
acrually riaoe s1oo,ooo oi million iuis. People aiouno
rle woilo woulo le willing ro riaoe lal rlar (so,ooo) oi
million iuis, lur rle Ruiiranian goveinmenr will punisl
any o irs cirizens cauglr accepring sucl an oei. Tlus rle
Ameiicans s1 million acroiy in Ruiirania las eecrively
leen raken ovei ly rle Ruiiranian goveinmenr, since ir
conriols rle oieign-exclange maiker, ano conveiring iuis
inro oollais is rle only way rle Ameiican ownei can oeiive
any lener iom lis invesrmenr.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :op
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Classical gold standard: Tle sysrem ly wlicl a counriys cuiiency
is ieoeemalle on oemano oi a xeo weiglr o golo. !n
Misess usage, unoei a classical golo sranoaio, a poirion o
rle cirizens casl lalances consisrs o acrual golo coins ano
lullion ro le useo oi making puiclases.
Gold-exchange standard: Tle sysrem ly wlicl a counriys cui-
iency is ieoeemalle on oemano oi a xeo weiglr o golo,
rlougl somerimes only ly orlei goveinmenrs ano cenrial
lanks. !n Misess usage, unoei a golo-exclange sranoaio
rle cirizens useo only papei nores in eveiyoay riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Flexible standard: Tle sysrem ly wlicl a counriys cuiiency is
ieoeemalle oi a vaiialle weiglr o golo, ro le announceo
ly rle goveinmenr ar irs oiscierion.
Currency peg: Tle vaiialle ano nonlegally-linoing iare ar wlicl a
goveinmenr is cuiienrly mainraining irs cuiiencys exclange
iare againsr golo.
Devaluation: Tle siruarion in wlicl a counriy on rle exille sran-
oaio announces a laige oiop in rle value o irs cuiiency
againsr golo.
Freely-vacillating currency: A cieoir oi ar cuiiency rlar las no
ocial peg ro golo ar all. !rs maiker piice ucruares jusr as
any commooiry.
:1o Stuy Cuic te Thc Thcery ej Mency en Crcit
Illusive standard: Tle sysrem ly wlicl a counriys cuiiency is
peggeo ro golo ar nonmaiker iares. Tle exclange iare is
mainraineo nor rliougl rle manipularion o golo ieseives
lur iarlei rliougl rle enoicemenr o oieign-exclange
conriols.
Foreign-exchange controls: Coveinmenr iesriicrions on rle mai-
ker oi oieign cuiiencies.
..
Cheptcr ::: Centcmperery Currcn.y Systcms :11
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !noei rle classical ano golo exclange sranoaios, oio ir
marrei i lanknores weie enooweo wirl legal renoei sra-
rus? (p. :p)
:. \ly oio rle unoirlooox sraresman pieei rle reim peg
ro ieoemprion? (p. o)
. * Mises says (p. 1) rlar cieoir ano ar moneys aie nor
money sulsrirures lur money piopei in rlemselves. oes
rlis mean rlar commooiry money is nor money piopei?
. \lar is rle oursranoing insrance o a ieely-vacillaring cui-
iency? (p. 1)
. \ly ooes Mises oislike rle reim scaiciry o oieign ex-
clange? (pp. )
tuav:iv :
Ikl klI0kN I0 !00N0 M0Nl\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary
Tle oisinregiarion o rle woilowioe classical golo sranoaio las
gone lano-in-lano wirl rle maicl rowaio all-iouno cenrial plan-
ning. Tle ieruin ro souno money involves a ienunciarion o ina-
rion. Tlis is only possille i rle pullic iecognizes rle uriliry o
inreivenrionisr goveinmenr.
Tle ieruin ro souno money srill means a ieruin ro rle golo
sranoaio. nly unoei rlis sysrem will rle oereiminarion o rle
moneraiy unirs puiclasing powei iemain oursioe rle spleie o
goveinmenr conriol. Tle only way ro riuly saeguaio a narions
money is ro iemove all avenues oi inarion. Tlis incluoes nor
only rle goveinmenrs iesoiring ro rle piinring piess ro nance
irs oecirs, lur also commeicial lanks aliliry ro issue oeposirs nor
ully lackeo up ly money piopei.
!oi a ielarively small counriy (Ruiirania) rle goveinmenr
o wlicl las leen using inarion ro nance irs oecirs, rle gov-
einmenr musr isr (rempoiaiily) piolilir rle uirlei issuance o
ouciaiy meoia oenominareo in iuis. nce rle iuis exclange
iare (as well as rle piice o golo quoreo in iuis) las cleaily peakeo,
rle goveinmenr o Ruiirania locks in rle cuiienr maiker piice o
eirlei a !.S. oollai oi golo (quoreo in iuis). An agency will le oeo-
icareo wirl rle sole rask o mainraining rle iuis ieoemprion iare
ro eirlei rle oollai oi golo ar rlis iare, oievei. Ruiirania will le
lack on rle golo exclange sranoaio.
:1
:1 Stuy Cuic te Thc Thcery ej Mency en Crcit
Tle !nireo Srares goveinmenr musr ieruin ro rle classical
golo sranoaio. An agency will le esrallisleo rlar will luy oi sell
golo againsr oollais upon oemano, ar rlis iare. !n oioei ro piovioe
moie iesisrance ro uruie inarion, rle goveinmenr sloulo sup-
piess small-oenominarion papei nores, wlicl woulo oice Amei-
icans ro once again caiiy ull-weiglr golo coins in rleii casl
lalances.
nly an alanoonmenr o rle inreivenrionisr minoser, coupleo
wirl a ieruin ro rle classical golo sranoaio, can saeguaio rle
cuiiency.
Cheptcr :: Thc Rcturn te Seun Mency :1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Meaetar |e||c aa6 the |reseat Irea6 Iewar6
k||keaa6 ||aaa|aq
Tle oisinregiarion o rle woilowioe classical golo sranoaio las
gone lano-in-lano wirl rle maicl rowaio all-iouno cenrial plan-
ning. Tle rienos aie ielareo. !narion allows goveinmenr ocials
ro seize conriol o moie iesouices rlan rle pullic woulo orleiwise
appiove. Rising piices pusles people inro liglei rax liackers ano
allows rle goveinmenr ro rax excess piors iomlusinesses. Tle
social uniesr causeo ly inarion can le llameo upon capiralism,
giving rle goveinmenr yer anorlei pierexr ro expano irs powei.
Tle ieruin ro souno money involves a ienunciarion o ina-
rion. Tlis is only possille i rle pullic iecognizes rle uriliry o
inreivenrionisr goveinmenr.
z. Ihe |ateqra| 6e|6 !taa6ar6
Tle ieruin ro souno money srill means a ieruin ro rle golo
sranoaio. nly unoei rlis sysrem will rle oereiminarion o rle
moneraiy unirs puiclasing powei iemain oursioe rle spleie o
goveinmenr conriol.
Tle only way ro riuly saeguaio a narions money is ro iemove
all avenues oi inarion. Tlis incluoes nor only rle goveinmenrs
iesoiring ro rle piinring piess ro nance irs oecirs, lur also com-
meicial lanks aliliry ro issue oeposirs nor ully lackeo up ly
money piopei. !n orlei woios, goveinmenrs musr speno only wlar
rley rax oi loiiow, ano lanks musr le piolilireo iomissuing new
ouciaiy meoia.
