The Theory of Money and Credit

Ludwig von Mises.
Mises, Ludwig von
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H. E. Batson, trans.
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Indianapolis, IN: Liberty Fund, Inc.
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15 of 33


The Problem of the Existence of Local Differences in the Objective Exchange Value of Money

1 Interlocal Price Relations


Let us at first ignore the possibility of various kinds of money being employed side by side, and assume that in a given district one kind of money serves exclusively as the common medium of exchange. The problem of the reciprocal exchange ratios of different kinds of money will then form the subject matter of the next chapter In this chapter, however, let us imagine an isolated geographical area of any size whose inhabitants engage in mutual trade and use a single good as common medium of exchange. It makes no immediate difference whether we think of this region as composed of several states, or as part of one large state, or as a particular individual state. It will not be necessary until a later stage in our argument to mention certain incidental modifications of the general formula which result from differences in the legal concepts of money in different states.


It has already been mentioned that two economic goods, which are of similar constitution in all other respects, are not to be regarded as members of the same species if they are not both ready for consumption at the same place. For many purposes it seems more convenient to regard them as goods of different species related to one another as goods of higher and lower orders.*77 Only in the case of money is it permissible in certain circumstances to ignore the factor of position in space. For the utility of money, in contrast to that of other economic goods, is to a certain extent free from the limitations of geographical distance. Checks and clearing systems, and similar institutions, have a tendency to make the use of money more or less independent of the difficulties and costs of transport. They have had the effect of permitting gold stored in the cellars of the Bank of England, for instance, to be used as a common medium of exchange anywhere in the world. We can easily imagine a monetary organization which, by the exclusive use of notes or clearinghouse methods, allows all transfers to be made with the instrumentality of sums of money that never change their position in space. If we assume, further, that the costs associated with every transaction are not influenced by the distance between the two parties to the contract and between each of them and the place where the money is (it is well known that this condition is already realized in some cases; for example, in the charges made for postal and money-order services), then there is sufficient justification for ignoring differences in the geographical situation of money. But a corresponding abstraction with regard to other economic goods would be inadmissible. No institution can make it possible for coffee in Brazil to be consumed in Europe. Before the consumption good "coffee in Europe" can be made out of the production good "coffee in Brazil," this production good must first be combined with the complementary good "means of transport."


If differences due to the geographical position of money are disregarded in this way, we get the following law for the exchange ratio between money and other economic goods: every economic good, that is ready for consumption (in the sense in which that phrase is usually understood in commerce and technology), has a subjective use-value qua consumption good at the place where it is and qua production good at those places to which it may be brought for consumption. These valuations originate independently of each other; but, for the determination of the exchange ratio between money and commodities, both are equally important. The money price of any commodity in any place, under the assumption of completely unrestricted exchange and disregarding the differences arising from the time taken in transit, must be the same as the price at any other place, augmented or diminished by the money cost of transport.


Now there is no further difficulty in including in this formula the cost of transport of money, or a further factor, on which the banker and exchange dealer lay great weight, namely, the costs arising from the recoinage which may be necessary. All these factors, which it is not necessary to enumerate in further detail, have a combined effect on the foreign exchange rate (cable rate, etc.) the resultant of which must be included in our calculation as a positive or negative quantity. To prevent any possible misunderstanding, it should once more be explicitly remarked that we are concerned here only with the rate of exchange between places in which the same kind of money is in use, although it is a matter of indifference whether the same coins are legal tender in both places. The essentially different problems of the rate of exchange between different kinds of money will not occupy us until the following chapter.

2 Alleged Local Differences in the Purchasing Power of Money


In contrast to the law of interlocal price relations that has just been explained is the popular belief in local variations in the purchasing power of money. The assertion is made again and again that the purchasing power of money may be different in different markets at the same time, and statistical data are continually being brought forward to support this assertion. Few economic opinions are so firmly rooted in the lay mind as this. Travelers are in the habit of bringing it home with them, usually as a piece of knowledge gained by personal observation. Few visitors to Austria from Germany at the beginning of the twentieth century had any doubts that the value of money was higher in Germany than in Austria. That the objective exchange value of gold, our commodity money Greek kat esechun, stood at different levels in different parts of the world, passed for established truth in even economic literature.*78


We have seen where the fallacy lies in this, and may spare ourselves unnecessary repetition. It is the leaving out of account of the positional factor in the nature of economic goods, a relic of the crudely materialist conception of the economic problem, that is to blame for this confusion of ideas. All the alleged local differences in the purchasing power of money can easily be explained in this way. It is not permissible to deduce a difference in the purchasing power of money in Germany and in Russia from the fact that the price of wheat is different in these countries, for wheat in Russia and wheat in Germany represent two different species of goods. To what absurd conclusions should we not come if we regarded goods lying in bond in a customs or excise warehouse and goods of the same technological species on which the duty or tax had already been paid as belonging to the same species of goods in the economic sense? We should then apparently have to suppose that the purchasing power of money could vary from building to building or from district to district within a single town. Of course, if there are those who prefer to retain commercial terminology, and think it better to distinguish species of goods merely by their external characteristics, we cannot say that they shall not do this. To contend over terminological questions would be an idle enterprise. We are not concerned with words, but with facts. But if this form of expression, in our opinion the less appropriate, is employed, care must be taken in some way to make full allowance for distinctions based on differences in the places at which the commodities are situated ready for consumption. It is not sufficient merely to take account of costs of transport and of customs duties and indirect taxes. The effect of direct taxes, for example, the burden of which is to a large extent transferable also, must be included in the calculation.


It seems better to us to use the terminology suggested above, which stresses with greater clearness that the purchasing power of money shows a tendency to come to the same level throughout the world, and that the alleged differences in it are almost entirely explicable by differences in the quality of the commodities offered and demanded, so that there is only a small and almost negligible remainder left over, that is due to differences in the quality of the offered and demanded money.


The existence of the tendency itself is hardly questioned. But the force which it exerts, and hence its importance also, are estimated variously, and the old classical proposition, that money like every other commodity always seeks out the market in which it has the highest value, is said to be mistaken. Wieser has said in this connection that the monetary transactions involved in exchange are induced by the commodity transactions; that they constitute an auxiliary movement, which proceeds only so far as is necessary to permit the completion of the principal movement. But the international movement of commodities, Wieser declares, is even nowadays noticeably small in comparison with domestic trade. The transmitted national equilibrium of prices is broken through for relatively few commodities whose prices are world prices. Consequently, the transmitted value of money is still for the most part as significant as ever. It will not be otherwise until, in place of the national organization of production and labor which still prevails today, a complete world organization has been established; but it will be a long while before this happens. At present the chief factor of production, labor, is still subject to national limitations everywhere; a nation adopts foreign advances in technique and organization only to the degree permitted by its national characteristics, and, in general, does not very easily avail itself of opportunities of work abroad, whereas within the nation entrepreneurs and wage laborers move about to a considerable extent. Consequently, wages everywhere retain the national level at which they have been historically determined, and thus the most important element in costs remains nationally determined at this historical level; and the same is true of most other cost elements. On the whole, the transmitted value of money forms the basis of further social calculations of costs and values. Meanwhile, the international contacts are not yet strong enough to raise national methods of production on to a single world level and to efface the differences in the transmitted national exchange values of money.*79


It is hardly possible to agree with these arguments, which smack a little too much of the cost-of-production theory of value and are certainly not to be reconciled with the principles of the subjective theory. Nobody would wish to dispute the fact that costs of production differ greatly from one another in different localities. But it must be denied that this exercises an influence on the price of commodities and on the purchasing power of money. The contrary follows too clearly from the principles of the theory of prices, and is too clearly demonstrated day by day in the market, to need any special proof in addition. The consumer who seeks the cheapest supply and the producer who seeks the most paying sale concur in the endeavor to liberate prices from the limitations of the local market. Intending buyers do not bother much about the national costs of production when those abroad are lower (And because this is so, the producer working with higher costs of production calls for protective duties.) That differences in the wages of labor in different countries are unable to influence the price levels of commodities is best shown by the circumstance that even the countries with high levels of wages are able to supply the markets of the countries with low levels of wages. Local differences in the prices of commodities whose natures are technologically identical are to be explained on the one hand by differences in the cost of preparing them for consumption (expenses of transport, cost of retailing, etc.) and on the other hand by the physical and legal obstacles that restrict the mobility of commodities and human beings.

3 Alleged Local Differences in the Cost of Living


There is a certain connection between the assertion of local differences in the purchasing power of money and the widespread belief in local differences in the cost of living. It is supposed to be possible "to live" more cheaply in some places than in others. It might be supposed that both statements come to the same thing, and that it makes no difference whether we say that the Austrian crown was "worth" less in 1913 than the eighty-five pfennigs which corresponded to its gold value, or that "living" was dearer in Austria than in Germany. But this is not correct. The two propositions are by no means identical. The opinion that living is more expensive in one place than in another in no way implies the proposition that the purchasing power of money is different. Even with complete equality of the exchange ratio between money and other economic goods it may happen that an individual is involved in unequal costs in securing the same level of satisfaction in different places. This is especially likely to be the case when residence in a certain place awakens wants which the same individual would not have been conscious of elsewhere. Such wants may be social or physical in nature. Thus, the Englishman of the richer classes is able to live more cheaply on the Continent, because he is obliged to fulfill a series of social duties at home that do not exist for him abroad. Again, living in a large town is dearer than in the country if only because the immediate propinquity in town of so many possibilities of enjoyment stimulates desires and calls forth wants that are unknown to the provincial. Those who often visit theaters, concerts, art exhibitions, and similar places of entertainment, naturally spend more money than those who live in otherwise similar circumstances, but have to go without these pleasures. The same is true of the physical wants of human beings. In tropical areas, Europeans have to take a series of precautions for the protection of health which would be unnecessary in the temperate zones. All those wants whose origin is dependent on local circumstances demand for their satisfaction a certain stock of goods which would otherwise be used for the satisfaction of other wants, and consequently they diminish the degree of satisfaction that a given stock of goods can afford.


