Ludwig von Mises, Die Quantitätstheorie (1918)

Mises’s German-language article develops the quantity theory of money to explain wartime inflation and clarify the choices facing currency policy. It moves from the foundations of value theory to the uneven effects of monetary expansion, then considers exchange rates, banking doctrine, and stabilization of the krone.

Die Quantitätstheorie ist die Anwendung der Lehre von Angebot und Nachfrage auf das Geld.

English translation: The quantity theory is the application of the doctrine of supply and demand to money.

This opening establishes both the theory’s basis and its explanatory limits. Supply and demand indicate how an existing exchange ratio changes, but do not adequately explain its formation. Nor do they, taken as given quantities, explain the motives governing exchange.

Der zweite Mangel, der ihm anhaftet, ist der, daß es Angebot und Nachfrage als gegebene Größen ansieht und darauf verzichtet, den Beweggründen nachzugehen, die die Menschen beim Kauf und Verkauf bestimmen.

English translation: The second defect that attaches to it is that it regards supply and demand as given magnitudes and renounces any enquiry into the motives which determine men in buying and selling.

Marginal-utility theory supplies the deeper account of valuation that monetary theory also requires. Mises thus treats the quantity theory as a foundation to be developed, not abandoned. Its central claim concerns the direction of monetary change rather than a fixed mathematical relationship between money and prices.

Die Quantitätstheorie bestimmt die Richtung, die die Veränderungen des Geldwertes nehmen müssen, nämlich, daß die Vermehrung der Geldmenge caeteris paribus den Wert der Geldeinheit schmälert und die Verminderung der Geldmenge ihn steigert.

English translation: The quantity theory determines the direction which changes in the value of money must take, namely that an increase in the quantity of money diminishes, ceteris paribus, the value of the monetary unit, and that a diminution of the quantity of money raises it.

Increasing the money stock, other things equal, lowers the value of the monetary unit; this does not establish that doubling money must halve its value. Mises sets aside proportionality under hypothetical conditions and emphasizes the actual process through which additional money enters circulation.

That process begins with particular recipients and markets. Drawing on Auspitz and Lieben’s example of military suppliers, Mises traces how new spending raises some prices before others. The resulting appearance of prosperity conceals redistribution: those whose selling prices or wages rise early gain at the expense of those whose receipts adjust later. A footnote adds the advantage that monetary depreciation gives debtors over creditors. Inflation changes economic relationships rather than simply rescaling all prices simultaneously.

Mises also distinguishes money as a medium of exchange from loan capital denominated in money. Monetary demand concerns desired cash holdings, not requests for loans. This distinction exposes an ambiguity in the claim that wartime circulation exceeds the needs of trade. The expanded issue exceeds monetary requirements at the former price level; rising prices subsequently induce larger cash holdings that absorb the additional money. Absorption does not show that expansion was harmless, since the adjustment itself required higher prices.

This reasoning underlies his diagnosis of wartime inflation. Reduced production and interrupted imports explain scarcity and changes in relative prices, while monetary expansion explains the general rise in money prices. With unchanged circulation, Mises argues, increased expenditure on scarce goods would entail reduced expenditure elsewhere and corresponding price declines. Wartime conditions instead combine diminished supplies with an enormous increase in money. Restored production and the end of blockade may lower prices without returning them to their prewar level unless circulation also contracts.

The article next challenges the separation, associated with Adolf Wagner, Lexis, and others, between international currency depreciation and domestic purchasing power. Mises’s ruble–mark example shows how a cheaper ruble, without higher Russian prices, would encourage exports of goods and securities, counteracting the exchange-rate divergence. Wartime barriers can impede adjustment, but securities movements retain a connecting role. Exchange-rate policy consequently cannot be detached from domestic monetary conditions.

Mises then rejects the claim that modern banking neutralizes monetary changes through an elastic circulation. Beyond referring to his earlier criticism, he offers a narrower wartime objection: even proponents of elasticity associate it with notes issued against short-term commercial bills, not with circulation created through government borrowing.

The conclusion distinguishes stabilizing the krone at its diminished value from restoring its former gold parity. The first course requires halting further note creation and resuming cash payments at a specified exchange rate. Restoring the parity established by the laws of 2 August 1892 requires repayment of the two states’ debts to the bank so that circulation can contract. Mises expects leading financial policymakers to resist stabilization at a depreciated parity. His practical conclusion remains conditional: each monetary objective has requirements that neither renewed production nor exchange-market measures can replace.