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Carl Mengers Money as Measure of Value

Translated by Gilles Campagnolo

1. Introduction According to the ruling doctrine, the original and major function of money is to measure the value in exchange of goods according to its own exchange value. Thus, one thinks that the value of money is a known magnitude, whereas that of other goods in trade has to be xed by measuring the latter against the former. If we consider that the value of money itself is not a xed magnitude but, on the contrary, undergoes changes according to time and place, then money has been regarded as a very imperfect measure. Hence, less variable ones have been sought, such as labor, for instance, or wheat and recently, combinations of metallic and duciary money have been proposed, and also lastly, various sets of more or less numerous goods. This progress has not changed the opinion about the object at stake. It is still believed that the quantum of value enclosed within a commodity is a magnitude that is unknown and that has to be measured against the quantum of value enclosed in the currency, as if the latter remained known, although variable. This extremely important opinion is based on two misunderstandings, and it is essential to correct them beforehand in order to understand the positive concept of money as a measure of value: (1) The idea that a given value in exchange is a xed quantum inherent in every single good, and (2) the idea that such a quantum, supposedly inherent in each and
History of Political Economy 37:2 2005 by Duke University Press.

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every good, can be measured against the quantum of value contained in the monetary unit. 1. In order to understand how untenable the rst thesis is, it is sufcient to consider that value in exchange is a relation of goods between themselves, and that consequently it could never be xed considering only one good in isolation. In reality, there are many variable relations of exchange, either those of any given goods between themselves, or those of commodities and money. To regard a given exchange value, or some xed exchange power, as belonging to some commodity, is only the consequence of a reasoning through which the cause of the variable exchange relations that we may nd between goods is sought in some exchange power inherent in every single good and, moreover, supposedly measurable against the variable value of money.1 Such a given exchange value is not real at allit is mere speculation derived from real exchange relations, the causes of which are regarded as the property of the objects themselves. This misconception regarding value is still shared by those authors who see the inner causes of the movement of prices in the quantum of exchange value, inherent either in goods or in money. But the same authors forget that the causes that work together for the formation of prices are not (barring the utility of things) any determinants belonging to the object considered in isolation, but rather outer relations, such as between supply and demand or available quantity and needs. Among the causes of the movement of price, one may well distinguish between those regarding currency and those regarding commodities, but such causes are present neither in a silver coin nor in any specic object for sale. If one still wants to say anything with a positive meaning about the exchange value that belongs to some given object (be it money or a commodity), then, by using the term value, one means but the possibility of trading this object for that, a possibility that is essentially determined from the outside, by the conditions of the market. Therefore, the rst misunderstanding that we should point out is to regard the relation in which objects are exchanged, that is to say, a relation that lies essentially outside of the object itself, as some value, both inherently variable and measurable. 2. The second mistake is closely related to this misconception of the exchange value. It lies in the belief that the quantum of value that is
1. [Menger introduces here the concept of purchasing power, though he calls it pouvoir dchange (exchange power) in his text.Trans.]

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assumed to be inherent in every single good nds its measure in the value inherent in the monetary unit. The error of this doctrine blatantly appears when carefully studying the facts where it is believed that one can see how the value of goods is measured against the value of money. The valuation of goods in money greatly resembles the measuring of their value against the value of money,2 but in fact this valuation appears to be something quite different. A bushel enables us to measure unambiguously the space that a heap of wheat occupies. But, when it comes to the evaluation of its exchange value, then neither a crown nor the value of a crown will provide us with the means to do so. The value will therefore be of no use whatsoever for that purpose. In order to know how to value how much our wheat is worthas well as any other good that may be tradedit is important to know the current prices of those items on the market at the very moment we trade. The question is not to measure the so-called value inherent in goods against some supposedly known value of money; the question is to calculate the prices that some goods or some quantities of those goods may reach. This calculation is based upon the present market-price, which must be known by the valuer. Therefore, the function of money as measure of value in its only acceptable meaning implies knowing beforehand the exchange relations that exist between commodities and money. The question is not that of a measure or that of a measurement procedure. If it is futile to suppose the presence of some xed quantum of value within objects, it is not a less serious mistake to fancy that the actual conditions of exchange come from the fact that the value of commodities has been measured against the value of money. Those two mistakes have been misleading in presenting the issue. 2. The Real Issue The role of money as a measure of various values has been better understood in the business world, as well as in jurisprudence and by the economists who are dedicated more to practical matters than to speculation. The former3 nd that the value of a commodity lies in the object
2. [Menger uses the French technical word mesurage here and in the last sentences of the essay, where he underlines it.Trans.] 3. [That is, all the people implicitly or explicitly referred to in the preceding sentence. Trans.]

