The Position of Money among Economic Goods

This file is a single translated theoretical essay in monetary economics/catallactics, originally published as a contribution to an edited volume. Its scope is conceptual rather than historical: Mises asks how money should be classified among economic goods, how its value is formed, and why monetary theory must be distinct without becoming detached from general price theory.

Opening with Karl Knies’s proposal to treat means of exchange as a third class alongside consumer and producer goods, Mises accepts the classification only pragmatically. Taxonomy is useful because catallactics repeatedly has to treat money separately; but overemphasis on money’s special status has encouraged errors, especially the thought that money’s purchasing power is determined by principles alien to ordinary exchange. His main thesis is that money is an economic good whose value derives from demanded monetary services, and whose analysis must begin with individual valuations.

All of those who denied the ability of the services of money to determine its exchange value failed to recognize that the only decisive element is demand.

The first section applies subjective value theory against intrinsic-value doctrines. Mises rejects the idea that only “materially” useful money is genuine money and that paper or purely monetary media must be abnormal. A good initially needs prior nonmonetary exchange value to become money, but once market actors use it as the common means of exchange, its monetary service can sustain demand independently.

But once an economic good has become money, then the specific demand for money can tie into an already existing exchange relationship between money and goods in the market, even if the demand for the money-good, as motivated by the other use, disappears.

Section II shifts from substance to method. Against the equation-of-exchange habit of beginning with national totals, Mises insists that catallactics must explain prices through the conduct of buyers and sellers. “Velocity” and “hoarding” are misleading when they imply that money works only at the instant of payment. Cash held in reserve also renders a service: it keeps the actor ready for uncertain future exchange.

The demand for money of individuals, as well as the entire economy, is determined by the desire to maintain a cash balance and not by the aggregate of transactions to be carried out during a certain time period.

Section III rescues the valid core of the quantity theory while discarding its mechanical version. Changes in money supply and money demand do affect purchasing power, but not by proportionally lifting or lowering all prices. Monetary change enters through particular persons and transactions, alters incomes and wealth, and diffuses through the economy over time.

It was overlooked that every change in the relationship between the supply of money and the demand for money would necessarily bring about a shift in the distribution of wealth and income and that, therefore, the prices of the different goods and services could not be effected proportionally and simultaneously.

Section IV gives the banking-theoretical consequence. Mises’s crucial distinction is between money proper, fully backed money certificates, and fiduciary media. Ordinary lending need not change the money supply; the issue of redeemable claims not backed by money does, and it is this issue—not “credit” in general—that produces the effects on prices, wages, and interest that banking theory must explain.

Everything depends on the clear separation of money from money substitutes and within the category of money substitutes a distinction between money certificates (a money substitute fully backed by money) and the fiduciary medium (the money substitute not backed by money).

The final section broadens the essay to economic calculation and the ideal of “stable value.” Mises rejects the old language of money as a measure of value, yet makes money indispensable to advanced market coordination. Money prices allow heterogeneous goods, higher-order production plans, and intertemporal choices to be compared within a single calculative framework.

Only with the use of money is it possible to compare the marginal utility of goods in all alternative employments.

From this standpoint, the search for perfectly stable money is a misplaced attempt to escape the temporal character of capitalism. No asset automatically preserves income forever; even land, bonds, and capital claims are exposed to entrepreneurial error, changing conditions, and default. Monetary policy can mitigate disturbances from the money side and restrain fiduciary media, but it cannot abolish relative-price change or reproduce the stationary state in real life. The essay remains relevant because it joins monetary theory to the broader Austrian concerns of subjective value, market process, non-neutral money, banking institutions, and the necessity of monetary calculation.