Hence, the statement that the cost of living is different in different localities only means that the same individual cannot secure the same degree of satisfaction from the same stock of goods in different places. We have just given one reason for this phenomenon. But, besides this, the belief in local differences in the cost of living is also supported by reference to local differences in the purchasing power of money. It would be possible to prove the incorrectness of this view. It is no more appropriate to speak of a difference between the purchasing power of money in Germany and in Austria than it would be justifiable to conclude from differences between the prices charged by hotels on the peaks and in the valleys of the Alps that the objective exchange value of money is different in the two situations and to formulate some such proposition as that the purchasing power of money varies inversely with the height above sea level. The purchasing power of money is the same everywhere; only the commodities offered are not the same. They differ in a quality that is eco nomically significant—the position in space of the place at which they are ready for consumption.


But although the exchange ratios between money and economic goods of completely similar constitution in all parts of a unitary market area in which the same sort of money is employed are at any time equal to one another, and all apparent exceptions can be traced back to differences in the spatial quality of the commodities, it is nevertheless true that price differentials evoked by the difference in position (and hence in economic quality) of the commodities may under certain circumstances constitute a subjective justification of the assertion that there are differences in the cost of living. He who voluntarily visits Karlsbad on account of his health would be wrong in deducing from the higher price of houses and food there that it is impossible to get as much enjoyment from a given sum of money in Karlsbad as elsewhere and that consequently living is dearer there. This conclusion does not allow for the difference in quality of the commodities whose prices are being compared. It is just because of this difference in quality, just because it has a certain value for him, that the visitor comes to Karlsbad. If he has to pay more in Karlsbad for the same quantity of satisfactions, this is due to the fact that in paying for them he is also paying the price of being able to enjoy them in the immediate neighborhood of the medicinal springs. The case is different for the businessman and laborer and official who are merely tied to Karlsbad by their occupations. The propinquity of the waters has no significance for the satisfaction of their wants, and so their having to pay extra on account of it for every good and service that they buy will, since they obtain no additional satisfaction from it, appear to them as a reduction of the possibilities of the enjoyment that they might otherwise have. If they compare their standard of living with that which they could achieve with the same expenditure in a neighboring town, they will arrive at the conclusion that living is really dearer at the spa than elsewhere. They will then only transfer their activity to the dearer spa if they believe that they will be able to secure there a sufficiently higher money income to enable them to achieve the same standard of living as elsewhere. But in comparing the standards of satisfaction attainable they will leave out of account the advantage of being able to satisfy their wants in the spa itself because this circumstance has no value in their eyes. Every kind of wage will therefore, under the assumption of complete mobility, be higher in the spa than in other, cheaper, places. This is generally known as far as it applies to contract wages; but it is also true of official salaries. The government pays a special bonus to those of its employees who have to take up their duties in "dear" places, in order to put them on a level with those functionaries who are able to live in cheaper places. The laborers too have to be compensated by higher wages for the higher cost of living.


This also is the clue to the meaning of the sentence, "Living is dearer in Austria than in Germany," a sentence which has a certain meaning even though there is no difference between the purchasing power of money in the two countries. The differences in prices in the two areas do not refer to commodities of the same nature; what are supposed to be identical commodities really differ in an essential point; they are available for consumption in different places. Physical causes on the one hand, social causes on the other, give to this distinction a decisive importance in the determination of prices. He who values the opportunity of working in Austria as an Austrian among Austrians, who has been brought up to work and earn money in Austria, and cannot get a living anywhere else on account of language difficulties, national customs, economic conditions, and the like, would nevertheless be wrong in concluding from a comparison of domestic and foreign commodity prices that living was dearer at home. He must not forget that part of every price he pays is for the privilege of being able to satisfy his wants in Austria. An independent rentier with a free choice of domicile is in a position to decide whether he prefers a life of apparently limited satisfactions in his native country among his own kindred to one of apparently more abundant satisfaction among strangers in a foreign land. But most people are spared the trouble of such a choice; for most, staying at home is a matter of necessity, emigration an impossibility.


To recapitulate: the exchange ratio subsisting between commodities and money is everywhere the same. But men and their wants are not everywhere the same, and neither are commodities. Only if these distinctions are ignored is it possible to speak of local differences in the purchasing power of money or to say that living is dearer in one place than in another.

Notes for this chapter

See pp. 97 above.
See Senior, Three Lectures on the Cost of Obtaining Money, pp. 1 ff.
See Wieser, "Der Geldwert und seine Veränderungen," Schriften des Vereins für Sozialpolitik 132: 531 f.

End of Notes

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The Exchange Ratio Between Money of Different Kinds

1 The Twofold Possibility of the Coexistence of Different Kinds of Money


The existence of an exchange ratio between two sorts of money is dependent upon both being used side by side, at the same time, by the same economic agents, as common media of exchange. We could perhaps conceive of two economic areas, not connected in any other way, being linked together only by the fact that each exchanged the commodity it used for money against that used for money by the other, in order then to use the acquired monetary commodity otherwise than as money. But this would not be a case of an exchange ratio between different kinds of money simply arising from their monetary employment. If we wish successfully to conduct our investigation as an investigation into the theory of money, then even in the present chapter we must disregard the nonmonetary uses of the material of which commodity money is made; or, at least, take account of them only where this is necessary for the complete clarification of all the processes connected with our problem. Now the assertion that, apart from the effects of the industrial use of the monetary material, an exchange ratio can be established between two sorts of money only when both are used as money simultaneously and side by side, is not the usual view. That is to say, prevailing opinion distinguishes two cases: that in which two or more domestic kinds of money exist side by side in the parallel standard, and that in which the money in exclusive use at home is of a kind different from the money used abroad. Both cases are dealt with separately, although there is no theoretical difference between them as far as the determination of the exchange ratio between the two sorts of money is concerned.


If a gold-standard country and a silver-standard country have business relations with each other and constitute a unitary market for certain economic goods, then it is obviously incorrect to say that the common medium of exchange consists of gold only for the inhabitants of the gold-standard country, and of silver only for those of the silver-standard country. On the contrary, from the economic point of view both metals must be regarded as money for each area. Until 1873, gold was just as much a medium of exchange for the German buyer of English commodities as silver was for the English buyer of German commodities. The German farmer who wished to exchange corn for English steel goods could not do so without the instrumentality of both gold and silver. Exceptional cases might arise, where a German sold in England for gold and bought again with gold, or where an Englishman sold in Germany for silver and bought with silver; but this merely demonstrates more clearly still the monetary characteristic of both metals for the inhabitants of both areas. Whether the case is one of an exchange through the instrumentality of money used once or used more than once, the only important point is that the existence of international trade relations results in the consequence that the money of each of the single areas concerned is money also for all the other areas


It is true that there are important differences between that money which plays the chief part in domestic trade, is the instrument of most exchanges, predominates in the dealings between consumers and sellers of consumption goods, and in loan transactions, and is recognized by the law as legal tender, and that money which is employed in relatively few transactions, is hardly ever used by consumers in their purchases, does not function as an instrument of loan operations, and is not legal tender. In popular opinion, the former money only is domestic money, the latter foreign money. Although we cannot accept this if we do not want to close the way to an understanding of the problem that occupies us, we must nevertheless emphasize that it has great significance in other connections. We shall have to come back to it in the chapter which deals with the social effects of fluctuations in the objective exchange value of money.

2 The Static or Natural Exchange Ratio Between Different Kinds of Money


For the exchange ratio between two or more kinds of money, whether they are employed side by side in the same country (the parallel standard) or constitute what is popularly called foreign money and domestic money, it is the exchange ratio between individual economic goods and the individual kinds of money that is decisive. The different kinds of money are exchanged in a ratio corresponding to the exchange ratios existing between each of them and the other economic goods. If 1 kg. of gold is exchanged for m kg. of a particular sort of commodity, and 1 kg. of silver for m/15 1/2 kg. of the same sort of commodity, then the exchange ratio between gold and silver will be established at 15 1/2. If some disturbance tends to alter this ratio between the two sorts of money, which we shall call the static or natural ratio, then automatic forces will be set in motion that will tend to reestablish it.*80


Let us consider the case of two countries each of which carries on its domestic trade with the aid of one sort of money only, which is different from that used in the other country. If the inhabitants of two areas with different currencies who have previously exchanged their commodities directly without the intervention of money begin to make use of money in the transaction of their business, they will base the exchange ratio between the two kinds of money on the exchange ratio between each kind of money and the commodities. Let us assume that a gold-standard country and a silver-standard country had exchanged cloth directly for wheat on such terms that one meter of cloth was given for one bushel of wheat. Let the price of cloth in the country of its origin be one gram of gold per meter; that of wheat, 15 grams of silver per bushel. If international trade is now put on a monetary basis, then the price of gold in terms of silver must be established at 15. If it were established higher, say at 16, then indirect exchange through the instrumentality of money would be disadvantageous from the point of view of the owners of the wheat as compared with direct exchange; in indirect exchange for a bushel of wheat they would obtain only fifteen-sixteenths of a meter of cloth as against a whole meter in direct exchange. The same disadvantage would arise for the owners of the cloth if the price of gold was established at anything lower, say at 14 grams of silver. This, of course, does not imply that the exchange ratios between the different kinds of money have actually developed in this manner. It is to be understood as a logical, not a historical, explanation. Of the two precious metals gold and silver it must especially be remarked that their reciprocal exchange ratios have slowly developed with the development of their monetary position.