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that is given in exchangethat is, in the amount of money paid to obtain it. They believe the variable magnitude of those equivalents to be the measure of the variations of this value. In the minds of the general public, if the equivalent in trade of a hundredweight of copper upon some given market is fr. 120,4 of a hundredweight of iron is fr. 10, and of a hundredweight of coal is fr. 2, then those currency equivalents represent the value of those three commodities, and their magnitude signies the proportion of such values respectively hence today, a hundredweight of copper is worth twelve hundredweights of iron and a hundredweight of iron is worth ve hundredweights of coal. If one hundredweight of iron goes up from fr. 10 to fr. 12, then one shall believe that its exchange value also has risen by one-fth. This popular view brings up some reluctance as far as terminology is concerned. One may doubt if it is proper to call a sum of money the value of a commodity. Still, this popular view is at least preserved from suppositious ctions that mar the above theories [numbers 1 and 2 above]. But the popular view itself is impaired by a supposition from which it has to be freed in order to base our present research on truly positive ground. It is the idea that a commodity has but one and the same monetary equivalent in a given market, that is to say that one may equally easily buy or sell the same commodity at the same price in this market. Everyday life experience teaches us that we cannot just resell at the same price, whenever we please, things that we bought, even though no change has occurred in the market. The monetary equivalent of a commodity signies variable quantities that are xed through the price one offers for them and the price one asks for them. There is usually one price for which one may be sure to be able to sell, and another, higher one, for which one is sure to be able to buy. It may be of some practical interest to know the average between those extremes, but the same average is far from accurately telling the exchange value of some given good. The idea that rules our science so muchthat some price is xed by the conditions of the market, at which one could indifferently buy or sellis thus illusory, and experience quickly proves the point. Once this mistake is corrected, the popular idea of exchange value is true (as previously stated at the beginning of this section)although its wording may be criticized. In order to prevent any confusion in the
4. [Of course, fr (more usually abbreviated FF until recently, but not in 1892) stands for francs, the former currency unit in France and some other countries, still of Switzerland and the former French colonies in Africa.Trans.]

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following pages, we shall use the phrase outer exchange value to refer to those equivalents in money that are presented or required. For instance, if one pays the measure of a commodity5 between fr. 9.10 and fr. 9.50, and another between fr. 20.15 and fr. 20.40, then we shall not be making a serious mistake when we call both those quantities of currency the outer exchange value of the two goods. This point of view naturally makes it compulsory to study in its turn the outer value of money (expressed in terms of commodities), as well as its essence, measure, and movements. That issue has recently been raised from many sides, but one cannot ignore the fact that the notion of outer exchange value usually lacks clarity and accuracy when applied to currency. The reason being that the value of the currency that is expressed in terms of commodities does not only change with time and place, but it varies in many degrees and even in different directions according to the kind of commodity used in order to express it. Besides, such a depiction of the value of money through a given commodity (be it iron, wheat, or coal) is but of little help to us, as each commodity presents its own variations. Difculties and complexities that remain in determining the outer value of commodities in money are but childs play in comparison with those hurdles we face with the problem regarding the outer value of money itself. The causes that determine the movements of prices depend on commodities for some and on money for others. There are then some that inuence both simultaneously. One must then wonder which part is played by money in the movements of prices. That is the issue we callfor lack of a better termthe problem of the movement of the inner value of money.6 In presenting the main positive results of our study on this topic, we shall clearly separate the following three issues of somewhat equal signicance: 1. We shall see whether our wealth (or our income) in monetary terms, or our nominal wealth (or our nominal income), can accurately express our real assets (or our real income). That is to say the numerous useful goods that they enable us to use in various circumstancesand conversely, whether the outer value of
5. [Here, the wording is clumsy, as it is in the original French: Si la mesure dune denre . . . se paie . . . Trans.] 6. See Lexis, Zeitschrift fr die gesamte Staatswissenschaft, 1888, vol. 44, p. 221 and following pages.

