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: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!
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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
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\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
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
ef
|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