If no other relations than those of barter exist between the inhabitants of two areas, then balances in favor of one party or the other cannot arise. The objective exchange values of the quantities of commodities and services surrendered by each of the contracting parties must be equal, whether present goods or future goods are involved. Each constitutes the price of the other. This fact is not altered in any way if the exchange no longer proceeds directly but indirectly through the intermediaryship of one or more common media of exchange. The surplus of the balance of payments that is not settled by the consignment of goods and services but by the transmission of money was long regarded merely as a consequence of the state of international trade. It is one of the great achievements of Classical political economy to have exposed the fundamental error involved in this view. It demonstrated that international movements of money are not consequences of the state of trade; that they constitute not the effect, but the cause, of a favorable or unfavorable trade balance. The precious metals are distributed among individuals and hence among nations according to the extent and intensity of their demands for money. No individual and no nation need fear at any time to have less money than it needs. Government measures designed to regulate the international government of money in order to ensure that the community shall have the amount it needs, are just as unnecessary and inappropriate as, say intervention to ensure a sufficiency or corn or iron or the like. This argument dealt the Mercantilist theory its death blow.*81


Nevertheless statesmen are still greatly exercised by the problem of the international distribution of money. For hundreds of years, the Midas theory, systematized by Mercantilism, has been the rule followed by governments in taking measures of commercial policy. In spite of Hume, Smith, and Ricardo, it still dominates men's minds more than would be expected. Phoenixlike, it rises again and again from its own ashes. And indeed it would hardly be possible to overcome it with objective argument; for it numbers its disciples among that great host of the half-educated who are proof against any argument, however simple, if it threatens to rob them of longcherished illusions that have become too dear to part with. It is only regrettable that these lay opinions not only predominate in discussions of economic policy on the part of legislators, the press—even the technical journals—and businessmen, but still occupy much space even in scientific literature. The blame for this must again be laid to the account of obscure notions concerning the nature of fiduciary media and their significance as regards the determination of prices. The reasons which, first in England and then in all other countries, were urged in favor of the limitation of the fiduciary note issue have never been understood by modern writers, who know them only at secondhand or thirdhand. That they in general plead for their retention, or only demand such modifications as leave the principle untouched, merely expresses their reluctance to replace an institution which on the whole has indubitably justified itself by a system whose effects they, to whom the phenomena of the market constitute an insoluble riddle, are naturally least of all able to foresee. When these writers seek for a motive in present-day banking policy, they can find none but that characterized by the slogan, "Protection of the national stock of the precious metals." We can pass the more lightly over these views in the present place since we shall have further opportunity in part three to discuss the true meaning of the bank laws that limit the note issue.


Money does not flow to the place where the rate of interest is highest; neither is it true that it is the richest nations that attract money to themselves. The proposition is as true of money as of every other economic good, that its distribution among individual economic agents depends on its marginal utility. Let us first completely abstract from all geographical and political concepts, such as country and state, and imagine a state of affairs in which money and commodities are completely mobile within a unitary market area. Let us further assume that all payments, other than those cancelled out by offsetting or mutual balancing of claims, are made by transferring money, and not by the cession of fiduciary media; that is to say, that uncovered notes and deposits are unknown. This supposition, again, is similar to that of the "purely metallic currency" of the English Currency School, although with the help of our precise concept of fiduciary media we are able to avoid the obscurities and shortcomings of their point of view. In a state of affairs corresponding to these suppositions of ours, all economic goods, including of course money, tend to be distributed in such a way that a position of equilibrium between individuals is reached, when no further act of exchange that any individual could undertake would bring him any gain, any increase of subjective value. In such a position of equilibrium, the total stock of money, just like the total stocks of commodities, is distributed among individuals according to the intensity with which they are able to express their demand for it in the market. Every displacement of the forces affecting the exchange ratio between money and other economic goods brings about a corresponding change in this distribution, until a new position of equilibrium is reached. This is true of individuals, but it is also true of all the individuals in a given area taken together. For the goods possessed and the goods demanded by a nation are only the sums of the goods possessed and the goods demanded by all the economic agents, private as well as public, which make up the nation, among which the state as such admittedly occupies an important position, but a very far from dominant one.


Trade balances are not causes but merely concomitants of move ments of money. For if we look beneath the veil with which the forms of monetary transactions conceal the nature of exchanges of goods, then it is clear that, even in international trade, commodities are exchanged for commodities, through the instrumentality of money. Just as the single individual does, so also all the individuals in an economic community taken together, wish in the last analysis to acquire not money, but other economic goods. If the state of the balance of payments is such that movements of money would have to occur from one country to the other, independently of any altered estimation of money on the part of their respective inhabitants, then operations are induced which reestablish equilibrium. Those persons who receive more money than they need will hasten to spend the surplus again as soon as possible, whether they buy production goods or consumption goods. On the other hand, those persons whose stock of money falls below the amount they need will be obliged to increase their stock of money, either by restricting their purchases or by disposing of commodities in their possession. The price variations, in the markets of the countries in question, that occur for these reasons, give rise to transactions which must always reestablish the equilibrium of the balance of payments. A credit or debit balance of payments that is not dependent upon an alteration in the conditions of demand for money can only be transient.*82


Thus international movements of money, so far as they are not of a transient nature and consequently soon rendered ineffective by movements in the contrary direction, are always called forth by variations in the demand for money. Now it follows from this that a country in which fiduciary media are not employed is never in danger of losing its stock of money to other countries. Shortage of money and superabundance of money can no more be a permanent experience for a nation than for an individual. Ultimately they are spread out uniformly among all economic agents using the same economic good as common medium of exchange, and naturally their effects on the objective exchange value of money which bring about the adjustment between the stock of money and the demand for it are finally uniform for all economic agents. Measures of economic policy which aim at increasing the quantity of money circulating in a country could be successful so far as the money circulates in other countries also, only if they brought about a displacement in relative demands for money. Nothing is fundamentally altered in all this by the employment of fiduciary media. So far as there remains a demand for money in the narrower sense despite the use of fiduciary media, it will express itself in the same way.


There are many gaps in the Classical doctrine of international trade. It was built up at a time when international exchange relations were largely limited to dealings in present goods. No wonder, then, that its chief reference was to such goods or that it left out of account the possibility of an international exchange of services, and of present goods for future goods. It remained for a later generation to undertake the expansion and correction here necessary, a task that was all the easier since all that was wanted was a consistent expansion of the same doctrine to cover these phenomena as well. The classical doctrine had further restricted itself to that part of the problem presented by international metallic money. The treatment with which credit money had to be content was not satisfactory, and this shortcoming has not been entirely remedied yet. The problem has been regarded too much from the point of view of the technique of the monetary system and too little from that of the theory of exchange of goods. If the latter point of view had been adopted, it would have been impossible to avoid commencing the investigation with the proposition that the balance of trade between two areas with different currencies must always be in equilibrium, without the emergence of a balance needing to be corrected by the transport of money.*83 If we take a gold-standard and a silver-standard country as an example, then there still remains the possibility that the money of the one country will be put to a nonmonetary use in the other. Such a possibility must naturally be ruled out of account. The relations between two countries with fiat money would be the best example to take; if we merely make our example more general by supposing that metallic money may be in use, then only the monetary use of the metallic money must be considered. It is then immediately clear that goods and services can only be paid for with other goods and services; that in the last analysis there can be no question of payment in money.

Notes for this chapter

The theory put forward above, which comes from Ricardo, is advocated with particular forcefulness nowadays by Cassel, who uses the name purchasing-power parity for the static exchange ratio. See Cassel, Money and Foreign Exchange After 1914 (London, 1922), p. 181 f.
See Senior, Three Lectures on the Transmission of the Precious Metals from Country to Country and the Mercantile Theory of Wealth (London, 1828), pp. 5 ff.
See Ricardo, "Principles of Political Economy and Taxation," in Works, ed. McCulloch, 2d ed. (London, 1852), pp. 213 ff.; Hertzka, Das Wesen des Geldes (Leipzig, 1887), pp. 42 ff.; Kinley, Money (New York, 1909), pp. 78 ff.; Wieser, "Der Geldwert und seine Veränderungen," Schriften des Vereins für Sozialpolitik 132: 530 ff.
Transitory displacements are possible, if foreign money is acquired in the speculative anticipation of its appreciating.

End of Notes

17 of 33


The Problem of Measuring the Objective Exchange Value of Money and Variations in It

1 The History of the Problem


The problem of measuring the objective exchange value of money and its variations has attracted much more attention than its significance warrants. If all the columns of figures and tables and curves that have been prepared in this connection could perform what has been promised of them, then we should certainly have to agree that the tremendous expenditure of labor upon their construction would not have been in vain. In fact, nothing less has been hoped from them than the solution of the difficult questions connected with the problem of the objective exchange value of money. But it is very well known, and has been almost ever since the methods were discovered, that such aids cannot avail here.


The fact that, in spite of all this, the improvement of methods of calculating index numbers is still worked at most zealously, and that they have even been able to achieve a certain popularity that is otherwise denied to economic investigation, may well appear puzzling. It becomes explicable if we take into account certain peculiarities of the human mind. Like the king in Rückert's Weisheit des Brahmanen, the layman always tends to seek for formulae that sum up the results of scientific investigation in a few words. But the briefest and most pregnant expression for such summaries is in figures. Simple numerical statement is sought for even where the nature of the case excludes it. The most important results of research in the social sciences leave the multitude apathetic, but any set of figures awakens its interest. Its history becomes a series of dates, its economics a collection of statistical data. No other objection is more often brought against economics by laymen than that there are no economic laws; and if an attempt is made to meet this objection, then almost invariably the request is made that an example of such a law should be named and expounded—as if fragments of systems, whose study demands years of thought on the part of the expert, could be made intelligible to the novice in a few minutes. Only by letting fall morsels of statistics is it possible for the economic theorist to maintain his prestige in the face of questions of this sort.