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currency (value expressed in commodities) varies according to the circumstances and may be measured. (The issue of the outer exchange value of money.) 2. Given that the causes that make prices vary are related to commodities for some and to money for others, and given that it is essential to know if the changes in prices in some cases follow from the latter or the former (that is, from some change in the inner value of the commodity that is considered, or from a change in the inner value of money), then we can wonder if a procedure exists that would enable us to infer from the changes in prices the increase or the decrease of the inner value of money and to measure that variation. (The measure of the movement of the inner value of the currency.) 3. Lastly, we shall see if some goods exist (or if we may discover some goods), the price of which, once expressed in terms of other goods, would vary but by the effect of causes inherent in the latterand, from that effect, we would then be able to determine and measure the changes in the inner exchange value of all other goods. (A stable measure of the inner exchange value of commodities.) 3. The Movement of the Outer Value of Money The quantity of currency at ones disposal at any given time and place is directly proportional to the quantity of objects of any kind that one may provide for oneself with money. Hence, in that case, nominal wealth and nominal income do convey in an accurate enough manner ones real income and wealth. On the contrary, in order that nominal wealththe quantity of crowns at ones disposalmay continue to correspond to ones real wealth at various periods and in various markets, one must take into account changes that occur in the exchange rates between money and the various utilities7: this is a problem with a solution neither easy in theory nor in practice. In order to determine the proportional expensiveness of one identical good in various marketswheat, for instanceone should bring all prices paid down not only to the unit of measure, but also to the unit of
7. [Menger quite surely means here the various levels of utility the agent derives from his purchase of commodities.Trans.]

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some given quality.8 According to the nature of the goods, such a condition may become very difcult and sometimes downright impossible to fulll (as in the case of housing, labor, or cattle). If it does not necessarily concern one sort of good, but a complex set of heterogeneous goods (like the set of items necessary to keep a household), then differences between the goods that are supplied in various markets generate obstacles to the calculation that are nearly impossible to overcome. Yet, the issue is clearly set as soon as statistical data is provided. Given that the prices of each and every item at given times and places are known, one will be able to determine how much more or less every quantity will cost, as well as how much for keeping the household in both cases. On the contrary, one is mistaken when one undertakes to determine the proportional cost of various kinds of commodities in general and taken as a whole, at various times and places, instead of that of one single commodity only, or of one sum of some commodities in a given quantity with a given quality. As a matter of fact, it is obvious that in such calculations, the corresponding quantity of each item that is actually consumed cannot be neglected. The household of a day laborer whose children are numerous will cost more if they live in town than in their village, while the relation will be just the reverse in the case of a wealthy bachelor. Similarly, in the very same place, the total expenses of various households may rise for some and diminish for others, according to the time and to the prices of various commodities. It is an erroneous belief that there exists a variation accurately measurable as regards the price of the whole of the goods in various markets, or at two different given periods. In other words, it is a misunderstanding when one seeks the gure that would accurately express the variations of the currency or its outer value. One can give the percentage of how much the needed amount of money has increased or decreased to buy a given object, or to keep a household according to a given lifestyle during a given span of time, but it is not possible to give any such uniform percentage as far as a composite set of goods is concerned, as the quantities are not xed. It is therefore impossible to precisely say by how much the outer value of the currency has increased or decreased during that period. There exists no measure of the outer movement of money; it is impossible that anyone could nd any.
8. [A unit of measure may be, say, a bushel of wheat, and the quality, say, grade A of the same.Trans.]