:1 Stuy Cuic te Thc Thcery ej Mency en Crcit
. Carreac keferm|a kar|taa|a
!oi a ielarively small counriy rle goveinmenr o wlicl las leen
using inarion ro nance irs oecirs, rle ciucial rling is ro quickly
assuie woilo invesrois rlar rle cuiiency is sralilizeo. Tleie is
a rwo-srep piocess involveo. !iisr, rle goveinmenr o Ruiirania
musr (rempoiaiily) piolilir rle uirlei issuance o ouciaiy meoia
oenominareo in iuis, rle cuiiency o rle counriy. Tlis will
cause rle exclange iare o rle iui ro srop alling againsr orlei,
majoi cuiiencies as well as golo.
nce rle iuis exclange iare (as well as rle piice o golo quoreo
in iuis) las cleaily peakeo, ano legun a oenire oownwaio rieno,
ir is rime oi srep rwo. !n rlis srage, rle goveinmenr o Ruiirania
locks in rle cuiienr maiker piice o eirlei a !.S. oollai oi golo
(quoreo in iuis). An agency will le oeoicareo wirl rle sole rask o
mainraining rle iuis ieoemprion iare ro eirlei rle oollai oi golo
ar rlis iare, oievei. ! people ruin in oollais oi golo (oepenoing
on rle cloice o rle link), rle agency is alloweo ro issue new iuis,
wlicl aie lackeo up 1oo peicenr ly rle new oeposir. Ar rlis poinr,
rle iui will le lack on eirlei a oollai- oi golo-exclange sranoaio,
ano no new ouciaiy meoia can le issueo.
. Ihe 0a|te6 !tates ketara te a !eaa6 Carreac
Tle !nireo Srares goveinmenr musr ieruin ro rle classical golo
sranoaio, wlicl oeieo a sriongei cleck on inarion rlan rle
golo-exclange sranoaio. !r musr isr piolilir rle issuance o new
oollais, wlerlei in rle oim o Tieasuiy nores oi lank lalances
nor lackeo up 1oo peicenr ly casl oeposirs. Arei rle oollai-piice
o golo sralilizes, rle !.S. goveinmenr will announce rle cuiienr
maiker piice as rle new, peimanenr exclange iare lerween rle
!.S. oollai ano golo. (Tle new piice miglr veiy well le liglei
rlan rle ocial iare o s pei ounce, esrallisleo in rle Bierron
Cheptcr :: Thc Rcturn te Seun Mency :1
\ooos agieemenr neai rle eno o \oilo \ai !!, ano lasring unril
Riclaio `ixon alolisleo rle lasr iemnanrs o rle golo sranoaio in
1p1.)
An agency will le esrallisleo rlar will luy oi sell golo againsr
oollais upon oemano, ar rlis iare. !n oioei ro piovioe moie iesis-
rance ro uruie inarion, rle goveinmenr sloulo suppiess small-
oenominarion papei nores, wlicl woulo oice Ameiicans ro once
again caiiy ull-weiglr golo coins in rleii casl lalances.
;. Ihe Ceatreers Ceacera|aq the Che|ce ef the
New6e|6 |ar|t
\irlin rle ianks o rlose aovocaring a ieruin o rle !.S. ro rle
golo sranoaio, rleie is conrioveisy ovei rle appiopiiare exclange
iare. Tle restorers wanr ro go lack on golo ar rle iare o s pei
ounce, wlicl was esrallisleo in rle 1p Colo Reseive Acr (ano
was rle golo piice useo in rle Bierron \ooos sysrem). Tle stabi-
lizers wanr ro iee rle maiker ro lolo ano use golo, rlen ser rle
oollai ro rle new piice o golo rlar will le esrallisleo in rle mai-
ker, even i ir lappens ro le moie rlan s pei ounce.
Tle aigumenrs o rle iesroieis aie inconsisrenr. Tleie is norl-
ing lonesr alour going lack ro s pei ounce. A mucl sriongei
case coulo le maoe rlar rle pie-1p piice o s:o. pei ounce
o golo was rle riue paiiry, wlicl Roosevelr rlen oislonoieo as
one o lis isr acrs in oce. !uirleimoie, rle people wlo weie
laimeo ly rle piioi inarion woulo nor necessaiily le rle same
ones ro lener iom a cuiienr lour o oearion. !oi example, ir is
riue rlar a lono oiiginally issueo in (say) 1p:8, piomising ro pay
s1,ooo pei yeai oi ry yeais, woulo lave lao irs ieal maiker
value salorageo wlen !R oevalueo rle oollai. Yer i rle oiiginal
puiclasei o rle lono solo ir in (say) 1po, rlen rle new ownei
las alieaoy raken inro accounr rle new inarionaiy iegime. Tle
:18 Stuy Cuic te Thc Thcery ej Mency en Crcit
ull capiral loss las alieaoy leen alsoileo ly rle oiiginal ownei.
Ar rlis poinr, ro iaise rle puiclasing powei o rle oollai ly iesroi-
ing golo ro irs oimei paiiry, woulo le ro piesenr a gir ro rle new
ownei o rle lono.
Tle orlei majoi awwirl rle iesroieis viewpoinr is rlar ina-
rion is laimul nor meiely lecause ir aecrs oeeiieo paymenrs.
Money is nor neurial, ano an inrenrional oearion will lave unoe-
siialle consequences rlar will occui in aooirion roiarlei rlan
unooingrle eailiei consequences o rle inarion.
Ceac|a6|aq kemarks
Tle pullic ano mosr inrellecruals lamenr rle consequences o ina-
rion, yer rley suppoir rlose policies (goveinmenr oecir spenoing
ano low inreiesr iares) rlar iequiie inarion. nly an alanoon-
menr o rle inreivenrionisr minoser, coupleo wirl a ieruin ro rle
classical golo sranoaio, can saeguaio rle cuiiency.
..
Cheptcr :: Thc Rcturn te Seun Mency :1p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
n pages po, Mises lamenrs rlar even many sup-
poireis o souno money oo nor iecognize rle oangei in
lank cieoir expansion wlen unoeiraken ro suppoir lusi-
ness (as opposeo ro nancing goveinmenr oecirs). Yer
rle ciicularion cieoir rleoiy o rle riaoe cycle (oevelopeo
in pair i i i, claprei v) slows rle weakness in rlis rlink-
ing. Tlar is wly Mises leie aovocares a complere pioli-
lirion on rle issuance o new ouciaiy meoia, since le
lelieves ir is rle only suie way ro avoio uruie ciises rlar
will inevirally oiscieoir capiralism. (`ore rlar Misess sug-
gesreo ieoims woulo net riansoim rle lanking sysrem
inro a 1oo-peicenr-ieseive aiiangemenr, lecause rle pie-
viously issueo ouciaiy meoia woulo srill exisr.)
