THE THEOR YOF MONEY

AND CREDIT

THE THEORY OF MONEY AND CREDIT

New edition, enlarged with an essay on

Monetary Reconstruction

BY LUDWIG VON MISES

Translated from the German by H. E. Batson

New Haven: r ALE U N I V E R SIT r PRE S S, I953

Copyright, 1953, by Tale University Press.

Printed in the United States of America.

All rights reserved. This book may not be reproduced, in whole or in part, in any form (except by reviewers for the public press), without written permission from the publishers.

Library ojCongress Catalog Card Number: 52-12°74

CONTENTS

PREFACE TO THE NEW EDITION		9
INTRODUCTION BY PROFESSOR LIONEL ROBBINS		II
PREFACE TO ENGLISH EDITION		14
PREFACE TO SECOND GERMAN EDITION		23
	PART ONE
	THE NATURE OF MONEY
CHAPTER I THE FUNCTIONS OF MONEY
§ I	The General Economic Conditions for the Use of
	Money	29
	The Origin of Money	go
	The 'Secondary' Functions of Money	34
CHAPTER II ON THE MEASUREMENT OF VALUE
§ I	The Immeasurability of Su~jective Use-Values	38
§ 2	Total Value	45
§ 3	Money as a Price-Index	47
CHAPTER III THE VARIOUS KINDS OF MONEY
§ I	Money and Money-Substitutes	50
§ 2	The Peculiarities of Money-Substitutes	54
§ 3	Commodity Money, Credit Money, and Fiat Money	59
§ 4	The Commodity Money of the Past and of the Present	62
CHAPTER IV MONEY AND THE STATE
§ I	The Position of the State in the :Market	68
§ 2	The Legal Concept of Money	69
§ 3	The Influence of the State on the Monetary System	71
CHAPTER V MONEY AS AN ECONOMIC GOOD
§ I Money neither a Production Good nor a Consumption
§ 2	Good	79
	Money as Part of Private Capital	86
§ 3	Money not a Part of Social Capital	go

I

CONTENTS

CHAPTER VI		THE ENEMIES OF MONEY
§ I Money in the Socialist Community			91
§ 2		Money Cranks	92
		PART TWO
		THE VALUE OF MONEY
CHAPTER I THE CONCEPT OF THE VALUE OF MONEY
§ 1	Subjective and Objective Factors in the Theory of the
§ 2		Value of Money	97
		The Objective Exchange-Value of Money	100
§ 3	The Problems Involved in the Theory of the Value of
		Money	102

CHAPTER II THE DETERMINANTS OF THE OBJECTIVE EXCHANGEVALUE, OR PURCHASING POWER, OF MONEY

(1)The Element of Continuity in the Objective ExchangeValue of Money

§I The Dependence of the Subjective Valuation of Money

	on the Existence of Objective Exchange-Value	108
§ 2 The Necessity for a Value Independent of the Monetary
	Function before an Object can serVe as Money	I 10
§ 3	The Significance of Pre-existing Prices in the Determina-
§ 4	tion of Market Exchange-Ratios	1 I I
	The Applicability of the Marginal-Utility Theory	to
§ 5	Money	114
	'Monetary' and 'Non-Monetary' Influences Affecting
	the Objective Exchange-Value of Money	123

(II)Fluctuations in the Objective Exchange-Value of Money evoked by Changes in the Ratio between the Supply of Money and the Demand for it

§ 6	The Quantity Theory	124
§ 7	The Stock of Money and the Demand for Money	13 1

§8 The Consequences of an Increase in the Quantity of Money while the Demand for Money remains Un-

changed or does not Increase to the same extent	137
§ 9 Criticism of some Arguments against the Quantity
Thwry	I~

2

CONTENTS

§10 Further Applications of the Quantity Theory

(III)A Special Cause of Variations in the Objective ExchangeValue of Mone] arising from the Peculiarities of Indirect

Exchange

§ II 'Dearness of Living'