Great names in the history of economics are associated with various systems of index numbers. Indeed, it was but natural that the best brains should have been the most attracted by this extraordinarily difficult problem. But in vain. Closer investigation shows us how little the inventors of the various index-number methods themselves thought of their attempts, how justly, as a rule, they were able to estimate their importance. He who cares to go to the trouble of demonstrating the uselessness of index numbers for monetary theory and the concrete tasks of monetary policy will be able to select a good proportion of his weapons from the writings of the very men who invented them.

2 The Nature of the Problem


The objective exchange value of the monetary unit can be expressed in units of any individual commodity. Just as we are in the habit of speaking of a money price of the other exchangeable goods, so we may conversely speak of the commodity price of money, and have then so many expressions for the objective exchange value of money as there are commercial commodities that are exchanged for money. But these expressions tell us little; they leave unanswered the questions that we want to solve. There are two parts to the problem of measuring the objective exchange value of money. First we have to obtain numerical demonstration of the fact of variations in the objective exchange value of money; then the question must be decided whether it is possible to make a quantitative examination of the causes of particular price movements, with special reference to the question whether it would be possible to produce evidence of such variations in the purchasing power of money as lie on the monetary side of the ratio.*84


So far as the first-named problem is concerned, it is self-evident that its solution must assume the existence of a good, or complex of goods, of unchanging objective exchange value. The fact that such goods are inconceivable needs no further elucidation. For a good of this sort could exist only if all the exchange ratios between all goods were entirely free from variations. With the continually varying foundations on which the exchange ratios of the market ultimately rest, this presumption can never be true of a social order based upon the free exchange of goods.*85


To measure is to determine the ratio of one quantity to another which is invariable or assumed to be invariable. Invariability in respect of the property to be measured, or at least the legitimacy of assuming such invariability, is a sine qua non of all measurement. Only when this assumption is admissible is it possible to determine the variations that are to be measured. Then, if the ratio between the measure and the object to be measured alter, this can only be referred to causes directly affecting the latter. Thus the problems of measuring the two kinds of variation in the objective exchange value of money go together. If the one is proved to be soluble, then so also is the other; and proof of the insolubility of the one is also proof of the insolubility of the other.

3 Methods of Calculating Index Numbers


Nearly all the attempts that have hitherto been made to solve the problem of measuring the objective exchange value of money have started from the idea that if the price movements of a large number of commodities were combined by a particular method of calculation, the effects of those determinants of the price movements which lie on the side of the commodities would largely cancel one another out, and consequently, that such calculations would make it possible to discover the direction and extent of the effects of those determinants of price movements that lie on the monetary side. This assumption would prove correct, and the inquiries instituted with its help could led to the desired results, if the exchange ratios between the other economic goods were constant among themselves. Since this assumption does not hold good, refuge must be taken in all sorts of artificial hypotheses in order to obtain at least some sort of an idea of the significance of the results gained. But to do this is to abandon the safe ground of statistics and enter into a territory in which, in the absence of any reliable guidance (such as could be provided only by a complete understanding of all the laws governing the value of money), we must necessarily go astray. So long as the determinants of the objective exchange value of money are not satisfactorily elucidated in some other way, the sole possible reliable guide through the tangle of statistical material is lacking. But even if investigation into the determinants of prices and their fluctuations, and the separation Of these determinants into single factors, could be achieved with complete precision, statistical investigation of prices would still be thrown on its own resources at the very point where it most needs support. That is to say, in monetary theory, as in every other branch of economic investigation, it will never be possible to determine the quantitative importance of the separate factors. Examination of the influence exerted by the separate determinants of prices will never reach the stage of being able to undertake numerical imputation among the different factors. All determinants of prices have their effect only through the medium of the subjective estimates of individuals; and the extent to which any given factor influences these subjective estimates can never be predicted. Consequently, the evaluation of the results of statistical investigations into prices, even if they could be supported by established theoretical conclusions, would still remain largely dependent on the rough estimates of the investigator, a circumstance that is apt to reduce their value considerably. Under certain conditions, index numbers may do very useful service as an aid to investigation into the history and statistics of prices; for the extension of the theory of the nature and value of money they are unfortunately not very important.

4 Wieser's Refinement of the Methods of Calculating Index Numbers


Very recently Wieser has made a new suggestion which constitutes an improvement of the budgetary method of calculating index numbers, notably employed by Falkner.*86 This is based on the view that when nominal wages change but continue to represent the same real wages, then the value of money has changed, because it expresses the same real quantity of value differently from before, or because the ratio of the monetary unit to the unit of real value has changed. On the other hand, the value of money is regarded as unchanged when nominal wages go up or down, but real wages move exactly parallel with them. If the contrast between money income and real income is substituted for that between nominal and real wages and the whole sum of the individuals in the community substituted for the single individual, then it is said to follow that such variations of the total money income as are accompanied by corresponding variations of the total real income do not indicate variations in the value of money at all, even if at the same time the prices of goods have changed in accordance with the altered conditions of supply. Only when the same real income is expressed by a different money income has the specific value of money changed. Thus to measure the value of money, a number of typical kinds of income should be chosen and the real expenditure corresponding to each determined, that is, the quantity of each kind of thing on which the incomes are spent. The money expenditure corresponding to this real expenditure is also to be shown, all for a particular base year; and then for each year the sums of money are to be evaluated in which the same quantities of real value were represented, given the prices ruling at the time. The result, it is claimed, would be the possibility of working out an average which would give for the whole country the monetary expression, as determined year by year in the market, of the real income taken as base. Thus it would be discovered whether a constant real value had a constant, a higher, or a lower, money expression year by year, and so a measure would be obtained of variations in the value of money.*87


The technical difficulties in the way of employing this method, which is the most nearly perfect and the most deeply thought out of all methods of calculating index numbers, are apparently insurmountable. But even if it were possible to master them, this method could never fulfill the purpose that it is intended to serve. It could attain its end only under the same supposition that would justify all other methods; namely, the supposition that the exchange ratios between the individual economic goods excluding money are constant, and that only the exchange ratio between money and each of the other economic goods is liable to fluctuation. This would naturally involve an inertia of all social institutions, of population, of the distribution of wealth and income, and of the subjective valuations of individuals. Where everything is in a state of flux the supposition breaks down completely.


It was impossible for this to escape Wieser, who insists on allowance for the fact that the types of income and the classes into which the community is divided gradually alter, and that in the course of time certain kinds of consumption are discontinued and new kinds begun. For short periods, Wieser is of the opinion that this involves no particular difficulty; that it would be easy to retain the comparability of the totals by eliminating expenditures that did not enter into both sets of budgets. For long periods, he recommends Marshall's chain method of always including a sufficient number of transitional types and restricting comparisons to any given type and that immediately preceding or following it. This hardly does away with the difficulty. The farther we went back in history, the more we should have to eliminate; ultimately it seems that only those portions of real income would remain that serve to satisfy the most fundamental needs of existence. Even within this limited scope, comparisons would be impossible, as, say, between the clothing of the twentieth century and that of the tenth century. It is still less possible to trace back historically the typical incomes, which would necessarily involve consideration of the existing division of society into classes. The progress of social differentiation constantly increases the number of types of income. And this is by no means simply due to the splitting up of single types; the process is much more complicated. Members of one group break off and intermingle with other groups or portions of other groups in a most complicated manner. With what type of income of the past can we compare that, say, of the modern factory worker?


But even if we were to ignore all these considerations, other difficulties would arise. It is quite possible, even most probable, that subjective valuations of equal portions of real income have altered in the course of time. Changes in ways of living, in tastes, in opinions concerning the objective use value of individual economic goods, evoke quite extraordinarily large fluctuations here, even in short periods. If we do not take account of this in estimating the variations of the money value of these portions of income, then new sources of error arise that may fundamentally affect our results. On the other hand, there is no basis at all for taking account of them.


All index-number systems, so far as they are intended to have a greater significance for monetary theory than that of mere playing with figures, are based upon the idea of measuring the utility of a certain quantity of money.*88 The object is to determine whether a gram of gold is more or less useful today than it was at a certain time in the past. As far as objective use value is concerned, such an investigation may perhaps yield results. We may assume the fiction, if we like, that, say, a loaf of bread is always of the same utility in the objective sense, always comprises the same food value. It is not necessary for us to enter at all into the question of whether this is permissible or not. For certainly this is not the purpose of index numbers; their purpose is the determination of the subjective significance of the quantity of money in question. For this, recourse must be had to the quite nebulous and illegitimate fiction of an eternal human with invariable valuations. In Wieser's typical incomes that have to be traced back through the centuries may be seen an attempt to refine this fiction and to free it from its limitations. But even this attempt cannot make the impossible possible, and was necessarily bound to fail. It represents the most perfect conceivable development of the index-number system, and the fact that this also leads to no practical result condemns the whole business. Of course, this could not escape Wieser. If he neglected to lay particular stress upon it, this is probably due solely to the circumstance that his concern was not so much to indicate a way of solving this insoluble problem, as to extract from a usual method all that could be got from it.