Alrlougl rley aie similai, Misess pioposals (in secrions
ano ) oi cuiiency ieoim in rle geneiic small counriy
Ruiirania veisus rle !nireo Srares aie oieienr. Mises
wanrs ro quickly srop rle iapioly oepieciaring cuiiency o
Ruiirania, rle goveinmenr o wlicl las leen monetizing
its decits. Mises is conrenr ro srop rle oownwaio spiial ly
iesroiing Ruiirania ro eirlei a oollai- oi a golo-exclange
sranoaio. (Recall rlar rle oollai irsel was srill rieo ro golo
ar rle ocial iare o s pei ounce wlen Mises wiore
rlese pioposals.) !oi rle !nireo Srares, Mises wanrs ro
srop rle uirlei issuance o ouciaiy meoiain oioei ro
aiiesr rle loom-lusr cycleano ro iesroie rle classical
golo sranoaio. Tlis larrei oljecrive explains Misess pio-
posal oi alolisling papei nores in oenominarions o s,
::o Stuy Cuic te Thc Thcery ej Mency en Crcit
s1o, ano peilaps s:o, so rlar rle pullic woulo caiiy ull-
weiglr golo coins (srampeo wirl s, s1o, erc.) oi rlese
riansacrions.
..
Cheptcr :: Thc Rcturn te Seun Mency ::1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Restorers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ar a lisroiic paiiry, a move rlar woulo iequiie oearion.
Stabilizers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ly locking in rle cuiienr maiker piice o golo.
Monetizing government decits: Coveiing rle oieience lerween
goveinmenr expenoiruies veisus rax ieceiprs ano loans iom
piivare lenoeis, ly iesoir ro rle piinring piess. ..
::: Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: \lile aovocaring ligl piices ano wage iares
as a panacea ano piaising rle Aominisriarion oi laving
iaiseo narional income . . . ro an unpieceoenreo leiglr,
rley llameo piivare enreipiise oi claiging ouriageous
piices ano pioreeiing. (p. )
:. * Mises wiires (pp. 8) rlar allegeoly piogiessive gov-
einmenrs will nor alanoon rleii mosr oimioalle weapon,
inarion. Yer isnr rlis a veision o rle ciirique o rle golo
sranoaio (pp. :o:1) rlar saio mooein goveinmenrs weie
no longei willing ro ollow rle iules o rle golo-sranoaio
game?
. !n wlar consisrs rle eminence o rle golo sranoaio?
(p. 8)
. \ly ooes Mises (lumoiously) pick rle name Joln Bao-
man oi rle Ruiiranian in one o lis rlouglr expeiimenrs?
(p. )
. \lar is rle incuialle oeecr o rle golo-exclange sran-
oaio (as opposeo ro rle classical golo sranoaio)? (p. 1)
..
k||lN0|Cl!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
avvixbix a
0N Ikl C|k!!|||CkI|0N 0|
M0NlIkk\ Ikl0k|l!
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Outline
. Cata||act|c aa6 kcata||act|c Meaetar 0ectr|ae
Money is sucl an impoiranr pair o economic lie rlar wiireis ana-
lyzeo ir leoie rle oevelopmenr o orlei aieas o economic rleoiy.
!ven arei rle oevelopmenr o catallactics ano rle mooein suljec-
rive rleoiy o value, acarallacric rleoiies o money peisisr. Yer a
necessaiy conoirion o a sarisacroiy rleoiy o money is rlar ir is
emleooeo in a moie geneial rleoiy o exclanges, wirlin wlicl
exclanges involving money aie meiely a componenr.
!conomic rleoiy is oiculr, ano iequiies rlar rle economisr
isr consioei rle oimarion o piices in rle case o oiiecr exclange.
Yer evenrually rle analysis musr le geneializeo ro incluoe inoiiecr
exclange ano rle iole o money, oi else rle conclusions may go
asriay.
z. Ihe !tate Iheer ef Meae
Tle Srare rleoiy o money claims rlar rle value o money iesrs
on rle aurloiiry o rle liglesr civil powei, iarlei rlan leing rle
iesulr o valuarions in rle maiker. Alrlougl irs pioponenrs may
nor iealize ir, rle Srare rleoiy o money ooesnr even arrempr ro
::
:: Stuy Cuic te Thc Thcery ej Mency en Crcit
explain rle puiclasing powei o money, wlicl is rle piimaiy pui-
pose o a moneraiy rleoiy.
. !champeters kttempt te |erma|ate a Cata||act|c
C|a|mIheer
As an analogy, ir is accepralle ro call money a claim on rle geneial
srock o gooos. Yer rle norion o money as a claim cannor seive as
an acrual rleoiy o money, seeking ro explain rle exclange iario
lerween money ano all orlei gooos ano seivices. Sclumperei las
maoe an arrempr ro oo so, lur le was oiceo ar rle ourser ro excluoe
loaios ano orlei impoiranr ieal-woilo oereiminanrs o rle value
o money. !is ailuie illusriares rlar ir is a oeao eno ro analyze
money as a claim.
. Meta|||sm
Knapp oenes metallism as rle moneraiy oocriine claiming rlar
rle unir o value is a ceirain quanriry o meral. Knapps oenirion
is uncleai, lur le uses rle reim ro incluoe all rlose rleoiies o
money rlar aie net nominalistic.
;. Ihe Ceacept Meta|||sm |a W|eser aa6 |h|||ppe|ch
Knapps cumleisome classicarion scleme las unoirunarely leen
aoopreo ly orlei economisrs, allowing rle conusion in lis woik
ro seep inro rleiis.
6. Nete: Ihe ke|at|ea ef the Ceatreers a|eat Nem|aa||smte
the |re||ems ef the Iwe laq||sh !chee|s ef 8aak|aq Iheer
Some wiireis, inuenceo ly Knapp, inreipiereo rle clasl lerween
rle Cuiiency ano Banking Sclools as a clasl lerween merallism
Hppcnix H: On thc C/essi.etien ej Menctery Thcerics ::
ano nominalism. !owevei, rlis is nor ieally rle ciux o rleii aigu-
menr. Because le oisoaineo rleoiy alrogerlei, Knapp was unalle
ro even expiess rle acrual conrioveisy lerween rle rwo !nglisl
sclools o rlouglr on lanking. ..
::8 Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Notes
!n rlis claprei (e.g., pp. ano ), Mises iejecrs rle rle-
oiy rlar rle value o money equals rle value o rle piecious
merals. Tlis may suipiise some ieaoeis, since rliouglour
rle look Mises cleaily enooises rle classical golo sranoaio,
ano le also srares rlar people in commeice (iiglrly) evalu-
are coins on rleii meral conrenr, nor on rle sramp placeo
ly rle legislaruie. !owevei, rleie is no conriaoicrion leie.
Mises agiees rlar rle moneraiy unir sloulo ulrimarely le
a xeo weiglr o golo (oi anorlei commooiry). !owevei,
ro explain rle te/uc (oi rle puiclasing powei) o rlar
moneraiy unir, one neeos a rleoiy o inoiiecr exclange,
giounoeo in rle suljecrive rleoiy o value.
!n lis ciirique o Sclumperei (in secrion i i i), Mises ex-
plains rlar a sarisacroiy rleoiy o money musr rake inro
accounr all oereiminanrs o irs puiclasing powei, incluo-
ing loaios. !oi example, i people in rle communiry
lecome eaiul ano riy ro accumulare an exria monrls
woirl o expenses in rle oim o casl, rlen orlei rlings
equal rle puiclasing powei o money will iise (i.e., piices
will all). A rleoiy rlar oisiegaioeo rle iole o loaios
woulo le unalle ro explain wly rle value o money
clangeo.