154

§12 Wagner's Theory: the Influence of the Permanent Predominance of the Supply Side over the Demand Side on

	the Determination of Prices	155
§ 13	Wieser's Theory: the Influence on the Value of Money
	exerted by a Change in the Relations between Natural	157
	Economy and Money Economy
§ 14	The Mechanism of the Market as a Force affecting the
	Objective Exchange-Value of Money	162

(IV) E"cursuses

§15 The Influence of the Size of the Monetary Unit and its Sub-divisions on the Objective Exchange-Value of

	~~		I~
§ 16	A Methodological Comment		167
CHAPTER III THE PROBLEM OF THE EXISTENCE OF LOCAL
DIFFERENCES IN THE OBJECTIVE EXCHANGE-VALUE OF MONEY
§ I	Inter-local Price Relations		170
§ 2	Alleged Local Differences in the Purchasing Power of
	Money		172
§ 3	Alleged Local Differences in the Cost of Living		175
. CHAPTER IV		THE EXCHANGE-RATIO BETWEEN MONEY OF DIFFERENT
KINDS
§ 1		Co-existence of Different Kinds of Money	179
§ 2	Static or Natural Exchange-Ratio		180
CHAPTER V		THE PROBLEM OF MEASURING THE OBJECTIVE
EXCHANGE-VALUE OF MONEY AND VARIATIONS IN IT
§ I		The History of the Problem	187
§ 2		The Nature of the Problem	188
§ 3		Methods of Calculating Index Numbers	189
§ 4		Wieser's Refinement of the Methods of Calculating
		Index-Numbers	19 1
§ 5		The Practical Utility of Index Numbers	194

3

CONTENTS

CHAPTER VI THE SOCIAL CONSEQ.UENCES OF VARIATIONS IN THE

OBJECTIVE EXCHANGE-VALUE OF MONEY

§ 1	The Exchange of Present Goods for Futur~ Goods		195
§ 2	Economic Calculation and Accountancy		203
§ 3	Social Consequences of Variations in t~e Value		of
	Money when only One Kind of Money is Employed		206
§ 4	The Consequences of Variations in the Exchange-Ratio
	between Two Kinds of Money		212
CHAPTER VII		MONETARY POLICY
§ 1	Monetary Policy Defined		216
§ 2	The Instruments of Monetary Policy		219
§ 3	Inflationism		219
§ 4	Restrictionism or Deflationism		23 1
§ 5	Invariability of the Objective Exchange-Value		of
§ 6	Money as the Aim of Monetary Policy		236
	The Limits of Monetary Policy		238
§ 7	Excursus: The Concepts, Inflation and Deflation		239
CHAPTER VIII		THE MONETARY POLICY OF ETATISM
§ 1	The Monetary Theory of Etatism		242
§ 2	National Prestige and the Rate of Exchange		244
§ 3 The Regulation of Prices by Authoritative Decree			245
§ 4-	The Balance-of-Payments Theory as a Basis of Currency
§ 5	Policy		249
	The Suppression of Speculation		25 2
		PART THREE
		MONEY AND BANKING
CHAPTER I THE BUSINESS OF BANKING
§ I	Types of Banking Activity		261
§ 2	The Banks as Negotiators of Credit		262
§ 3	The Banks as Issuers of Fiduciary Media		263
§ 4	Deposits as the Origin of Circulation Credit		268
§ 5	The Granting of Circulation Credit		27 I
§ 6	Fiduciary Media and the Nature of Indirect Exchange 275