5 The Practical Utility of Index Numbers


The inadmissibility of the methods proposed for measuring variations in the value of money does not obtrude itself too much if we only want to use them for solving practical problems of economic policy. Even if index numbers cannot fulfill the demands that theory has to make, they can still, in spite of their fundamental shortcomings and the inexactness of the methods by which they are actually determined, perform useful workaday services for the politician.


If we have no other aim in view than the comparison of points of time that lie close to one another, then the errors that are involved in every method of calculating numbers may be so far ignored as to allow us to draw certain rough conclusions from them. Thus, for example, it becomes possible to a certain extent to span the temporal gap that lies, in a period of variation in the value of money, between movements of stock exchange rates and movements of the purchasing power that is expressed in the prices of commodities.*89


In the same way we can follow statistically the progress of variations in purchasing power from month to month. The practical utility of all these calculations for certain purposes is beyond doubt; they have proved their worth in quite recent events. But we should beware of demanding more from them than they are able to perform.

Notes for this chapter

[Following Menger, we should call the first of these two problems the problem of the measurability of the äussere objective exchange value of money, the second that of the measurability of its innere objective exchange value. See also p. 146 n. H.E.B.]
See Menger, Grundsätze der Volkswirtschaftslehre, 2d ed. (Vienna, 1923), pp. 298 ff.
On Falkner's method, see Laughlin, The Principles of Money (London, 1903), pp. 213—21; Kinley, Money (New York, 1909), pp. 253 ff.
See Wieser, "Uber die Messung der Veränderungen des Geldwerts," Schriften des Vereins für Sozialpolitik 132 (Leipzig, 1910): 544 ff. Joseph Lowe seems to have made a similar proposal as early as 1822; on this, see Walsh, The Measurement of General Exchange Value (New York, 1901), p. 84.
See Weiss, Die moderne Tendenz in der Lehre vom Geldwert, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 19, p. 546.
See also pp. 243 ff. below.

End of Notes

18 of 33


The Social Consequences of Variations in the Objective Exchange Value of Money

1 The Exchange of Present Goods for Future Goods


Variations in the objective exchange value of money evoke displacements in the distribution of income and property, on the one hand because individuals are apt to overlook the variability of the value of money, and on the other hand because variations in the value of money do not affect all economic goods and services uniformly and simultaneously.


For hundreds, even thousands, of years, people completely failed to see that variations in the objective exchange value of money could be induced by monetary factors. They tried to explain all variations of prices exclusively from the commodity side. It was Bodin's great achievement to make the first attack upon this assumption, which then quickly disappeared from scientific literature. It long continued to dominate lay opinion, but nowadays it appears to be badly shaken even here. Nevertheless, when individuals are exchanging present goods against future goods they do not take account in their valuations of variations in the objective exchange value of money. Lenders and borrowers are not in the habit of allowing for possible future fluctuations in the objective exchange value of money.


Transactions in which present goods are exchanged for future goods also occur when a future obligation has to be fulfilled, not in money, but in other goods. Still more frequent are transactions in which the contracts do not have to be fulfilled by either party until a later point of time. All such transactions involve a risk, and this fact is well known to all contractors. When anybody buys (or sells) corn, cotton, or sugar futures, or when anybody enters into a long-term contract for the supply of coal, iron, or timber, he is well aware of the risks that are involved in the transaction. He will carefully weigh the chances of future variations in prices, and often take steps, by means of insurance or hedging transactions such as the technique of the modern exchange has developed, to reduce the aleatory factor in his dealings.


In making long-term contracts involving money, the contracting parties are generally unconscious that they are taking part in a speculative transaction. Individuals are guided in their dealings by the belief that money is stable in value, that its objective exchange value is not liable to fluctuations, at least so far as its monetary determinants are concerned. This is shown most clearly in the attitude assumed by legal systems with regard to the problem of the objective exchange value of money.


In law, the objective exchange value of money is stable. It is sometimes asserted that legal systems adopt the fiction of the stability of the exchange value of money; but this is not true. In setting up a fiction, the law requires us to take an actual situation and imagine it to be different from what it really is, either by thinking of nonexistent elements as added to it or by thinking of existing elements as removed from it, so as to permit the application of legal maxims which refer only to the situation as thus transformed. Its purpose in doing this is to make it possible to decide cases according to analogy when a direct ruling does not apply. The whole nature of legal fictions is determined by this purpose, and they are sustained only so far as it requires. The legislator and the judge always remain aware that the fictitious situation does not correspond to reality. So it is also with the so-called dogmatic fiction that is employed in jurisprudence to permit legal facts to be systematically classified and related to each other. Here again, the situation is thought of as existing, but it is not assumed to exist.*90


The attitude of the law to money is quite a different matter. The jurist is totally unacquainted with the problem of the value of money; he knows nothing of fluctuations in its exchange value. The naive popular belief in the stability of the value of money has been admitted, with all its obscurity, into the law, and no great historical cause of large and sudden variations in the value of money has ever provided a motive for critical examination of the legal attitude toward the subject. The system of civil law had already been completed when Bodin set the example of attempting to trace back variations in the purchasing power of money to causes exerting their influence from the monetary side. In this matter, the discoveries of more modern economists have left no trace on the law. For the law, the invariability of the value of money is not a fiction, but a fact.


All the same, the law does devote its attention to certain incidental questions of the value of money. It deals thoroughly with the question of how existing legal obligations and indebtednesses should be reckoned as affected by a transition from one currency to another. In earlier times, jurisprudence devoted the same attention to the royal debasement of the coinage as it was later to devote to the problems raised by the changing policies of states in choosing first between credit money and metallic money and then between gold and silver. Nevertheless, the treatment that these questions have received at the hands of the jurists has not resulted in recognition of the fact that the value of money is subject to continual fluctuation. In fact, the nature of the problem, and the way in which it was dealt with, made this impossible from the very beginning. It was treated, not as a question of the attitude of the law toward variations in the value of money, but as a question of the power of the prince or state arbitrarily to modify existing obligations and thus to destroy existing rights. At one time, this gave rise to the question whether the legal validity of the money was determined by the stamp of the ruler of the country or by the metal content of the coin; later, to the question whether the command of the law or the free usage of business was to settle if the money was legal tender or not. The answer of public opinion, grounded on the principles of private property and the protection of acquired rights, ran the same in both cases: "Prout quidque contractum est, ita et solvi debet; ut cum re contraximus, re solvi debet, veluti cum mutuum dedimus, ut retro pecuniae tantundem solvi debeat."*91 The proviso in this connection, that nothing was to be regarded as money except what passed for such at the time when the transaction was entered into and that the debt must be repaid not merely in the metal but in the currency that was specified in the contract, followed from the popular view, regarded as the only correct one by all classes of the community but especially by the tradesmen, that what was essential about a coin was its metallic content, and that the stamp had no other significance than as an authoritative certificate of weight and fineness. It occurred to nobody to treat coins in business transactions any differently from other pieces of metal of the same weight and fineness. In fact, it is now removed beyond doubt that the standard was a metallic one.


The view that in the fulfillment of obligations contracted in terms of money the metallic content alone of the money was to be taken into account prevailed against the nominalistic doctrine expounded by the minting authorities. It is manifested in the legal measures taken for stabilizing the metal content of the coinage, and since the end of the seventeenth century when currencies developed into systematic monetary standards it has provided the criterion for determining the ratio between different coins of the same metal (when current simultaneously or successively), and for the attempts, admittedly unsuccessful, to combine the two precious metals in a uniform monetary system.


Even the coming of credit money, and the problems that it raised, could not direct the attention of jurisprudence to the question of the value of money. A system of paper money was thought of as according with the spirit of the law only if the paper money remained constantly equivalent to the metallic money to which it was originally equivalent and which it had replaced or if the metal content or metal value of the claims remained decisive in contracts of indebtedness. But the fact that the exchange value of even metallic money is liable to variation has continued to escape explicit legal recognition and public opinion, at least as far as gold is concerned (and no other metal need nowadays be taken into consideration); there is not a single legal maxim that takes account of it, although it has been well known to economists for more than three centuries.


In its naive belief in the stability of the value of money the law is in complete harmony with public opinion. When any sort of difference arises between law and opinion, a reaction must necessarily follow; a movement sets in against that part of the law that is felt to be unjust. Such conflicts always tend to end in a victory of opinion over the law; ultimately the views of the ruling class become embodied in the law. The fact that it is nowhere possible to discover a trace of opposition to the attitude of the law on this question of the value of money shows clearly that its provisions relating to this matter cannot possibly be opposed to general opinion. That is to say, not only the law but public opinion also has never been troubled with the slightest doubt whatever concerning the stability of the value of money; in fact, so free has it been from doubts on this score that for an extremely long period money was regarded as the measure of value. And so when anybody enters into a credit transaction that s to be fulfilled in money it never occurs to him to take account of future fluctuations in the purchasing power of money.


Every variation in the exchange ratio between money and other economic goods shifts the position initially assumed by the parties to credit transactions in terms of money. An increase in the purchasing power of money is disadvantageous to the debtor and advantageous to the creditor; a decrease in its purchasing power has the contrary significance. If the parties to the contract took account of expected variations in the value of money when they exchanged present goods against future goods, these consequences would not occur. (But it is true that neither the extent nor the direction of these variations can be foreseen.)


