Ludwig von Mises · 1932
This contribution to an edited volume, occupying pages 309–318, examines money’s place within economic theory through five connected discussions: monetary service and value; cash holdings and demand; changes in purchasing power; money substitutes; and monetary calculation and value stability. Mises’s central claim is that money requires distinctive analysis without requiring a separate theory of value. Its usefulness as a medium of exchange belongs within the subjective theory that explains the prices of other goods. Monetary theory goes astray when it substitutes material properties, aggregate formulas, or ideals of permanence for the valuations and actions of market participants.
The opening endorses Knies’s division of economic goods into consumption goods, production goods, and exchange media as scientifically useful. Such classifications must prove themselves through the explanations they enable. But recognizing money’s special function should not detach monetary theory from catallactics, the theory of exchange. Mises argues that economists have often exaggerated the separation, creating artificial difficulties alongside the genuine ones.
Section I locates monetary value in demand for monetary services. Against the distinction between materially valuable “real” money and supposedly valueless substitutes, Mises rejects the premise that value inheres in objects. He credits John Law with recognizing that using precious metals as exchange media contributes to their value just as other uses do. His own formulation makes demand decisive:
Alle, die dem Gelddienste die Fähigkeit absprechen, den Tauschwert des Geldes zu begründen, verkennen, daß das allein Entscheidende die Nachfrage ist.
English translation: All those who deny monetary service the capacity to establish money’s exchange value fail to recognize that demand alone is decisive.
This principle also separates money’s historical emergence from its continued existence. A good must initially possess an exchange value grounded in nonmonetary uses, because demand for it as an exchange medium needs an existing exchange ratio as its point of departure. Once established as money, however, it can retain monetary value even if demand for its other uses disappears. Knies therefore mistakes a condition of origin for a permanent requirement. More broadly, distinguishing “genuine” from merely imagined needs imports moral judgments into an explanation that should concern actual valuations.
Section II applies this reasoning to money holdings. Mises criticizes approaches that begin with the national economy as a whole and explain purchasing power through money quantity, transaction totals, and velocity. An exchange equation does not explain how buyers’ and sellers’ valuations change. Neither velocity nor the price level is given independently of their actions. The relevant comparison is between the importance individuals attach to holding cash and to possessing particular goods.
Der Gelddienst erschöpft sich nicht im Umsatz.
English translation: Monetary service is not exhausted by transactions.
Cash waiting for future use is already serving as a generally accepted exchange medium. Consequently, the distinction between active money and idle or hoarded money is arbitrary as an explanatory starting point. Demand for money arises from the desire to maintain cash balances, not simply from the volume of payments to be executed. This is the essay’s strongest methodological move: it replaces an aggregate image of circulating money with an account of why individuals hold it.
Section III defends the quantity theory’s basic proposition that changes in monetary supply relative to demand affect purchasing power, while rejecting mechanical versions of that theory. Mises also refuses to explain opposition merely by identifying the interests that benefit from inflationary doctrines; the intellectual problem is how mistaken theories acquire wider credibility. His principal theoretical objection concerns proportionality. Monetary changes first affect particular people, redistribute wealth and income, and then spread through their spending and valuations.
Mit anderen Worten: Das Problem der Geldwertveränderungen ist mit den Methoden der Statik bearbeitet worden, wo doch über seinen dynamischen Charakter nie ein Zweifel hätte obwalten dürfen.
English translation: In other words: the problem of changes in money’s value has been treated with the methods of statics, although there should never have been any doubt about its dynamic character.
Prices therefore change neither uniformly nor simultaneously. The causal sequence, rather than an equation relating aggregate totals, is what monetary theory must explain.
Section IV identifies money substitutes as a genuinely difficult special problem. Secure claims payable on demand can perform money’s service, but fully money-backed certificates must be distinguished from unbacked fiduciary media. Ordinary lending does not itself enlarge the money stock; its effects on cash demand depend on circumstances. Concentrated repayment dates can even increase that demand. For banking theory, the decisive phenomenon is thus the issue of fiduciary media, not “credit” indiscriminately understood. Terminological precision matters because it isolates different causal processes.
Section V turns to monetary calculation. Direct exchange remains a necessary theoretical construction, but developed markets, exchanges involving more remote production goods, and the distinct expression of interest presuppose money. Mises nevertheless rejects the inference that money measures value or should provide an invariant standard. The aspiration to stable purchasing power is traced to attempts to protect wealth from market uncertainty, first through land, then mortgages and public debt. None guarantees perpetual income: productive property must be successfully employed, borrowers can fail, and states can repudiate debts.
Die Lösung des Problems der Wertstabilität könnte aber nur gelingen, wenn man aus der Wirtschaft alle Bewegung und Veränderung ausschaltet.
English translation: A solution to the problem of value stability could succeed only if all movement and change were eliminated from the economy.
Stabilizing an average of commodity prices would not stabilize the exchange ratios among commodities or remove investment risk. Mises concludes with a limited monetary-policy objective: avoid violent monetary disturbances, choose commodity money relatively resistant to abrupt nonmonetary fluctuations, and restrain fiduciary-media issuance. The essay’s relevance lies in its integration of cash-balance demand, sequential monetary effects, banking distinctions, and economic calculation within one account of acting individuals. Money is indispensable to developed exchange, but cannot release economic life from change.
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