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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On the Classification of Monetary Theories

(This Appendix was first published as a journal article in 1917-1918, it was later used as a chapter in the 2nd German edition of 1924, but was then relegated to the Appendix in the Batson translation of 1934.)

1 Catallactic and Acatallactic Monetary Doctrine


The phenomenon of money occupies so prominent a position among the other phenomena of economic life, that it has been speculated upon even by persons who have devoted no further attention to the problems of economic theory, and even at a time when thorough investigation into the processes of exchange was still unknown. The results of such speculations were various. The merchants and, following them, the jurists who were closely connected with mercantile affairs, ascribed the use of money to the properties of the precious metals, and said that the value of money depended on the value of the precious metals. Canonist jurisprudence, ignorant of the ways of the world, saw the origin of the employment of money in the command of the state; it taught that the value of money was a valor impositus. Others, again, sought to explain the problem by means of analogy. From a biological point of view, they compared money with the blood; as the circulation of the blood animates the body, so the circulation of money animates the economic organism. Or they compared it with speech, which likewise had the function of facilitating human Verkehr (interchange, trade). Or they made use of juristic terminology and defined money as a draft by everybody on everybody else.


All these points of view have this in common: they cannot be built into any system that deals realistically with the processes of economic activity. It is utterly impossible to employ them as foundations for a theory of exchange. And the attempt has hardly been made; for it is clear that any endeavor to bring, say, the doctrine of money as a draft into harmony with any explanation of prices must lead to disappointing results. If it is desired to have a general name for these attempts to solve the problem of money, they may be called acatallactic, because no place can be found for them in catallactics.


The catallactic theories of money, on the other hand, do fit into a theory of exchange ratios. They look for what is essential in money in the negotiation of exchanges; they explain its value by the laws of exchange. It should be possible for every general theory of value to provide a theory of the value of money also, and for every theory of the value of money to be included in a general theory of value. The fact that a general theory of value or a theory of the value of money fulfills these conditions is by no means a proof of its correctness. But no theory can prove satisfactory if it does not fulfill these conditions.


It may seem strange that acatallactic views on money were not completely suppressed by the growth of the catallactic doctrine. There were many reasons for this.


It is not possible to master the problems of theoretical economics unless questions of the determination of prices (commodity prices, wages, rent, interest, etc.) are at first dealt with under the supposition of direct exchange, indirect exchange being temporarily left out of account. This necessity gives rise to a division of the theory of catallactics into two parts—the doctrine of direct, and that of indirect, exchange. Now so abundant and difficult are the problems of pure theory, that the opportunity of putting part of them on one side, at least for the time being, has been very welcome. So it has come about that most recent investigators have devoted either no attention at all or very little to the theory of indirect exchange; any way, it has been the most neglected section of our science. The consequences of this omission have been most unfortunate. They have been expressed not only in the sphere of the theory of indirect exchange, the theory of money and banking, but also in the sphere of the theory of direct exchange. There are problems of theory full comprehension of which can be attained only with the aid of the theory of indirect exchange. To seek a solution of these problems, among which, for example, is the problem of crises, with no instruments but those of the theory of direct exchange, is inevitably to go astray.


Thus the theory of money was meanwhile surrendered to the acatallactists. Even in the writings of many catallactic theorists, odd relics of acatallactic views are to be found. Now and then statements are met with which are not in harmony with their authors' other statements on the subject of money and exchange and which obviously have been accepted merely because they were traditional and because the author had not noticed that they clashed with the rest of his system.


On the other hand, the currency controversy had aroused greater interest than ever in questions of monetary theory just at the time when the coming modern theory was devoting very little attention to them. Many "practical men" ventured into this sphere. Now the practical man without general economic training who begins to meditate upon monetary problems at first sees nothing else and limits his investigation to their immediate restricted sphere without taking account of their connections with other things; it is therefore easy for his monetary theory to become acatallactic. That the "practical man," so proudly looked down upon by the professional "theorist," can proceed from investigations of monetary problems to the most penetrating comprehension of economic theory, is best shown by the development of Ricardo. The period of which we speak saw no such development. But it produced writers on monetary theory who did all that was necessary for the monetary policy of the time. From among a large number it is only necessary to mention two names—Bamberger and Soetbeer. A considerable portion of their activity was devoted to fighting the doctrines of contemporary acatallactists.