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So far, efforts at solving the issue set above have only given results that are theoretically awed and practically insignicant. The variations of the unit price in a series of commodities when passing from one place to another, or from one period to another, have often been listed, and the mean of those gures in each column has been calculated. Thanks to that procedure, one is able to know whether the unit-prices for a certain number of commodities have increased or decreased on average but one will not be able to determine the amount of the variation that has occurred in that set of goods taken as a whole, and even far less the movements of all the prices. A mean that is calculated using data that assigns as much inuence to changes in the prices of cinnamon as it does to changes in the prices of iron or wheat would not be of much practical help and could even lead to mistakes. Others have tried their best to state the currency price of all the commodities consumed in one given place during one given observation period and they then made the corresponding calculation for another period. But, the comparison of both sums still does not enable us to put in equations either the variations of the outer exchange value of currency, or the change that occurred in the price of things generally speaking. The solution found will only be correct for that very sum of those goods, xed as to their quantities and qualities, and fullling the needs of some people who would live exactly in the same way during both periodsbut it will leave us ignorant, or it would be misleading if we wanted to infer from all this the cost of living in various classes of the population. Here there are two issues that get intertwined but should really be kept apart, namely that which seeks the proportion between the prices of one kind of commodity (or of one aggregate set of various commodities in xed quantities) at one moment or another, and on the other hand, that which states the proportional variation identical for all kinds of commodities. It is only through such a proportion that we could get a measure of the movement of the value of money, that is to say, of its outer exchange value. The rst issue posed above has an accurate solution. Given that we know the prices in two separate markets, we can see their proportion and we may thus determine the quantity of currency that is necessary to provide ourselves with a given quantity of some commodity or with some aggregate set of various commodities of some given quality and quantity in this or that marketfor instance, the items required for some household according to a certain class. Conversely, such a solution in the second issue is a priori an impossibility. None could reasonably say in

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an absolute manner that the outer value of money is higher by one-third, respectively lower, in one market than in the other, or that, in a given market, it has moved up or down by one-third. Such statements, even if their wording is precise, can only be taken as approximate summarizations that are meant to be more or less useful in solving the specic issue at stake. 4. The Movement of the Inner Value of Money In exchanging goods, relations are uniformly determined by causes related to the two objects that may be exchanged. But such relations may undoubtedly be modied by causes related only to one of them. Elements that set the price are always distributed on both sides, whereas modifying factors may well belong only to one of them. What we are saying here naturally applies to money, even though one has not always been aware of it. The idea which states that changes in prices may pertain to circumstances related to currency as well as to the objects traded against it, encounters prejudice deeply rooted in people and is not yet familiar to many. Neither the stockholder who is calculating the amount of his wealth, nor the trader writing down his balancesheets, takes into account the variations that may have occurred in the outer value of the currency. How to measure the value of commodities in currency is something well known, but no one thinks of calculating the value of the currency in terms of commodities. As a matter of fact, that would be much more difcult, and it could not even be done accurately. Therefore, changes in the outer value of commodities are examined closely, while nobody studies the reverse phenomenon, which is how the outer value of currency does change. Moreover, this lack of attention leads the general public into making mistakes concerning its inner value. Most are ready to trace all changes in prices back to causes that inuence items that are traded, and also to regard money as remaining outside the sphere of that inuence, as bearing an immutable inner value. Economics, as a science, has overcome this prejudice since the time of Jean Bodin. The most basic analysis of trade will sufce to clarify that the consequences that change the quantity of the present currency, as well as the needs for circulating it, will inevitably bear some weight upon pricesand [it will thus sufce to] dissipate the illusion of an immutable inner value of money. In the eld of science it was necessary to get rid of that illusion in order to raise this issue of practical interest of

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whether variations in the market prices come from causes related either to commodities themselves, or to currency, or lastly to both factors at the same time. Along with this problem can be added that of knowing to what extent these various causes are effective. The answer may rst be sought through an argument based on statistical data. If one were to observe the prices of all commodities that go up or down uniformly, then it would be highly probable that the cause of the phenomenon would be almost indisputablethat it is related to money rather than to commodities. Then there would exist, in that case, a variation in the inner value of money. Still, it would not be impossible from a theoretical standpoint that the general movement of prices would depend upon causes regarding all commodities or, in other words, that a change in their inner value had occurred. In the same way, if a variation in the prices of all the commodities in all the markets were to go in one direction but with uneven intensity, it would allow one to draw the conclusion that causes act through inuencing either commodities or money. However, much more probable is that the causes of such variations could be related only to commodities themselves (which they would then modify unevenly). Conversely, if the quantity of only one goodor some given number of goodswere to go up or down while the others did not move, that would suggest that the causes of such a change must be sought within those goods exclusively. Although, if one wanted to, one could explain that this happens through some change in the value of the currency, counterbalanced through a reverse-direction change in the value of items whose prices would not have changed. Reasoning of this kind may be easily added to. It is based on the general idea that the most likely explanation is that there is some cause of variation in the same direction for the smallest possible number of objects. But the less uniform the variations of the prices arebe it as to their direction or as to their degreethe less probable an explanation of that kind becomes. It never gets beyond mere probability, and, in many cases, it becomes almost untenable. The issue, which is of great practical importance, is whether the observed movement of prices signies a change either in the inner value of the currency, or of the traded items, or lastly of both altogether. A nal answer cannot be found through such a procedure. This procedure most often presents but a poorly reliable probability, and, most frequently, merely nothing. One may measure the variations of the prices that follow in one or the other case; it is not possible to determine them through such a method.