..
Hppcnix H: On thc C/essi.etien ej Menctery Thcerics ::p
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Terminology
Catallactics: Tle sruoy o exclanges oi (moie naiiowly) rle sruoy
o moneraiy exclanges, wirl an emplasis on rle oereimina-
rion o piice iarios.
Metallism: As oeneo ly Knapp, rle moneraiy oocriine claiming
rlar rle unir o value is a ceirain quanriry o meral.
Nominalism: Tle moneraiy oocriine claiming rlar rle unir o
value oeiives iomrle goveinmenrs oesignarion o rle legal-
renoei unir o accounr. ..
:o Stuy Cuic te Thc Thcery ej Mency en Crcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Questions
1. !xplain: Tleie aie piollems o rleoiy ull compielen-
sion o wlicl can le arraineo only wirl rle aio o rle
rleoiy o inoiiecr exclange. To seek a solurion o rlese
piollems, among wlicl, oi example, is rle piollem o
ciises, wirl no insriumenrs lur rlose o rle rleoiy o oiiecr
exclange, is inevirally ro go asriay. (p. :)
:. !xplain: !acrs oo nor speak, rley neeo ro le spoken e/eut
ly a rleoiy. (p. )
. !xplain: Tle Srare Tleoiy o moneyano all acarallacric
rleoiies o money in geneiallieaks oown nor so mucl
lecause o rle acrs, lur lecause ir is nor alle so mucl as
ro arrempr ro explain rlem. (p. )
. !xplain: !n a sriicr ano exacr sense . . . all money rlar is nor
clanging owneis ar rle veiy momenr unoei consioeiarion
is awairing employmenr. `eveirleless, ir woulo le incoi-
iecr ro call sucl money unemployeo, as pair o a ieseive
ir sarises a oemano oi money, ano consequenrly ulls
rle claiacreiisric uncrion o money. (p. 1)
. oes Mises rlink rlar rle papei money expeiiences o rle
wai yeais pose a ieurarion o carallacric rleoiies o money?
(pp. 8o81)
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
Certicates
|
Tle rianslarois nore in Appenoix B is sel-explanaroiy ano
neeos no summaiy leie. !owevei, we lave iepioouceo rle
rianslarois excellenr oiagiam ro illusriare rle Misesian clas-
sicarion scleme iegaioing oieienr moneraiy conceprs.]
:1
6|0!!kk\
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aleatory: epenoenr on clance, luck, oi an unceirain ourcome.
Banker: A peison wlo lenos our orlei peoples money.
Banking School: An !nglisl sclool o rlouglr wlicl aigueo rlar
rle lanks weie incapalle o inoepenoenrly alreiing rle iare
o inreiesr oi rle puiclasing powei o money, lecause rle
maiker woulo use cleaiing opeiarions, lills o exclange, ano
orlei reclniques ro ieceive rle cieoir ir oemanoeo oi lusi-
ness puiposes.
Banknotes: Papei nores issueo ly lanks, rypically enrirling rle
leaiei ro a specieo amounr o rle money gooo.
Bill of exchange: A non-inreiesr-leaiing wiirren oioei rlar linos
one pairy ro a pay a xeo sum o money ro anorlei pairy ar
a specieo uruie oare oi upon oemano. A lill o exclange
is geneially rianseialle rliougl enooisemenr.
Bimetallist legislation: !oirs ly rle goveinmenr ro esrallisl a
xeo conveision iario lerween golo ano silvei. !oi example,
rle goveinmenr miglr iequiie rlar meiclanrs wlo posr a
piice in golo ounces, also accepr paymenr in silvei ounces ar
a xeo mulriple o rle golo piice.
Cable rate: Slang useo ly oieign-exclange riaoeis ro oenore rle
exclange iare lerween rle !.S. oollai ano Biirisl pouno
sreiling.
:
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Capital consumption: A meraploi oenoring rle ieoucrion in cap-
iral lecause o a ailuie ro ieinvesr enougl our o cuiienr
ourpur.
Capitalist: A peison wlo lenos our lis oi lei own money.
Cash (verb): To ieoeem a claim (sucl as a lanknore) ly paying rle
specieo amounr o rle money gooo.
Cash ow: Tle srieam o money paymenrs ovei rime oue ro an
asser oi collecrion o assers.
Catallactics: Tle sruoy o exclanges oi (moie naiiowly) rle sruoy
o moneraiy exclanges, wirl an emplasis on rle oereimina-
rion o piice iarios.
Circulation Credit: A loan gianreo even rlougl rle lenoei ooes net
saciice rle use o piesenr gooos. Ciicularion cieoir involves
rle use o ouciaiy meoia.
Circulation credit theory of the trade cycle: Tle rleoiy oevelopeo
ly Mises (in rle piesenr look) explaining rle loom plase o
rle lusiness cycle as oue ro rle airicial expansion o lank
cieoir, maoe possille ly ouciaiy meoia. Tle lusr is rlen
ineviralle, as capiral gooos aie malinvesreo ouiing rle loom.
Classical gold standard: Tle sysrem ly wlicl a counriys cuiiency
is ieoeemalle on oemano oi a xeo weiglr o golo. !n
Misess usage, unoei a classical golo sranoaio, a poirion o
rle cirizens casl lalances consisrs o acrual golo coins ano
lullion ro le useo oi making puiclases.
Clearing systems: Aiiangemenrs rlar cancel our oi cleai iecipio-
cal nancial claims, so rlar only ner claims neeo le serrleo
rliougl rle acrual riansei o money.
C/essery :
Commodity Credit: A loan gianreo rliougl rle ienunciarion o rle
use o piesenr gooos ly rle lenoei. Commooiry cieoir may
involve money ceiricares lur nor ouciaiy meoia.
Commodity money: A common meoiumo exclange rlar is an eco-
nomic gooo in irs own iiglr, valueo oi nonmoneraiy iea-
sons.
Convertible Treasury notes: Papei nores issueo ly rle goveinmenr
rlar enrirle rle leaiei ro ieoemprion in money upon oemano.
Cover (of note issue): Assers lacking rle issue o new lanknores.
epenoing on rle iegularions, a lank miglr issue ouciaiy
meoia nor lackeo ly money irsel, lur lackeo ly anorlei
asser sucl as a commooiry lill.
Credit: Tle aliliry ro ieceive piesenr gooos in exclange oi rle
piomise o oeliveiing (rypically a giearei numlei o ) uruie
gooos.
Credit balance of payments: Tle siruarion occuiiing wlen rle peo-
ple o a counriy collecrively speno less on oieign gooos ano
assers rlan vice veisa. !r is serrleo ly an inow o money ro
rle counriy.
Credit intermediaries: !nsrirurions rlar acr as mioolemen le-
rween lenoeis ano loiioweis.
Credit money: A common meoium o exclange rlar is a claim on a
peison oi legal peison (sucl as a coipoiarion oi goveinmenr
agency), nor alling oue unril a (possilly unceirain) uruie
oare.
