The Theory of Money and Credit - Людвиг фон Мизес Liberty Fund Library of the Works of Ludwig von Mises

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has made strides that it would be impossible to ignore. And my own occupation with the problems of catallactics has led me in many respects to conclusions that differ from those of the first edition. My attitude toward the theory of interest is different today from what it was in 1911; and although, in preparing this as in preparing the first edition, I have been obliged to postpone any treatment of the problem of interest (which lies outside the theory of indirect exchange), in certain parts of the book it has nevertheless been necessary to refer to the problem. Again, on the question of crises my opinions have altered in one respect: I have come to the conclusion that the theory which I put forward as an elaboration and continuation of the doctrines of the Currency School is in itself a sufficient explanation of crises and not merely a supplement to an explanation in terms of the theory of direct exchange, as I supposed in the first edition.

      Further I have become convinced that the distinction between statics and dynamics cannot be dispensed with even in expounding the theory of money. In writing the first edition, I imagined that I should have to do without it, in order not to give rise to any misunderstandings on the part of the German reader. For in an article that had appeared shortly before in a widely read symposium, Altmann had used the concepts “static” and “dynamic,” applying them to monetary theory in a sense that diverged from the terminology of the modern American school.1 Meanwhile, however, the significance of the distinction between statics and dynamics in modern theory has probably become familiar to everybody who, even if not very closely, has followed the development of economics. It is safe to employ the terms nowadays without fear of their being confused with Altmann’s terminology. I have in part revised the chapter on the social consequences of variations in the value of money in order to clarify the argument. In the first edition the chapter on monetary policy contains long historical discussions; the experiences of recent years afford sufficient illustrations of the fundamental argument to allow these discussions now to be dispensed with.

      A section on problems of banking policy of today has been added, and one in which the monetary theory and policy of the etatists are briefly examined. In compliance with a desire of several colleagues I have also included a revised and expanded version of a short essay on the classification of theories of money, which was published some years ago in volume 44 of the Archiv für Sozialwissenschaft und Sozialpolitik.

      For the rest, it has been far from my intention to deal critically with the flood of new publications devoted to the problems of money and credit. In science, as Spinoza says, “the truth bears witness both to its own nature and to that of error.” My book contains critical arguments only where they are necessary to establish my own views and to explain or prepare the ground for them. This omission can be the more easily justified in that this task of criticism is skillfully performed in two admirable works that have recently appeared.2

      The concluding chapter of part three, which deals with problems of credit policy, is reprinted as it stood in the first edition. Its arguments refer to the position of banking in 1911, but the significance of its theoretical conclusions does not appear to have altered. They are supplemented by the above-mentioned discussion of the problems of present-day banking policy that concludes the present edition. But even in this additional discussion, proposals with any claim to absolute validity should not be sought for. Its intention is merely to show the nature of the problem at issue. The choice among all the possible solutions in any individual case depends upon the evaluation of pros and cons; decision between them is the function not of economics but of politics.

      LUDWIG VON MISES

       Vienna March 1924

      THE THEORY OF MONEY

       AND CREDIT

       The Function of Money

      Where the free exchange of goods and services is unknown, money is not wanted. In a state of society in which the division of labor was a purely domestic matter and production and consumption were consummated within the single household it would be just as useless as it would be for an isolated man. But even in an economic order based on division of labor, money would still be unnecessary if the means of production were socialized, the control of production and the distribution of the finished product were in the hands of a central body, and individuals were not allowed to exchange the consumption goods allotted to them for the consumption goods allotted to others.

      The phenomenon of money presupposes an economic order in which production is based on division of labor and in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods). In such a society, there is no systematic centralized control of production, for this is inconceivable without centralized disposal over the means of production. Production is “anarchistic.” What is to be produced, and how it is to be produced, is decided in the first place by the owners of the means of production, who produce, however, not only for their own needs, but also for the needs of others, and in their valuations take into account, not only the use-value that they themselves attach to their products, but also the use-value that these possess in the estimation of the other members of the community. The balancing of production and consumption takes place in the market, where the different producers meet to exchange goods and services by bargaining together. The function of money is to facilitate the business of the market by acting as a common medium of exchange.

      Indirect exchange is distinguished from direct exchange according as a medium is involved or not.

      Suppose that A and B exchange with each other a number of units of the commodities m and n. A acquires the commodity n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity m for his immediate use. This is a case of direct exchange.

      If there are more than two individuals and more than two kinds of commodity in the market, indirect exchange also is possible. A may then acquire a commodity p, not because he desires to consume it, but in order to exchange it for a second commodity q which he does desire to consume. Let us suppose that A brings to the market two units of the commodity m, B two units of the commodity n, and C two units of the commodity o, and that A wishes to acquire one unit of each of the commodities n and o, B one unit of each of the commodities o and m, and C one unit of each of the commodities m and n. Even in this case a direct exchange is possible if the subjective valuations of the three commodities permit the exchange of each unit of m, n, and o for a unit of one of the others. But if this or a similar hypothesis does not hold good, and in by far the greater number of all exchange transactions it does not hold good, then indirect exchange becomes necessary, and the demand for goods for immediate wants is supplemented by a demand for goods to be exchanged for others.1

      Let us take, for example, the simple case in which the commodity p is desired only by the holders of the commodity q, while the comodity q is not desired by the holders of the commodity p but by those, say, of a third commodity r, which in its turn is desired only by the possessors of p. No direct exchange between these persons can possibly take place. If exchanges occur at all, they must be indirect; as, for instance, if the possessors of the commodity p exchange it for the commodity q and then exchange this for the commodity r which is the one they desire for their own consumption. The case is not essentially different when supply and demand do not coincide quantitatively; for example, when one indivisible good has to be exchanged for various goods in the possession of several persons.

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