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Another approach frequently followed in order to determine the oscillations of the inner value of money is based upon the observed fact that the prices of commodities move in reverse directions, some falling, others rising. Some economists believe that the causes of increase and decrease in various commodities compensate and neutralize each other so that the gure which would convey the overall difference of the price of commodities between two periods would approximately answer the issue of the change that may have occurred in the inner value of the medium of exchange. In order to get that wished-for gure, many offer to calculate the mean between the quantitative unit-price of every kind of good (this is the very procedure that we criticized above, when discussing the issue of determining the outer value). The proportion they would get would not only signify the change that occurred within the latter [outer value], but also that of the inner value of the currency. This point of view does not necessarily imply confusing the two kinds of value. It could even be possible that the same calculation could be useful in solving both issues. Thus, the argument differs in those two cases. While some consider the gure they got as accurately conveying the change that occurred in the outer exchange value of money, because it corresponds to the average change in the prices of various commodities, others tend to use it so as to measure the change that occurred in the inner value of money, because they consider that it synthesizes the variations of the prices of those commodities. In this synthesis, the effects of the causes of the increase and those of the decrease that belong to commodities are supposedly neutralized. For identical or similar reasons, various authors look at the general amount of the variation between two periods. This gure, which is obtained by taking into account the quantities really consumed, is a gure above all related to the outer value of currency. It is also appropriate to convey the change of its inner value, and, needless to say, the two issues could have been mistaken one for the other. Both methods and their sequels are based on the hypothesis that the overall changes that occur in prices between two periods, and the causes of rises and falls [in the prices of] each kind of commodity, do reciprocally neutralize each other in part, if not totally. Whether such a procedure is legitimate depends upon the accuracy of that hypothesis. Now, it is clear that causes which act in reverse directions upon the price of one and the same commodity do tend to neutralize each other. For instance, if the supply and demand for wheat rise at the same time and in

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the same proportion, the price of wheat will not change. Conversely, the effect on the price of wheat of a rise in its supply will not be affected by a rise in the demand for iron, even if each of both movements happens at its fullest. The variation of the price of one single item results from all the causes that act upon the value of money, as well as upon this very item, but not at all from those acting upon the price of any other commodity. Thus, it is completely impossible to understand how the average or the synthesis of all variations could depend only upon the variations in the value of money. The proportional gures related to the general movement of prices are formed as much through the causes that inuence the value of money as through those related to each commodity in particularand so are the gures of the variations of the price of each commodity. It is denitely unacceptable to think of that as conveying only the movement of the inner value of money. We remind the reader that the raising and lowering causes9 related to each kind of good have not neutralized each other. One of the biggest mistakes which we should point out here seems to be fostered by daily experience, that those high prices in some items for sale are counterbalanced by the increase of others, as far as consequences on the household are concerned. It cannot be neglected, but has to do only with outer value, and denitely bears no relation whatsoever with the issue whether variations in prices which can be observed are due to causes inherent in commodities or in money. The cheap price of some piece of garment may counterbalance the high price of bread for me, and the same effect may be observed with two sets of more or less diversied items, without any consequence to the issue at stake. Through changes in the prices of commoditiesbe they numerous or notthe cost of keeping a household may not have changed, but that fact itself would still not prove that nothing was due to any facts related to currency in those movements of prices. Conversely, the same is true of the cost of keeping some kinds of household, or even of all households: it may vary, but still no variation in the inner value of the currency could be inferred with certainty. Procedures that are used so often are based upon a confusion of the issues at stake. Whereas no one can deny the advantage of such calculations to determine as much as possible the movement of the outer
9. [To translate les causes exaltantes et dprimantes (in the original) as inating and deating would imply taking sides as to whether Menger already dened ination in this text but one may think so.Trans.]