4

CONTENTS

CHAPTER II		THE EVOLUTION OF FIDUCIARY MEDIA
§ 1		The Two Ways of Issuing Fiduciary Media	278
§ 2		Fiduciary Media and the Clearing System	281
§ 3		Fiduciary Media in Domestic Trade	286
§ 4		Fiduciary Media in International Trade	29 1
CHAPTER III FIDUCIARY MEDIA AND THE DEMAND FOR MONEY
§ I		The Influence of Fiduciary Media on the Demand for
§ 2		Money in the Narrower Sense	297
		The Fluctuations in the Demand for Money	300
§ 3		The Elasticity of the System of Reciprocal Cancellation	302
§ 4	The Elasticity of a Credit Circulation Based on Bills,
§ 5	especially on Commodity Bills		305
		The Significance of the Exclusive Employment of Bills
		as Cover for Fiduciary Media	3 I	3
§ 6		The Periodical Rise and Fall in the Extent to which
§ 7		Bank Credit is Requisitioned	3 14
		The Influence of Fiduciary Media on Fluctuations in
		the Objective Exchange-Value of Money	3 I	8
CHAPTER IV		THE REDEMPTION OF FIDUCIARY MEDIA
§ I	The Necessity for Complete Equivalence between
§ 2	Money and Money-Substitutes		3 I	9
	The Return of Fiduciary Media to the Issuer		32 I
§ 3	The Case Against the Issue of Fiduciary Media		322
§ 4	The Redemption Fund		325
§ 5	The So-called 'Banking' Type of Cover		33 1
§ 6	The Significance of Short-Term Cover		334
§ 7 The Security of the Investments of the Credit-Issuing
	Banks		335
§ 8	Foreign Bills in the Redemption Fund		337
CHAPTER V MONEY, CREDIT, AND INTEREST
§ 1	On the Nature of the Problem		339
§ 2	Money and Interest		346
§ 3	Equilibrium Rate and Money Rate of Interest		349
§ 4	Interest Policy and Production		357
§ 5	Credit and Economic Crises		365

CHAPTER VI PROBLEMS OF CREDIT POLICY

(1)	Prefatory Remark
§ I	The Conflict of Credit Policies	367

5

	CONTENTS
(II)	Problems of Credit Policy Before the War
§ 2	Peel's Act	368
§ 3	The Nature of Discount Policy	373
§ 4	The Gold-Premium Policy	377
§ 5	Systems Similar to the Gold-Premium Policy	382
§ 6	The' Illegitimate' Demand for Money	384
§ 7	Other Measures	386
§ 8	The Promotion of Cheque and Clearing Transactions	387

(m)Problems of Credit Policy in the Period Immediately After the

War

§ 9	The Gold-Exchange Standard	391
§ 10	A Return to a Gold Currency	394
§ liThe Freedom of the Banks		395
§ 12	Fisher's Commodity Standard	399
§ 13	Future Currency Policy	406

PART FOUR

MONET AR Y RECONSTR UCTION

CHAPTER I THE PRINCIPLE OF SOUND MONEY
§ 1	The Classical Idea of Sound Money	413
§ 2	The Virtues and Alleged Shortcomings of the Gold
	Standard	416
§ 3	The Full-Employment Doctrine	423
§ 4	The Emergency Argument in Favour of Inflation	426
CHAPTER II CONTEMPORARY CURRENCY SYSTEMS
§ 1	The Inflexible Gold Standard	429
§ 2	The Flexible Standard	429
§ 3	The Freely-vacillating Currency	43 1
§ 4	The Illusive Standard	432
CHAPTER In THE RETURN TO SOUND MONEY
§ I	Monetary Policy and the Present Trend Towards All-
§ 2	round Planning	435
	The Integral Gold Standard	438
§ 3	Currency Reform in Ruritania	442
§ 4 The United States' Return to a Sound Currency		448
§ 5	The Controversy Concerning the Choice of the New
	Gold Parity	452

6

CONTENTS

CONCLUDING REMARKS		456
APPENDIX A ON THE CLASSIFICATION OF MONETARY THEORIES
§ I	Catallactic and Acatallactic Doctrine	46 I
§ 2	The 'State' Theory of Money	463
§ 3	Schumpeter's Theory	469
§ 4	'Metallism'	473
§ 5	The Concept of'Metallism' in Wieser and Philippovich	475
§ 6	The Two English Schools of Banking Theory	481
APPENDIX	B TRANSLATOR'S NOTE ON THE TRANSLATION OF
CERTAIN TECHNICAL TERMS		482

7