Friedrich A. Hayek, “The Exchange Value of Money: A Review” (1929)

Hayek’s review of Hans Neisser’s Der Tauschwert des Geldes is both appreciative and methodologically guarded. He presents the book as a disciplined synthesis of monetary theory rather than as a radically original intervention, and he repeatedly distinguishes its genuine analytical merits from what he sees as the dubious status of its organizing object: the “general” value of money or price level.

Yet, as an investigation into the factors determining the price level – given that this concept can have any theoretical significance attributed to it – the work has definite merits, and like every careful inquiry it has much of value to offer even to those who set little significance upon its main object of research.

The review’s central tension lies here. Hayek doubts whether aggregate price-level concepts can bear the theoretical weight placed on them, but he still values Neisser’s careful clarification of the problems that monetary theory must address. Neisser’s treatment begins with Fisher’s equation of exchange, and Hayek approves his refusal to confuse an accounting schema with causal explanation.

Neisser very correctly emphasizes that the equation itself is very far from offering even a theory of the value of money. All it does is to clearly outline the problems which an explanation of the value of money faces, by schematically rendering prominent the basic factors involved.

For Hayek, this is the proper use of the equation: not as a theory, but as a way of displaying the variables whose interaction still requires explanation. He similarly commends Neisser’s discussion of quantity theory and income theory, while noting that Neisser’s criticism of some income-theory formulations is too sweeping. The review is thus less a rejection of contemporary monetary theory than an attempt to sort valid conceptual distinctions from misleading aggregates.

One of the strongest features of Neisser’s book, in Hayek’s reading, is its insistence that money cannot be treated as though it were merely a commodity exchanged in barter. Money functions as a form of demand separable from an immediate reciprocal supply of goods, and this gives monetary exchange its distinctive theoretical structure.

But the service which the author performs by his explicit emphasis upon the fact that money represents ‘pure demand’, not dependent upon a simultaneous supply of goods as in the barter economy, and that thereby money ‘acquires a life of its own’ (Eigenleben), must not be underestimated.

This point anticipates Hayek’s own concern with the dynamic effects of monetary institutions. Once money has “a life of its own,” analysis must attend to cash balances, credit creation, interest-rate policy, and the banking system rather than merely to goods exchanged against goods. Hayek nevertheless remains skeptical of velocity of circulation as an average magnitude, since it risks restating the problem in aggregate form without explaining the individual and institutional processes beneath it.

The review becomes most favorable when Hayek turns to Neisser’s analysis of credit money. He regards this section as the book’s finest achievement because it explains bank deposits, cheque money, and the relation between cash payments and credit-created deposits without relying on a simple mechanical quantity theory.

After a short section on notes and coin, which presents ‘without detailed examination the conclusions previously arrived at in monetary theory’ (p. 40), there follows an exhaustive analysis of credit money which appears to me to be the most valuable part of the whole book.

Hayek especially values Neisser’s rejection of any automatic harmony between the quantity of credit and the quantity of goods. The decisive variable is not the mere existence of trade bills or bank credit, but interest-rate policy. This emphasis lets Hayek connect monetary theory to production: credit expansion can affect profitability, investment, and prices, but not through a self-regulating mechanism that guarantees equilibrium.

The later parts of the review treat Neisser’s discussions of national money quantities, international trade, monetary expansion, and production more briefly. Hayek accepts Neisser’s cautious conclusion that monetary expansion can raise production only within narrow limits, while remaining critical of the assumption that price-level stability is obviously desirable. The review’s lasting significance lies in this combination: it recognizes Neisser’s book as a major contribution to German monetary theory, yet uses the occasion to sharpen Hayek’s own doubts about aggregate price-level analysis and his preference for a theory centered on credit, cash demand, and the coordinating role of interest.