The variability of the purchasing power of money is only taken into account when attention is drawn to the problem by the co-existence of two or more sorts of money whose exchange ratio is liable to big fluctuations. It is generally known that possible future variations in foreign-exchange rates are fully allowed for in the terms of credit transactions of all kinds. The part played by considerations of this sort, both in trade within countries where more than one sort of money is in use and in trade between countries with different currencies, is well known. But the allowance for the variability of the value of money in such cases is made in a fashion that is still not incompatible with the supposition that the value of money is stable. The fluctuations in value of one kind of money are measured by the equivalent of one of its units in terms of units of another kind of money, but the value of this other kind of money is for its part assumed to be stable. The fluctuations of the currency whose stability is in question are measured in terms of gold; but the fact that gold currencies are also liable to fluctuation is not taken into account. In their dealings individuals allow for the variability of the objective exchange value of money, so far as they are conscious of it; but they are conscious of it only with regard to certain kinds of money, not with regard to all. Gold, the principal common medium of exchange nowadays, is thought of as stable in value.*92


So far as variations in the objective exchange value of money are foreseen, they influence the terms of credit transactions. If a future fall in the purchasing power of the monetary unit has to be reckoned with, lenders must be prepared for the fact that the sum of money which a debtor repays at the conclusion of the transaction will have a smaller purchasing power than the sum originally lent. Lenders, in fact, would do better not to lend at all, but to buy other goods with their money. The contrary is true for debtors. If they buy commodities with the money they have borrowed and sell them again after a time, they will retain a surplus over and above the sum that they have to pay back. The credit transaction results in a gain for them. Consequently it is not difficult to understand that, so long as continued depreciation is to be reckoned with, those who lend money demand higher rates of interest and those who borrow money are willing to pay the higher rates. If, on the other hand, it is expected that the value of money will increase, then the rate of interest will be lower than it would otherwise have been.*93


Thus if the direction and extent of variations in the exchange value of money could be foreseen, they would not be able to affect the relations between debtor and creditor; the coming alterations in purchasing power could be sufficiently allowed for in the original terms of the credit transaction.*94 But since this assumption, even so far as fluctuations in credit money or fiat money relatively to gold money are concerned, never holds good except in a most imperfect manner, the allowance made in debt contracts for future variations in the value of money is necessarily inadequate; while even nowadays, after the big and rapid fluctuations in the value of gold that have occurred since the outbreak of the world war, the great majority of those concerned in economic life (one might, in fact, say all of them, apart from the few who are acquainted with theoretical economics) are completely ignorant of the fact that the value of gold is variable. The value of gold currencies is still regarded as stable.


Those economists who have recognized that the value of even the best money is variable have recommended that in settling the terms of credit transactions, that is to say, the terms on which present goods are exchanged for future goods, the medium of exchange should not be one good alone, as is usual nowadays, but a "bundle" of goods; it is possible in theory if not in practice to include all economic goods in such a bundle. If this proposal were adopted, money would still be used as a medium for the exchange of present goods; but in credit transactions the outstanding obligation would be discharged, not by payment of the nominal sum of money specified in the contract, but by payment of a sum of money with the purchasing power that the original sum had at the time when the contract was made. Thus, if the objective exchange value of money rises during the period of the contract, a correspondingly smaller sum of money will be payable; if it falls, a correspondingly larger sum.


The arguments devoted above to the problem of measuring variations in the value of money show the fundamental inadequacy of these recommendations. If the prices of the various economic goods are given equal weight in the determination of the parity coefficients without consideration of their relative quantities, then the evils for which a remedy is sought may merely be aggravated. If variations in the prices of such commodities as wheat, rye, cotton, coal, and iron are given the same significance as variations in the prices of such commodities as pepper, opium, diamonds, or nickel, then the establishment of the tabular standard would have the effect of making the content of long-term contracts even more uncertain than at present. If what is called a weighted average is used, in which individual commodities have an effect proportioned to their significance,*95 then the same consequences will still follow as soon as the conditions of production and consumption alter. For the subjective values attached by human beings to different economic goods are just as liable to constant fluctuation as are the conditions of production; but it is impossible to take account of this fact in determining the parity coefficients, because these must be invariable in order to permit connection with the past.


It is probable that the immediate associations of any mention nowadays of the effects of variations in the value of money on existing debt relations will be in terms of the results of the monstrous experiments in inflation that have characterized the recent history of Europe. In all countries, during the latter part of this period, the jurists have thoroughly discussed the question of whether it would have been possible or even whether it was still possible, by means of the existing law, or by creating new laws, to offset the injury done to creditors. In these discussions it was usually overlooked that the variations in the content of debt contracts that were consequent upon the depreciation of money were due to the attitude toward the problem taken by the law itself. It is not as if the legal system were being invoked to remedy an inconvenience for which it was not responsible. It was just its own attitude that was felt to be an inconvenience—the circumstance that the government had brought about depreciation. For the legal maxim by which an inconvertible banknote is legal tender equally with the gold money that was in circulation before the outbreak of the war, with which it has nothing in common but the name mark, is a part of the whole system of legal rules which allow the state to exploit its power to create new money as a source of income. It can no more be dissociated from this system than can the laws canceling the obligation of the banks to convert their notes and obliging them to make loans to the government by the issue of new notes.


When jurists and businessmen assert that the depredation of money has a very great influence on all kinds of debt relations, that it makes all kinds of business more difficult, or even impossible, that it invariably leads to consequences that nobody desires and that everybody feels to be unjust, we naturally agree with them. In a social order that is entirely founded on the use of money and in which all accounting is done in terms of money, the destruction of the monetary system means nothing less than the destruction of the basis of all exchange. Nevertheless, this evil cannot be counteracted by ad hoc laws designed to remove the burden of the depreciation from single persons, or groups of persons, or classes of the community, and consequently to impose it all the more heavily on others. If we do not desire the pernicious consequences of depreciation, then we must make up our minds to oppose the inflationary policy by which the depreciation is created.


It has been proposed that monetary liabilities should be settled in terms of gold and not according to their nominal amount. If this proposal were adopted, for each mark that had been borrowed that sum would have to be repaid that could at the time of repayment buy the same weight of gold as one mark could at the time when the debt contract was entered into.*96 The fact that such proposals are now put forward and meet with approval shows that etatism has already lost its hold on the monetary system and that inflationary policies are inevitably approaching their end.*97 Even only a few years ago, such a proposal would either have been ridiculed or else branded as high treason. (It is, by the way, characteristic that the first step toward enforcing the idea that the legal tender of paper money should be restricted to its market value was taken without exception in directions that were favorable to the national exchequer.)


To do away with the consequences of unlimited inflationary policy one thing only is necessary—the renunciation of all inflationary measures. The problem which the proponents of the tabular standard seek to solve by means of a "commodity currency" supplementing the metallic currency, and which Irving Fisher seeks to solve by his proposals for stabilizing the purchasing power of money, is a different one—that of dealing with variations in the value of gold.

2 Economic Calculation and Accountancy


The naive conception of money as stable in value or as a measure of value is also responsible for economic calculation being carried out in terms of money.


Even in other respects, accountancy is not perfect. The precision of its statements is only illusory. The valuations of goods and rights with which it deals are always based on estimates depending on more or less uncertain and unknown factors. So far as this uncertainty arises from the commodity side of the valuations, commercial practice, sanctioned by the law, attempts to get over the difficulty by the exercise of the greatest possible caution. With this purpose it demands conservative estimates of assets and liberal estimates of liabilities, so that the merchant may be preserved from self-deceit about the success of his enterprises and his creditors protected.


But there are also shortcomings in accountancy that are due to the uncertainty in its valuations that results from the liability to variation of the value of money itself. Of this, the merchant, the accountant, and the commercial court are alike unsuspicious. They hold money to be a measure of price and value, and they reckon as freely in monetary units as in units of length, area, capacity, and weight. And if an economist happens to draw their attention to the dubious nature of this procedure, they do not even understand the point of his remarks.*98


This disregard of variations in the value of money in economic calculation falsities accounts of profit and loss. If the value of money falls, ordinary bookkeeping, which does not take account of monetary depreciation, shows apparent profits, because it balances against the sums of money received for sales a cost of production calculated in money of a higher value, and because it writes off from book values originally estimated in money of a higher value items of money of a smaller value. What is thus improperly regarded as profit, instead of as part of capital, is consumed by the entrepreneur or passed on either to the consumer in the form of price reductions that would not otherwise have been made or to the laborer in the form of higher wages, and the government proceeds to tax it as income or profits. In any case, consumption of capital results from the fact that monetary depreciation falsities capital accounting. Under certain conditions the consequent destruction of capital and increase of consumption may be partly counteracted by the fact that the depreciation also gives rise to genuine profits, those of debtors, for example, which are not consumed but put into reserves. But this can never more than partly balance the destruction of capital induced by the depreciation.*99


The consumers of the commodities that are sold too cheaply as a result of the false reckoning induced by the depreciation need not be inhabitants of the territory in which the depreciating money is used as the national currency. The price reductions brought about by currency depreciation encourage export to countries the value of whose money is either not falling at all or at least falling less rapidly. The entrepreneur who is reckoning in terms of a currency with a stable value is unable to compete with the entrepreneur who is prepared to make a quasi-gift of part of his capital to his customers. In 1920 and 1921, Dutch traders who had sold commodities to Austria could buy them back again after a while much more cheaply than they had originally sold them, because the Austrian traders completely failed to see that they were selling them for less than they had cost.


So long as the true state of the case is not recognized, it is customary to rejoice in a naive Mercantilistic fashion over the increase of exports and to see in the depreciation of money a welcome "export premium." But once it is discovered that the source whence this premium flows is the capital of the community, then the "selling off" procedure is usually regarded less favorably. Again, in importing countries the public attitude wavers between indignation against "dumping" and satisfaction with the favorable conditions of purchase.