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value of the currency, they tell us nothing about that [movement] of its inner valuethe most important issue of political economy at present.10 Seeking which variations the inner value of money follows is the same as trying to distinguish the variations of the prices of commodities which causes of that change come from money and which from the commodity itself?and then, observing the direction of each one and measuring its inuence. This is essentially an analytic problem, for the solution of which even the most accurate statistics about oscillations due to both kinds of causes will be useless. Whether mean or synthesis, the methods above are inconsistent with the nature of the issue at stake. The latter could be set right but through a theory that would present us with an account of the true causes of the prices and of their changes, insomuch as they come from money, or from commodities respectively and which would allow us to follow and measure the inuence of each of them. Such a theory would show us that causes of variation coming from money and causes coming from goods that money can buy are homogeneous as to their nature and as to their effects, and that they differ only because of the peculiarities of each object that is traded. Therefore, the theory of the variations of the inner value of money can be set but within the theoretical eld and through a general theory of the formation of prices. Once this issue is set, then the questions whether the inner value of money has varied in such and such given case, and how and by how much it has varied, have answers which will surely depend on statistical data. Still, it will not only be necessary to know prices accurately and in detail, but also in the same way the causes of their variations from a theoretical standpoint, as well as in given cases. Attempts at solving the issue at stake without analyzing the factors that determine prices seem to be in vain.
10. Lexis has pushed a bit further his investigations. He starts from the fact that the expense for each kind of goodthat is to say, the value of the quantities consumed by a household or by the whole nationtends to remain approximately the same, as lower prices stimulate consumption while higher prices tend to keep it down. Besides, savings made in buying objects with a diminishing price make it easier for increased consumption of other items, and that also fosters the general result which is that the value in money of the consumed quantities varies much less than the unit-price of each item. The author brings forth those facts in order to determine the inner value of the currency, loc. cit., p. 225 and following pages. See Lehr, Beitrge zur Statistik der Preise, p. 28 and following pages. Nasse in the rst volume of his Handbuch from Schnberg, I, vol. 8, 5, and also the works upon this matter by Drobisch, Jevons, Paasche, and Leslie; nally, Ch. [Carl] Menger, Handwrterbuch der Staatswissenschaften, vol. III, entry Geld, p. 739 and following pages.

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5. The Idea of a Stable Measure of the Outer Value of Goods Undeniably, there is no object that is traded in our markets that can be exchanged at all times against all others according to an immutable proportion. There is none either that is left untouched by all the causes that act to make the prices of others vary. None at last, whose outer value, as well as inner value, remains the same at all times and in all places. The idea of articially building some stable measure of the outer value of the goods that could always be valued everywhere is absolutely untenable, since setting such a measure would imply the stability of all exchange relations between all the goods. On the contrary, it does not seem to me that the attempt at establishing a stable measure of the inner value of things deserves all the contempt it usually gets. The main causes that make prices vary in our marketsthe higher or lower intensity of the needs, the bigger or smaller quantity that is availabledo undeniably inuence all items, including precious metals, used as intermediaries of trade. But this fact alone is not enough, in my mind, to demonstrate the impossibility of nding an object that is traded whose inner value would remain immutable. The causes that make prices change do not inuence all goods with an equal intensity. In a given place, at a given time, the inner exchange value of some kinds of goods is somewhat stable. This fact is important in solving main theoretical issues. The very idea of one good with an absolutely xed inner value does not seem to me one to discard because of the above question. The possibility of decreeing the quantity of some goods that will be brought to the market provides the chance to neutralize the effect of the other causes inherent in those goods that would tend to modify the rate according to which they are traded against others. There does not exist one thing whose inner exchange value is unvarying by nature, but there are some things that are not impossible to make unvarying, such through regulating the quantities that come to the market. This applies especially to the mediums of exchange that the legislative body compels all to receive in payment and the circulation of which the same may regulate, according to its competency. A state or group of states may decree the quantity of currency they issue. Therefore, the idea of a good whose inner value would permanently remain at the same level is not contradictory in itself. This is not something impossible. As far as money is concerned, it is not impossible to