Currency peg: Tle vaiialle ano nonlegally-linoing iare ar wlicl a
goveinmenr is cuiienrly mainraining irs cuiiencys exclange
iare againsr golo.
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Currency School: An !nglisl sclool o rlouglr wlicl aigueo rlar
rle lanks causeo economic ciises rliougl rle expansion
ano conriacrion o cieoir. !owevei, rle Cuiiency Sclool
rlouglr rle suppiession o rle issue o ouciaiy meoia in
rle oim o lanknores (wlicl was cooieo in Peels Acr)
woulo solve rle piollem, lecause irs memleis eiioneously
excluoeo oemano (oi cuiienr accounr) oeposirs iom rleii
analysis.
Current accounts (in banking): Accounrs lelo wirl a lank, giving
rle ownei rle aliliry ro wiire oiars oi wirloiawmoney upon
oemano. (Tooay a sranoaio clecking accounr woulo le an
example.)
Debase: To oilure rle value o rle money, oi 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 o a counriy collecrively speno moie on oieign gooos
ano assers rlan vice veisa. !r is serrleo ly an ourowo money
iom rle counriy.
Deation: A ieoucrion in rle quanriry o money rlar is nor oser
ly a all in rle oemano oi ir, sucl rlar piices reno ro all.
(`ore rlar rlis is a reclnical economic oenirion, nor neces-
saiily laving rle connorarions o oearion in populai ois-
cussions.)
Deposit banking: Banking rliougl rle use o ciicularion cieoir,
wleie rle lank ieceives oeposirs inro cuiienr accounrs iom
one gioup o clienrs in oioei ro make loans ro anorlei gioup
o loiioweis. Tle oeposirois consioei rlis money ro le pair
o rleii casl lalances, even rlougl mucl o ir las leen lenr
our ro orleis.
C/essery :
Devaluation: Tle siruarion in wlicl a counriy on rle exille sran-
oaio announces a laige oiop in rle value o irs cuiiency
againsr golo.
Direct exchange: An exclange in wlicl lorl pairies inreno ro
oiiecrly use rle ieceiveo gooo, eirlei in consumprion oi pio-
oucrion.
Division of labor: Tle siruarion in wlicl people specialize in pai-
riculai occuparions, piooucing ai moie rlan rley peisonally
can consume, ano riaoe away rleii suiplus ro ieceive some
o rle suiplus cieareo ly orleis.
Equilibriumrate of interest: Tle iare o inreiesr coiiesponoing ro
rle riue supplies o capiral gooos ano consumei pieeiences
oi piesenr veisus uruie consumprion. Also known as rle
naruial iare o inreiesr.
tatism(as theory): Tle oocriine o rle omniporence o rle Srare.
tatism(as policy): Tle arrempr ro iegulare all social ano economic
aaiis ly aurloiirarive commanomenr ano piolilirion.
Exchange rate: Tle iario ar wlicl one cuiiency riaoes againsr
anorlei in rle oieign-exclange maiker.
Exchange value: Tle signicance o a gooo oue ro irs aliliry ro le
riaoeo oi orlei gooos. (!xclange value can le qualieo as
eirlei suljecrive oi oljecrive.)
Fiat money: Acommon meoiumo exclange accepreo nor lecause
o irs reclnological piopeiries, lur lecause o a special
legal oesignarion piovioeo ly rle appiopiiare aurloiiry. !iar
money is nor lackeo up ly anyrling else.
:8 Stuy Cuic te Thc Thcery ej Mency en Crcit
Fiduciary media: Money sulsrirures issueo ovei ano alove rle
money (in rle naiiowei sense) lelo in rle ieoemprion uno.
!iouciaiy meoia aie unlackeo.
Fixed capital: Assers emlooieo in ouialle invesrmenrs sucl as ac-
roiies ano specializeo equipmenr rlar will le useo ovei a long
peiioo.
Flexible standard: Tle sysrem ly wlicl a counriys cuiiency is
ieoeemalle oi a vaiialle weiglr o golo, ro le announceo
ly rle goveinmenr ar irs oiscierion.
Foreign-exchange controls: Coveinmenr iesriicrions on rle mai-
ker oi oieign cuiiencies.
Foreign-exchange rate: Tle exclange iario lerween a oomesric
ano oieign cuiiency.
Forward contract: Similai ro a uruies conriacr, rlougl a oiwaio
conriacr is nor sranoaioizeo. !uirleimoie, rleie is no oaily
maiking-ro-maiker. n rle oeliveiy oare, rle luyei pays rle
oiwaio piice as oiiginally specieo in rle conriacr. Tlus rle
oiwaio conriacr can aclieve a posirive oi negarive maiker
value, as conoirions clange ano cause rle acrual spor piice
(on rle oeliveiy oare) ro move alove oi lelow rle oiiginally
specieo oiwaio piice.
Free banking (among modern Austrians): Tle oocriine loloing rlar
a iee maiker in lanking will pick rle oprimal iacrion o
ieseives, wlicl may le lelow 1oo peicenr. !iee lanking
rleoiisrs oo nor lelieve rlar rle issue o ouciaiy meoia
pei se causes rle lusiness cycle, only rlar excess quanriries
o ouciaiy meoia oo, ano rlar sucl an ourcome is almosr
always associareo wirl goveinmenr-suppoireo issues o ou-
ciaiy meoia.
C/essery :p
Free good: A gooo rlar las a piice o zeio, lecause ir is nor scaice.
Tleie is enougl o rle gooo ro sarisy all luman wanrs rlar
ir can reclnically ulll.
Freely-vacillating currency: A cieoir oi ar cuiiency rlar las no
ocial peg ro golo ar all. !rs maiker piice ucruares jusr as
any commooiry.
Futures contract: A sranoaioizeo conriacr, riaoeo on an oiganizeo
exclange, wleie rwo pairies agiee ro exclange a gooo ar
a specieo piice (rle uruies piice) ar a specieo uruie
oare (rle oeliveiy oare). As conoirions clange ano alrei rle
uruies piice peiraining ro rle oeliveiy oare, rle exclange
will cieoir oi oelir rle accounrs o rle luyei ano sellei o
rle oiiginal uruies conriacr on a oaily lasis ro ieecr rle
clange. (! rle uruies piice goes up, rle luyei gains ano rle
sellei loses, erc.) Tlese oaily episooes o maiking-ro-maiker
iesroie rle maiker value o rle uruies conriacr irsel ro zeio.
!pon oeliveiy, rle sellei o rle uruies conriacr oeliveis rle
gooo, wlile rle luyei pays rle cuiienr spor piice oi rlar
oare, net rle uruies piice as oiiginally specieo.
Gold-exchange standard: Tle sysrem ly wlicl a counriys cui-
iency is ieoeemalle on oemano oi a xeo weiglr o golo,
rlougl somerimes only ly orlei goveinmenrs ano cenrial
lanks. !n Misess usage, unoei a golo-exclange sranoaio
rle cirizens useo only papei nores in eveiyoay riansacrions,
wlile rle acrual golo was sroieo in lank oi goveinmenr
vaulrs.
Gold standard: Tle aiiangemenr ly wlicl a narions money (sucl
as rle !.S. oollai oi rle Biirisl pouno) can le ieoeemeo oi
a oenire weiglr o golo.