Where the currency depreciation is a result of government inflation carried out by the issue of notes, it is possible to avert its disastrous effect on economic calculation by conducting all bookkeeping in a stable money instead. But so far as the depreciation is a depreciation of gold, the world money, there is no such easy way out.*100

3 Social Consequences of Variations in the Value of Money When Only One Kind of Money Is Employed


If we disregard the exchange of present goods for future goods, and restrict our considerations for the time being to those cases in which the only exchanges are those between present goods and present money, we shall at once observe a fundamental difference between the effects of an isolated variation in a single commodity price, emanating solely from the commodity side, and the effects of a variation in the exchange ratio between money and other economic goods in general, emanating from the monetary side. Variations in the price of a single commodity influence the distribution of goods among individuals primarily because the commodity in question, if it plays a part in exchange transactions at all, is ex definitione not distributed among individuals in proportion to their demands for it .There are economic agents who produce it (in the broadest sense of the word, so as to include dealers) and sell it, and there are economic agents who merely buy it and consume it. And it is obvious what effects would result from a displacement of the exchange ratio between this particular good and the other economic goods (including money); it is clear who would be likely to benefit by them and who to be injured.


The effects in the case of money are different. As far as money is concerned, all economic agents are to a certain extent dealers.*101 Every separate economic agent maintains a stock of money that corresponds to the extent and intensity with which he is able to express his demand for it in the market. If the objective exchange value of all the stocks of money in the world could be instantaneously and in equal proportion increased or decreased, if all at once the money prices of all goods and services could rise or fall uniformly, the relative wealth of individual economic agents would not be affected. Subsequent monetary calculation would be in larger or smaller figures; that is all. The variation in the value of money would have no other significance than that of a variation of the calendar or of weights and measures.


The social displacements that occur as consequences of variations in the value of money result solely from the circumstance that this assumption never holds good. In the chapter dealing with the determinants of the objective exchange value of money it was shown that variations in the value of money always start from a given point and gradually spread out from this point through the whole community. And this alone is why such variations have an effect on the social distribution of income.


It is true that the variations in market exchange ratios that emanate from the commodity side are also not as a rule completed all at once; they also start at some particular point and then spread with greater or less rapidity. And because of this, price variations of this sort too are followed by consequences that are due to the fact that the variations in prices do not occur all at once but only gradually. But these are consequences that are encountered in a marked degree by a limited number of economic agents only namely, those who, as dealers or producers, are sellers of the commodity in question. And further, this is not the sum of the consequences of variations in the objective exchange value of a commodity. When the price of coal falls because production has increased while demand has remained unaltered, then, for example, those retailers are involved who have taken supplies from the wholesale dealers at the old higher price but are now able to dispose of them only at the new and lower price. But this alone will not account for all the social changes brought about by the increase of production of coal. The increase in the supply of coal will have improved the economic position of the community. The fall in the price of coal does not merely amount to a rearrangement of income and property between producer and consumer; it also expresses an increase in the national dividend and national wealth. Many have gained what none have lost. The case of money is different.


The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or tails off, or, if it increases, at least increases less than the stock. This increase in the stock of money, as we have seen, starts with the original owners of the additional quantity of money and then transfers itself to those that deal with these persons, and so forth. A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before. High prices lead to increased production and rising wages, and, because all of this is generally regarded as a sign of economic prosperity, a fall in the value of money is, and always has been, considered an extraordinarily effective means of increasing economic welfare.*102 This is a mistaken view, for an increase in the quantity of money results in no increase of the stock of consumption goods at people's disposal. Its effect may well consist in an alteration of the distribution of economic goods among human beings but in no case, apart from the incidental circumstance referred to on page 161 above, can it directly increase the total amount of goods possessed by human beings, or their welfare. It is true that this result may be brought about indirectly, in the way in which any change in distribution may affect production as well; that is, by those classes in whose favor the redistribution occurs using their additional command of money to accumulate more capital than would have been accumulated by those people from whom the money was withdrawn. But this does not concern us here. What we are concerned with is whether the variation in the value of money has any other economic significance than its effect on distribution. If it. has no other economic significance, then the increase of prosperity can only be apparent; for it can only benefit a part of the community at the cost of a corresponding loss by the other part. And thus in fact the matter is. The cost must be borne by those classes or countries that are the last to be reached by the fall in the value of money.


Let us, for instance, suppose that a new gold mine is opened in an isolated state. The supplementary quantity of gold that streams from it into commerce goes at first to the owners of the mine and then by turns to those who have dealings with them. If we schematically divide the whole community into four groups, the mine owners, the producers of luxury goods, the remaining producers, and the agriculturalists, the first two groups will be able to enjoy the benefits resulting from the reduction in the value of money the former of them to a greater extent than the latter. But even as soon as we reach the third group, the situation is altered. The profit obtained by this group as a result of the increased demands of the first two will already be offset to some extent by the rise in the prices of luxury goods which will have experienced the full effect of the depreciation by the time it begins to affect other goods. Finally for the fourth group, the whole process will result in nothing but loss. The farmers will have to pay dearer for all industrial products before they are compensated by the increased prices of agricultural products. It is true that when at last the prices of agricultural products do rise, the period of economic hardship for the farmers is over; but it will no longer be possible for them to secure profits that will compensate them for the losses they have suffered. That is to say, they will not be able to use their increased receipts to purchase commodities at prices corresponding to the old level of the value of money; for the increase of prices will already have gone through the whole community. Thus the losses suffered by the farmers at the time when they still sold their products at the old low prices but had to pay for the products of others at the new and higher prices remain uncompensated. It is these losses of the groups that are the last to be reached by the variation in the value of money which ultimately constitute the source of the profits made by the mine owners and the groups most closely connected with them.


There is no difference between the effects on the distribution of income and wealth that are evoked by the fact that variations in the objective exchange value of money do not affect different goods and services at the same time and in the same degree, whether the case is that of metallic money or that of fiat or credit money. When the increase of money proceeds by way of issue of currency notes or inconvertible banknotes, at first only certain economic agents benefit and the additional quantity of money only spreads gradually through the whole community. If, for example, there is an issue of paper money in time of war, the new notes will first go into the pockets of the war contractors. "As a result, these persons' demands for certain articles will increase and so also the price and the sale of these articles, but especially in so far as they are luxury articles. Thus the position of the producers of these articles will be improved, their demand for other commodities will also increase, and thus the increase of prices and sales will go on, distributing itself over a constantly augmented number of articles, until at last it has reached them all."*103 In this case, as before, there are those who gain by inflation and those who lose by it. The sooner anybody is in a position to adjust his money income to its new value, the more favorable will the process be for him. Which persons, groups, and classes fare better in this, and which worse, depends upon the actual data of each individual case, without knowledge of which we are not in a position to form a judgment.


Let us now leave the example of the isolated state and turn our attention to the international movements that arise from a fall in the value of money due to an increase in its amount. Here, again, the process is the same. There is no increase in the available stock of goods; only its distribution is altered. The country in which the new mines are situated and the countries that deal directly with it have their position bettered by the fact that they are still able to buy commodities from other countries at the old lower prices at a time when depreciation at home has already occurred. Those countries that are the last to be reached by the new stream of money are those which must ultimately bear the cost of the increased welfare of the other countries. Thus Europe made a bad bargain when the newly discovered gold fields of America, Australia, and South Africa evoked a tremendous boom in these countries. Palaces rose over night where there was nothing a few years before but virgin forest and wilderness; the prairies were intersected with railways; and anything and everything in the way of luxury goods that could be produced by the Old World found markets in territories which a little earlier had been populated by naked nomads and among people who in many cases had previously been without even the barest necessaries of existence. All of this wealth was imported from the old industrial countries by the new colonists, the fortunate diggers, and paid for in gold that was spent as freely as it had been received. It is true that the prices paid for these commodities were higher than would have corresponded to the earlier purchasing power of money; nevertheless, they were not so high as to make full allowance for the changed circumstances. Europe had exported ships and rails, metal goods and textiles, furniture and machines, for gold which it little needed or did not need at all, for what it had already was enough for all its monetary transactions.


A diminution of the value of money brought about by any other kind of cause has an entirely similar effect. For the economic consequences of variations in the value of money are determined, not by their causes, but by the nature of their slow progress, from person to person, from class to class, and from country to country. If we consider in particular those variations in the value of money which arise from the action of sellers in increasing prices, as described in the second chapter of this part, we shall find that the resultant gradual diminution of the value of money constitutes one of the motives of the groups which apparently dictate the rise of prices. The groups which begin the rise have it turned to their own disadvantage when the other groups eventually raise their prices too; but the former groups receive their higher prices at a time when the prices of the things they buy are still at the lower level. This constitutes a permanent gain for them. It is balanced by the losses of those groups who are the last to raise the prices of their goods or services; for these already have to pay the higher prices at a time when they are still receiving only the lower prices for what they sell. And when they eventually raise their prices also, being the last to do this they can no longer offset their earlier losses at the expense of other classes of the community. Wage laborers used to be in this situation, because as a rule the price of labor did not share in the earlier stages of upward price movements. Here the entrepreneurs gained what the laborers lost. For a long time, civil servants were in the same situation. Their multitudinous complaints were partly based on the fact that, since their money incomes could not easily be increased, they had largely to bear the cost of the continual rise in prices. But recently this state of affairs has been changed through the organization of the civil servants on trade-union lines, which has enabled them to secure a quicker response to demands for increases of salaries.


The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here. Let us assume, for instance, that bankruptcy of the credit-issuing institutions of a country leads to a panic and that everybody is ready to sell commodities at any price whatever in order to put himself in possession of cash, while on the other hand buyers cannot be found except at greatly reduced prices. It is conceivable that the increase in the value of money that would arise in consequence of such a panic would reach all persons and commodities uniformly and simultaneously. As a rule, however, an increase in the value of money spreads only gradually. The first of those who have to con tent themselves with lower prices than before for the commodities they sell, while they still have to pay the old higher prices for the commodities they buy, are those who are injured by the increase in the value of money. Those, however, who are the last to have to reduce the prices of the commodities they sell, and have meanwhile been able to take advantage of the fall in the prices of other things, are those who profit by the change.