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remove the factors that work together in modifying prices when all things are left in a laisser aller 11 situationand thus one obtains a medium of exchange with an unvarying inner value, in the sense in which we use the word. The latter [the medium of exchange] would enable us to distinguish, in the change in prices, the effect from the causes that act upon the value of commodities. Realizing that idea would imply an accurate knowledge of the various factors of price as well as of the chain of events from which their variations result. Practical difculties would not be less important. Nevertheless, from a theoretical point of view, solving the problem merely implies but a sound knowledge of economics, and its practical solution requires nothing impossible. It is theoretically possible to solve this issue. Let us add that its practical signicanceespecially as relations between debtors and creditors are concernedsets it among those issues where there is an utmost emergency and that ask for earnest endeavors. 6. Money as Measure of Price If one starts from the erroneous idea that, while they trade, both contracting partners must receive goods of an equal value, because otherwise one would always lose as much as the other would gain, then it is necessaryas it has been said a thousand times since Aristotleto have some means of equalizing the values that are exchanged, and therefore, some measure of price. Two quantities that are equal to a third are equal between themselves. If we acquire two goods, or two sets of goods, with the same value amount, then we will also be able to barter them at no loss for either partner, and if there still exists a discrepancy, then we have the means to compensate for it. Money is thus the measure of price in the sense that it allows the exchange of quantities of equal value. The function which is thus attributed to money much resembles that which other theories of the measure of value do ascribe to it, and our argument from principles against the former would also stand against the latter. Still, as we have reasoned that relations of exchange are not determined through any kind of measuring of value, but through the proportion between supply and demand, we must still explain how prices are xed according to any previous measurement.
11. [The original French reads, Il nest pas impossible dliminer, en ce qui concerne largent, les facteurs qui concourraient la modication des prix lorsquon laisse aller les choses. We use the French words that resemble the well-known expression laisser-faire. Trans.]

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The old theory lies upon the idea that the equality of values is the main concern in the exchange process. Now, such a hypothesis is diametrically opposed to the real intentions of the traders. Neither one [partner] nor the other thinks in the least of exchanging some equal value for another equal value: the goal they follow is to satisfy their needs, as much as the resources at their disposal will allow each of them to do. Usually, exchange happens only when each partner believes they can see in it the means to make their economic situation better. People who do business do not care in the least about exchanging equal units, equal quantities of labor, identical production costs, goods of equal economic value, or equal quantities of value enclosed in the exchanged products, or anything similar. If they had such a purpose, it is sure they would nd it quite difcult to act so. But they just do not think in the least of something like that. They trade in order to realize their economic prot, and they consider their mutual advantage when determining the amount of the goods they exchange. Exchange does not require any previous measuring. Goods were being bartered long before money ever became an intermediary of trade. At that time, traders were only concerned about their needs, the quantities at their disposal, and the importance they would give to the objects they could trade, as far as their own status and the status of other households was concerned. The use of metal as an intermediary made trade easier and offered more accuracy to economic calculation, but it did not change the nature of trade. Still nowadays, the effort of everyone to satisfy their own needs, as much as possible, is the determining cause, not only of the fact of exchange in itself, but also of the formation of prices. The goal of people who do business in the markets is to write down some gain under the income column of their balance sheet and, as to expenses, to provide themselves with as much satisfaction as possible through bartering [troquer] money for a commodity. Buying and selling are among the main ways of conveying the universal desire for gain and making ones position better. Money has become the intermediary of exchange, but if it serves well in measuring prices, it is only in the sense that we have just pointed out. The motive for bartering is prot, but more than that, the quantities that are exchanged for each other get xed through the subjective advantage of both subjects.12 One may still be tempted to make an exception in the case when the contracting partners do not x the price by themselves, but when they
12. See my Grundstze der Volkswirtschaftslehre, Vienna, 1871, p. 172.

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exchange xed quantities at the market price. The signicance of that kind of business is for most people likely to be the origin of the error we are ghting against. But in that exceptional case itself, exchange is not based upon the measure of some quantum of value, but upon the price that has been established in the market under the ruling motives that have just been mentioned, and each of them [the partners] has played a part in setting that very price according to how they may benet the most. Charles Menger,13 Professor at the University of Vienna

13. [The rst name of the author (Carl) was changed into its French equivalent, which was common practice at that time.Trans.]

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