:o Stuy Cuic te Thc Thcery ej Mency en Crcit
Golden rule (of bank lending): Marcling rle maruiiries o assers
ano lialiliries, so rlar rle lank is nor oepenoenr on rle alil-
iry ro ioll ovei maruiing oelr. ! a lank ooes nor ollowrle
goloen iule, incieases in sloir-reiminreiesr iares can leao ro
oisasrei, wlen rle lank musr pay irs own cieoirois wlile irs
assers aie nor yer oue.
Goods of higher orders: Cooos useo ro pioouce consumei gooos.
(Acapiral gooo useo ro pioouce a consumei gooo is a secono-
oioei gooo. A capiral gooo useo ro pioouce a secono-oioei
gooo is a rliio-oioei gooo, erc.)
Goods of the rst order: Consumei gooos.
Greshams Law: Populaily summaiizeo as lao money oiives our
gooo, rle plenomenon ly wlicl people will lolo money
rlar is unoeivalueo ly legislarion, ano will speno rle money
rlar is oveivalueo ly legislarion. !oi example, i limerallisr
legislarion iequiies rlar meiclanrs accepr silvei ano golo ar
rle iario o 1-ro-1, wlen in acr rle acrual maiker exclange
iare is :o-ro-1, rlen eveiyone will riy ro luy wirl silvei, ano
no one will use golo oi making puiclases. Colo will seem
ro oisappeai, ano only silvei will le useo in commeice. !oi a
oieienr example, i rle goveinmenr passes legal renoei laws
on all goveinmenr-srampeo coins, rlen coins wirl low meral
value (sucl as !.S. quaireis minreo in rle yeai :ooo) will cii-
culare in riaoe, wleieas coins wirl ligl meral conrenr (sucl
as !.S. quaireis minreo in rle yeai 1po) will le loaioeo ly
people wlo iecognize rle value o rle silvei.
Hedging transaction: A nancial 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 ourpeioim mosr orlei srocks miglr go long ly pui-
clasing seveial rlousano slaies o ir. Bur ro leoge limsel
C/essery :1
againsr a geneial all in rle maiker, le miglr also go sloir
an inoex uno loloing all rle srocks in rle S&P oo. Tlus,
even i XYZ alls in piice, rle invesroi will srill make money,
so long as Srock XYZ oiops ly a smallei amounr rlan mosr
orlei srocks.
Hoards (noun): People wlo accumulare laige casl lalances in cei-
rain ciicumsrances, allegeoly counreiacring rle pieoicrions
o a nave quanriry rleoiy o money.
Hypothecary loans: !oans gianreo wirl an asser sucl as ieal esrare
seiving as collareial.
Illusive standard: Tle sysrem ly wlicl a counriys cuiiency is
peggeo ro golo ar nonmaiker iares. Tle exclange iare is
mainraineo nor rliougl rle manipularion o golo ieseives
lur iarlei rliougl rle enoicemenr o oieign-exclange
conriols.
Indirect exchange: An exclange in wlicl ar leasr one pairy inrenos
ro lolo rle ieceiveo gooo, in oioei ro riaoe ir away in rle
uruie oi somerling else.
Ination: An inciease in rle quanriry o money (in rle lioaoei
sense o rle reim) rlar is nor oser ly a coiiesponoing
inciease in rle oemano oi money (in rle lioaoei sense o
rle reim), wirl rle necessaiy iesulr leing a all in rle pui-
clasing powei o money. (`ore rlar rlis is a reclnical eco-
nomic oenirion, nor necessaiily laving rle connorarions o
inarion in populai oiscussions.)
Ination tax: Tle ieoisriilurion o wealrl iom rle cirizeniy ro
rle goveinmenr (oi irs oesignareo leneciaiies) rliougl
inarion.
:: Stuy Cuic te Thc Thcery ej Mency en Crcit
Inationism: Moneraiy policy rlar seeks ro inciease rle quanriry
o money.
Institutional unemployment: Tle siruarion wleie woikeis aie qual-
ieo ano willing ro accepr jols ar pievailing wage iares, yer
cannor no employeis ro liie rlem.
Interest: !ncome acciuing ro rle ownei o uruie gooos as rley
maruie inro piesenr gooos, oue ro rle liglei valuarion
placeo on piesenr veisus uruie gooos.
Lawof diminishing marginal utility: Tle iule, oeoucille iom rle
naruie o economizing acrion, rlar eacl aooirional unir o
a gooo oi seivice will lave a lowei value, lecause a peison
will allocare successive unirs ro sarisying enos rlar aie less
ano less impoiranr.
Legal tender: An irem rlar rle goveinmenr oeclaies ro le valio oi
rle paymenr o oelrs oenominareo in money, ar pai value.
Liquid (adjective): Tle aliliry o leing solo oi rle ull maiker
piice wirl a veiy sloir seaicl rime. (!oi example, a slaie
o coipoiare srock is mucl moie liquio rlan a louse.)
Liquidity: Tle siruarion in wlicl an insrirurions assers will oelivei
a casl owallowing ir ro pay irs lialiliries on rime. (All liquio
enreipiises aie also solvenr, lur nor necessaiily vice veisa.)
Loan banking: Banking rliougl rle use o commooiry cieoir,
wleie rle lank ieceives loans iom one gioup o saveis in
oioei ro irsel make loans ro anorlei gioup o loiioweis.
Tle saveis oo nor consioei rlis money as pair o rleii casl
lalances ouiing rle reim o rle loan ro rle lank.
Lower gold point: !noei rle golo sranoaio, rle minimum maiker
piice o golo (quoreo in a counriys cuiiency) lenearl wlicl
C/essery :
ir is pioralleincluoing all cosrs o rianspoir, ie-coinage,
erc.oi cirizens ro impoir golo ano exclange ir wirl rle
aurloiiries ar rle ocial ieoemprion iare oi rle oomesric
cuiiency.
Market value: Synonymous wirl rle oljecrive exclange value o a
gooo, rypically quoreo in money reims.
Mediumof exchange: Agooo rlar is accepreo in exclange, wirl rle
inrenrion o riaoing ir away ro acquiie somerling else in rle
uruie.
Metallism: As oeneo ly Knapp, rle moneraiy oocriine claiming
rlar rle unir o value is a ceirain quanriry o meral.
Mixed economy: An economy possessing aspecrs o lorl capiral-
ism ano socialism, in wlicl piivare inoiviouals ierain nom-
inal owneislip o rle means o piooucrion, lur rle gov-
einmenr exrensively iegulares rleii use o rlis piopeiry,
incluoing wages, inreiesr iares, ano orlei piices ser on rle
maiker.
Monetary policy: Coveinmenr oi cenrial lank eoirs ro alrei rle
puiclasing powei o money.
Monetizing government decits: Coveiing rle oieience lerween
goveinmenr expenoiruies veisus rax ieceiprs ano loans iom
piivare lenoeis, ly iesoir ro rle piinring piess.
Money: A meoium o exclange rlar is geneially accepreo in rle
communiry. Money rypically sranos on one sioe o viirually
eveiy exclange.
Money certicates: Money sulsrirures rlar aie ully lackeo ly
money (in rle naiiowei sense).