4 The Consequences of Variations in the Exchange Ratio Between Two Kinds of Money


Among the consequences of variations in the value of money it is those of variations in the exchange ratio between two different kinds of money in which economic science has been chiefly interested. This interest has been aroused by the events of monetary history. In the course of the nineteenth century international trade developed in a hitherto undreamed-of manner, and the economic connections between countries became extraordinarily close. Now just at this time when commercial relations were beginning to grow more active, the monetary standards of the individual states were becoming more diverse. A number of countries went over for a shorter or longer period to credit money and the others, which were partly on gold and partly on silver, were soon in difficulties, because the ratio between the values of these two precious metals, which had changed but slowly during centuries, suddenly began to exhibit sharp variations. And in recent years this problem has been given a much greater practical significance still by monetary happenings in the war and postwar periods.


Let us suppose that one kilogram of silver had been exchangeable for ten quintals of wheat, and that upon the objective exchange value of silver being halved, owing, say, to the discovery of new and prolific mines, one kilogram of it was no longer able to purchase more than five bushels of wheat. From what has been said on the natural exchange ratio of different kinds of money, it follows that the objective exchange value of silver in terms of other kinds of money would now also be halved. If it had previously been possible to purchase one kilogram of gold with fifteen kilograms of silver, thirty kilograms would now be needed to make the same purchase; for the objective exchange value of gold in relation to commodities would have remained unchanged, while that of silver had been halved. Now this change in the purchasing power of silver over commodities will not occur all at once, but gradually. A full account has been given of the way in which it will start from a certain point and gradually spread outward, and of the consequences of this process. Until now we have investigated these consequences only so far as they occur within an area with a uniform monetary standard; but now we must trace up the further consequences involved in commercial relations with areas in which other sorts of money are employed. One thing that was found to be true of the former case can be predicated of this also: if the variations in the objective exchange value of the money occurred uniformly and simultaneously throughout the whole community then such social consequences could not appear at all. The fact that these variations always occur one after another is the sole reason for their remarkable economic effects.


Variations in the objective exchange value of a given kind of money do not affect the determination of the exchange ratio between this and other kinds of money until they begin to affect commodities that either are already objects of commercial relations between the two areas or at least are able to become such upon a moderate change in prices. The point of time at which this situation arises determines the effects upon the commercial relations of the two areas that will result from variations in the objective exchange value of money. These vary according as the prices of the commodities concerned in international trade are adjusted to the new value of money before or after those of other commodities. Under the modern organization of the monetary system this adjustment is usually first made on the stock exchanges. Speculation on the foreign-exchange and security markets anticipates coming variations in the exchange ratios between the different kinds of money at a time when the variations in the value of money have by no means completed their course through the community, perhaps when they have only just begun it, but in any case before they have reached the commodities that play a decisive part in foreign trade. He would be a poor speculator who did not grasp the course of events in time and act accordingly. But as soon as the variation in the foreign-exchange rate has been brought about, it reacts upon foreign trade in a peculiar manner until the prices of all goods and services have been adjusted to the new objective exchange value of money. During this interval the margins between the different prices and wages constitute a fund that somebody must receive and somebody surrender. In a word, we are here again confronted with a redistribution, which is noteworthy in that its influence extends beyond the are where the good whose objective exchange value is changing is employed as domestic money. It is clear that this is the only sort of consequence that can follow from variations in the value of money. The social stock of goods has in no way been increased; the total quantity that can be distributed has remained the same.


As soon as an uncompleted change in the objective exchange value of any particular kind if money becomes expressed in the foreign-exchange rates, a new opportunity of making a profit is opened up, either for exporters or for importers according as the purchasing power of money is decreasing or increasing. Let us take the former case, that of the diminution in the value of money. Since, according to our assumptions, the changes in domestic prices are not yet finished, exporters derive an advantage from the circumstance that the commodities that they market already fetch the new higher prices whereas the commodities and services that they want themselves and, what is of particular importance, the material and personal factors of production that they employ, are still obtainable at the old lower prices. Who the "exporter" is who pockets this gain, whether it is the producer or the dealer, is impertinent to our present inquiry; all that we need to know is that in the given circumstances transactions will result in profit for some and loss for others.


In any case the exporter shares his profit with the foreign importer and foreign consumer And it is even possible—this depends upon the organization of the export trade—that the profits which the exporter retains are only apparent, not real.


Thus the result is always that the gains of foreign buyers, which in certain cases are shared with home exporters, are counterbalanced by losses that are borne entirely at home. It is clear that what was said of the promotion of exportation by the falsification of monetary accounting applies also to the "export premium" arising from a diminution of the value of money.

Notes for this chapter

See Dernburg, Pandekten, 6th ed. (Berlin, 1900), vol. 1, p. 84. On the fact that one of the chief characteristics of a fiction is the explicit consciousness of its fictitiousness, see also Vaihinger, Die Philosophie des Als ob, 6th ed. (Leipzig, 1920), p. 173; English trans., The Philosophy of "As If" (London: Kegan Paul, 1924).
L. 80, Dig. de solutionibus et liberationibus 46, 3. Pomponius libro quarto ad Quintum Mucium. See further Seidler, "Die Schwankungen des Geldwertes und die juristische Lehre von dem Inhalt der Geldschulden," Jahrbücher für Nationalökonomie und Statistik (1894), 3d series, vol. 7, pp. 685 ff.; Endemann, Studien in der romanische-kanonistischen Wirtschafts- und Rechtslehre bis gegen Ende des 17 Jahrhunderts (Berlin, 1874), vol. 2, p. 173.
In a review of the first edition (Die Neue Zeit, 30th year, vol. 2, p. 1024-1027), Hilferding criticized the above arguments as "merely funny." Perhaps it is demanding too much to expect this detached sense of humor to be shared by those classes of the German nation who have suffered in consequence of the depreciation of the mark. Yet only a year or two ago even these do not appear to have understood the problem any better. Fisher (Hearings Before the Committee on Banking and Currency of the House of Representatives, 67th Cong., 4th sess., on H.R. 1788 [Washington, D.C., 1923], pp. 5 ff., 25 ff.) gives typical illustrations. It was certainly an evil fate for Germany that its monetary and economic policy in recent years should have been in the hands of men like Hilferding and Havenstein, who were not qualified even for dealing with the depreciation of the mark in relation to gold.
See Knies, Geld und Kredit, (Berlin, 1876), vol. 2, Part I, pp. 105 ff.; Fisher, The Rate of Interest (New York, 1907), pp. 77 ff., 257 ff., 327 ff., 356 ff.
See Clark, Essentials of Economic Theory (New York, 1907), pp. 541 ff.
See Walsh, The Measurement of General Exchange Value (New York, 1901), pp. 80 ff.; Zi&zbreve;ek, Die statistischen Mittelwerte (Leipzig, 1908), pp. 183 ff.
See Mügel, Geldentwertung und Gesetzgebung (Berlin, 1923), p. 24.
[It should be remembered that all this was written in 1924. H.E.B.]
At Vienna in March 1892 at the sessions of the Currency Inquiry Commission, which was appointed in preparation for the regulation of the Austrian currency, Carl Menger remarked: "I should like to add that not only legislators, but all of us in our everyday life, are in the habit of disregarding the fluctuations in the purchasing power of money. Even such distinguished bankers as yourselves, gentlemen, draw up your balance sheet at the end of the year without inquiring whether by any chance the sum of money representing the share capital has gained or lost in purchasing power." These remarks of Menger's were not understood by the director of the Bodenkreditanstalt, Theodor von Taussig, the most outstanding of all Austrian bankers. He replied: "A balance sheet is a balancing of the property or assets of a company or individual against its liabilities, both expressed in terms of the accepted measure of value or monetary standard, that is, for Austria in gulden. Now I cannot see how, when we are thus expressing property and indebtedness in terms of the standard (which we have assumed to be homogeneous), we are to take account of variations in the standard of measurement instead of taking account of variations in the object to be measured, as is customary." Taussig completely failed to see that the point at issue concerned the estimation of the value of goods and the amount of depreciation to be written off, and not the balancing of monetary claims and monetary obligations, or that a profit and loss account, if it is not to be hopelessly inexact, must take account of variations in the value of money. Menger had no occasion to raise this point in his reply, since he was rather concerned to show that his remarks were not to be interpreted, as Taussig was inclined to interpret them, as an accusation of dishonest practice on the part of the bank directors. Menger added: "What I said was merely that all of us, not only the directors of the banks (I said even such men as are at the head of the banks), make the mistake of not taking account in everyday life of changes in the value of money" (Stenographische Protokolle über die vom 8. bis 17. März 1892 abgehaltenen Sitzungen der nach Wien einberufenen Währungs-Enquete-Kommission [Vienna, 2892], pp. 221, 257, 270).
See my book, Nation, Staat und Wirtschaft (Vienna, 1919), pp. 129 ff. A whole series of writings dealing with these questions has since appeared in Germany and Austria.
Cf. further pp. 440 ff. below.
See Ricardo, Letters to Malthus, ed. Bonar (Oxford, 1887), p. 10.
See Hume, Essays, ed. Frowde (London), p. 294 ff.
Auspitz and Lieben, Untersuchungen über die Theorie des Preises (Leipzig, 1889), p. 65.

End of Notes

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