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Money cranks: Veiy nave wiireis wlo lelieve rlar scaiciry is an
airicial insrirurional consriainr, ano rlar piospeiiry iequiies
only a sucienr willingness ro cieare moie money ano/oi
issue moie lank cieoir.
Money in the broader sense: Tle acrual money gooo (wlerlei
commooiry, ar, oi cieoir money), plus money sulsrirures.
Money in the narrower sense: Tle acrual money gooo (wlerlei
commooiry, ar, oi cieoir money), nor incluoing money sul-
srirures.
Money substitute: A peiecrly secuie ano insranrly ieoeemalle
claim on money, wlicl irsel ciiculares as money (in rle
lioaoei sense) lecause ir ullls rle uncrions o money.
Money rate of interest: Tle iare o inreiesr oereimineo in rle mai-
kerplace oi loans o money. (Tle money iare can oeviare
iom rle equililiium |oi naruial] iare o inreiesr, in a pio-
cess rlar is explaineo in pair i i i o rle look.)
Nave inationism: !narionism suppoireo ly rle lelie rlar
money consrirures wealrl.
Nominalism: Tle moneraiy oocriine claiming rlar rle unir o
value oeiives iomrle goveinmenrs oesignarion o rle legal-
renoei unir o accounr.
Objective exchange value of money: Tle possililiry o olraining a
ceirain quanriry o orlei gooos in exclange oi a unir o
money.
Objective theory of value: An explanarion o value rlar ielies on rle
oljecrive piopeiries o a gooo, sucl as irs cosr o piooucrion
oi rle amounr o laloi rlar wenr inro irs consriucrion. (Tle
C/essery :
classical economisrs, sucl as AoamSmirl ano avio Ricaioo,
lelo an oljecrive rleoiy o value.)
Paper standard: Tle aiiangemenr ly wlicl rle goveinmenr ooes
nor ieoeem papei nores oi a piecious meral. (A papei sran-
oaio sranos in conriasr ro a golo sranoaio.)
Parallel Standard: Amoneraiy sysremin wlicl rwo oieienr gooos
lorl seive as monies. (!oi example, golo ano silvei miglr
lorl seive as money unoei a Paiallel Sranoaio.)
Peels Act [Bank Charter Act ]: An impoiranr legislarive acr rlar
rook rle powei o issuing newnores away iompiivare lanks
ano vesreo ir complerely wirl rle Bank o !nglano, wlicl
irsel was iequiieo ro mainrain 1oo peicenr merallic lack-
ing oi any new nores rlar ir issueo. !owevei, rle Acr ciu-
cially oio net impose sucl a iesriicrion on rle exrension o
oeposirs, meaning rlar piivare lanks coulo cieare moie ou-
ciaiy meoia ly gianring loans (nor lackeo ly golo) ro rleii
cusromeis.
Price controls: Coveinmenr oeciees rliearening nes oi orlei
punislmenr oi people riaoing ar piices rlar aie eirlei roo
ligl (in rle case o a piice ceiling) oi roo low (in rle case o
a piice ooi).
Price of money: Tle quanriry o gooos (oi seivices) rlar musr le
given up in exclange ro acquiie a unir o money.
Prices: Tle maiker exclange iarios lerween vaiious gooos ano sei-
vices. !n a moneraiy economy, piices aie rypically quoreo in
reims o rle money gooo.
Private capital: Tle aggiegare o rle piooucrs rlar seive as a
means ro rle acquisirion o gooos.
: Stuy Cuic te Thc Thcery ej Mency en Crcit
Purchasing power: Tle amounr o gooos ano seivices rlar a unir
o money can commano lecause o rle vaiious piices in rle
maiker.
Purchasing power/ination premium: An inciease in rle conriac-
rual iare o inreiesr oue ro rle expecreo iise in piices.
Purchasing Power Parity: Tle rleoiy sraring rlar rle exclange
iario lerween rwo monies is oereimineo ly rle iespecrive
exclange iarios o eacl money ano orlei gooos ano seivices.
Quantity theory of money: An olo oocriine explaining clanges in
rle puiclasing powei o money ly ieeience ro rle quan-
riry o money ano rle oemano ro lolo ir. (Tleie aie many
veisions o rle quanriry rleoiy, wirl rle moie meclanical
oneswlicl posir rlar a ooulling o rle money srock will
leao ro a ooulling o all piicesleing olviously wiong.)
Real wages: \age iares ielarive ro rle piices o gooos ano seivices.
Regression Theorem: Misess aigumenr rlar rle cuiienr puiclas-
ing powei o money is inuenceo ly peoples memoiy o
yesreioays puiclasing powei. Tle causaliry is riaceo lack
in rime, unril rle poinr ar wlicl rle money gooo was valueo
as a iegulai commooiry in oiiecr exclange.
Restorers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ar a lisroiic paiiry, a move rlar woulo iequiie oearion.
Restrictionism/Deationism: Moneraiy policy rlar aims ar iaising
rle oljecrive exclange value o money.
Scale of values: An analyrical rool ly wlicl rle economisr inrei-
piers rle acrions o an inoivioual, wlo suljecrively ianks pai-
riculai unirs o gooos ano seivices in oioei iommosr ro leasr
impoiranr.
C/essery :
Seigniorage: Tle oieience lerween rle maiker value o money
ano rle cosr ro pioouce ir.
Shortages: A sloirall in rle quanriry o gooos oeieo oi 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 o rle piooucrs inrenoeo
oi employmenr in uirlei piooucrion.
Solvency: Tle siruarion in wlicl rle maiker value o an insriru-
rions assers exceeos irs lialiliries.
Stabilizers: Tlose wlo wanr a counriy ro ieruin ro a golo sranoaio
ly locking in rle cuiienr maiker piice o golo.
Subjective theory of value: An explanarion o value rlar ielies on
inoiviouals suljecrive iankings o pairiculai unirs o gooos
ano seivices. (Tle so-calleo Maiginal Revolurion o rle
eaily 18osspeaileaoeo ly Cail Mengei, \illiam Sranley
Jevons, ano !on \aliasoveiruineo rle oljecrive rleoiy
o value ano usleieo in rle suljecrive rleoiy.)
Subsistence fund: A concepr useo ly Bolm-Baweik ro oenore rle
savings rle capiralisrs musr lave isr accumulareo, in oioei
ro eeo ano orleiwise suppoir rle woikeis as rley engage in
rime-consuming piooucrion piocesses.
Token coins: Coins rlar seive as iepiesenrarives o money (usually
in veiy small oenominarions), even rlougl rley oo nor con-
rain rle ull weiglr o meral in rle case o a commooiry
money.
Upper gold point: !noei rle golo sranoaio, rle maximum maiker
piice o golo (quoreo in a counriys cuiiency) alove wlicl
:8 Stuy Cuic te Thc Thcery ej Mency en Crcit
ir is pioralleincluoing all cosrs o rianspoir, ie-coinage,
erc.oi oieigneis ro exclange rle oomesric cuiiency oi
golo (ar rle ocial ieoemprion iare, wlicl is lelow rle cui-
ienr maiker piice), ano lave rle golo slippeo our o rle oiig-
inal counriy.
Use-value: Tle signicance o a gooo oue ro irs aliliry ro le
oiiecrly useo ly rle ownei in consumprion oi piooucrion.
(!se-value can le qualieo as eirlei suljecrive oi oljecrive.)
Value: Tle impoirance rlar an inoivioual places on a pairiculai
unir o a gooo oi seivice.
(Wicksellian) natural rate of interest: evelopeo ly economisr Knur
\icksell, rle lyporlerical iare o inreiesr rlar woulo occui
i gooos weie riaoeo oiiecrly againsr eacl orlei wirlour rle
use o money.
Working capital: Cuiienr assers minus cuiienr lialiliries. Moie
geneially, a measuie o a ims aliliry ro quickly ruin some
o irs assers inro casl in oioei ro nance an expansion.
|N0lK
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B
Bankei, 1, 1
Banking
lusiness o, 1
oeposir, 1o
iacrional ieseive, 1o, 18,
11
iee, 11:
loan, 1o
Sclool, 1, 1, 1o, 1,
::8:p
Banknore, :, 8, 1, 1p, 1
Bills o exclange, 1p, 11
Bimerallism, 8
Bolm-Baweik, !ugen von, 18,
:, 81, 1, 1p8o
Business cycle, 1, 18, 18,
1po, ::o
C
Calle iare, 8
Capiral
consumprion, 1o, 11o
piivare, ,
social, ,
Capiralisr, 1, 1
Ciicularion cieoir, 1, 18,
1p, 1o, 1
Ciicularion cieoir rleoiy o rle
riaoe cycle. Scc Business
cycle
Classical economisrs, 11, 1, 18,
:o
Cleaiing sysrems, 8, 1
Commooiry cieoir, 1, 18,
1o
Commooiry money, :, ::,
p
Cosr o living, 8, 8
Cieoir, 1, 11, 1p
Cieoir money, :, :, :po, ,
8, p, 1, 1po, :o
Cieoir policy, 18p
Cieoir riansacrions, 1oo,
1, 18
Cuiiency Sclool, 1, 18,
1p1p:, 1p, ::8:p
Cuiiency specularion, 1:8:p,
1:
D
earion, 111, 11p, 1:o,
18p, :118
earionism, 111, 11p
:p
:o Stuy Cuic te Thc Thcery ej Mency en Crcit
iminisling maiginal uriliry,
law o, 11, 1
iiecr exclange
oenirion, ,
piice oereiminarion in, 81
iole in rleoiy o money, ,
p, ::, ::
ivision o laloi,
E
!rarism, 1:, 1:, 1:
F
!iar money, :, :, , 8, 8,
1, 11, :o
!iouciaiy meoia, 8, , 1,
1, 18, 1p, 1o, 1,
11, 1, 1,
18, :11, ::o
!islei, !iving, 1, 18, 18ppo
!oieign exclange iare, 8, p:,
1:1, 1o, 1:, :oo8, :11
!oiwaio conriacr, 1op
!uruies conriacr, 1op
G
Colo sranoaio, :, p, 11, 1:o,
1:1, 188, 1888p,
1pp8, :oo, :o, :o11,
:1:
Coloen iule (o maruiiry marcl-
ing), 1
Cooos
consumprion, , 1, 8, 8p,
1
iee, 1
oljecrive exclange value o,
o1
piesenr veisus uruie, 1o,
1, 18, 1p
piooucrion, , 1, 8, 8p,
1
suljecrive exclange value o,
o1
Cieslams !aw, 8
H
!oaios,
!oiwirz, Sreve, 11:
I
!noex numleis, pp1o, 18ppo
!noiiecr exclange
oenirion, ,
emeigence o, ,
ineviraliliry,
ielarion ro ouciaiy meoia,
1p
ielarion ro rleoiy o money,
:o, ::
!narion, 111, 1181p, 1:o,
1:, 18, 18p, 1p8, :o,
:1, :118
!narionism, 111, 1181p,
1:o, 1:, 1::, 1::p
!nreiesr
money iare o, 1, 18,
18:
naruial iare o, 1, 1, 1o,
18, 18:
souice o, 1, 1p
ncx :1
J
Jevons, \illiam Sranley, :o
L
!egal renoei legislarion, :, :p
!iquioiry, :, o, 1, 18p,
1p
M
Maiginal ievolurion, :o
Meoium o exclange, , ,
8o
Mengei, Cail, 8, 1:, :o, p, p,
:, 8, o, 1, 81, 1p
Moneraiy policy, 11::
Money
lioaoei sense, in rle, 18,
1, 1, 1, 18
ceiricares, 8,
commooiry. Scc Commooiry
money
cianks, o, :
cieoir. Scc Cieoir money
oenirion, ,
ar. Scc !iar money
uncrion o, ,
inoex o piices, 1, 1p
measuie o maiker exclange
value, 1
naiiowei sense, in rle, :,
1, 1, 1, 1,
18, 1po, 18
oljecrive exclange value o.
Scc Money, puiclasing
powei o
oiigin o, , , , 1
puiclasing powei o, :, :,
:8, , , po, 8,
p, , p8o, 8,
pp1o1, 1op1o, 111,
1, 18, 1po
quanriry rleoiy o. Scc uan-
riry rleoiy o money
seconoaiy uncrions o, , ,
,
socialism ano, p, 1
souno, 1p:o, :1:
srares inuence on, 8
srare rleoiy o, , 8, p,
:::8, ::
sulsrirure, :, ::, :po,
, p, 11, 1, 1po
supply ano oemano, :,
8, 8, 1, 1
P
Papei sranoaio, :
Paiallel sranoaio, p1
Peels Acr, 1, 18, 188,
1p
Piices
causeo ly suljecrive pieei-
ences, 1, 8, p
conriols on, :8, 1:, 1::8,
1o, 1:, :oo8
Puiclasing powei paiiry, p:, p,
:o
Q
uanriry rleoiy o money, 8,
o, :,
:: Stuy Cuic te Thc Thcery ej Mency en Crcit
R
Regiession rleoiem, 818:
Ricaioo, avio, :o
Rorllaio, Muiiay, 1o, 11:
S
Saving, ielarion ro sulsisrence
uno, 18o
Scale o values, 11, 1, :1, 8:
Sclumperei, Josepl, ::8, :o
Seignioiage, 1
Selgin, Ceoige, 11:
Smirl, Aoam, :o, 1
Solvency, 1, 18p, 1p
T
Token coins, :, :p, 8o, 1
Tiaoe lalance p:p, pp,
11p, 1:1, 1::, 1:8
Tiaoe cycle. Scc Business cycle
U
!nemploymenr, connecrion
wirl inarion, 1p8
!riliry, 11, 1, 181p
V
Value
cosr rleoiy o, 18
oenirion, 11, 1
laloi rleoiy o, 18
measuiemenr o, :1
oljecrive rleoiy o, 11, 1,
18, :o
oljecrive use, :,
suljecrive rleoiy o, 11,
11, 18, :o, 8,
po, 1, :, , 8
suljecrive use, o1, :, ,
8, 8
roral, 1
W
\alias, !on, :o
\icksell, Knur, 11, 1, 18:
\iesei, !iieoiicl von, 18, :1,
:, 8, 8p, 1oo