At present, acatallactic doctrines of money find ready acceptance among those economists who have no use for "theory." Those who, openly or implicitly, deny the necessity of theoretical investigation are not in a position to demand of a monetary doctrine that it should be possible to fit it into a theoretical system.

2 The "State" Theory of Money


The common characteristic of all acatallactic monetary doctrines is a negative one; they cannot be fitted into any theory of catallactics. This does not mean that they involve a complete absence of views as to the value of money. Without any such views, they would not be monetary doctrines at all. But their theories of the value of money are constructed subconsciously; they are not made explicit; they are not completely thought out. For if they were consistently thought out to their logical conclusions, it would become obvious that they were self-contradictory. A consistently developed theory of money must be merged into a theory of exchange, and so cease to be acatallactic.


According to the naivest and most primitive of the acatallactic doctrines, the value of money coincides with the value of the monetary material. But to attempt to go farther and begin to inquire into the grounds of the value of the precious metals, is already to have arrived at the construction of a catallactic system. The explanation of the value of goods is sought either in their utility or in the difficulty of obtaining them. In either case, the starting point has been discovered for a theory of the value of money also. Thus this naive approach, logically developed, conducts us automatically to the real problems. It is acatallactic, but it leads to catallactics.


Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce.*13 The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money. By stressing the contrast between valor impositus and bonitas intrinseca, the canonists did indeed make it possible for scholastic sophistry to reconcile the Roman-canonist legal system with the facts of economic life. But at the same time they revealed the intrinsic futility of the doctrine of valor impositus; they demonstrated the impossibility of explaining the processes of the market with its assistance.


Nevertheless the nominalistic doctrine did not disappear from monetary literature. The princes of the time, who saw in the debasement of money an important means of improving their financial position, needed the justification of this theory, If, in its endeavors to construct a complete theory of the human economy, the struggling science of economics kept itself free from nominalism, there were nevertheless always enough nominalists for fiscal needs. At the beginning of the nineteenth century, nominalism still had representatives in Gentz and Adam Müller, writing in support of the Austrian monetary policy of the Bankozettel period. And nominalism was used as a foundation for the demands of the inflationists. But it was to experience its full renascence in the German "realistic" economics of the twentieth century.


An acatallactic monetary theory is a logical necessity for the empirico-realistic trend in economics. Since this school, unfavorable to all "theory," refrains from propounding any system of catallactics, it is bound to oppose any monetary doctrine that leads to such a system. So at first it avoided any treatment of the problem of money whatever; so far as it did touch upon this problem (in its often admirable work on the history of coinage and in its attitude toward political questions), it retained the traditional Classical theory of value. But gradually its views on the problem of money glided unconsciously into the primitive acatallactic ideas described above, which regard money made of precious metal as a good that is valuable "in itself." Now this was inconsistent. To a school that has inscribed the device of etatism on its banner, and to which all eco nomic problems appear as questions of administration, the state theory of nominalism is more suitable.*14 Knapp completed this connection. Hence the success of his book in Germany.


The fact that Knapp has nothing to say about the catallactic monetary problem, the problem of purchasing power, cannot be regarded as an objection from the point of view of a doctrine which repudiates catallactics and has abandoned in advance any attempt at a causal explanation of the determination of prices. The difficulty over which the older nominalistic theories had come to grief did not exist for Knapp, whose public consisted solely of the disciples of the realistic economics. He was able—in fact, considering his public, he was bound—to abandon all attempt at an explanation of the validity of money in commerce. If important questions of monetary policy had arisen in Germany in the years immediately succeeding the appearance of Knapp's work, then the inadequacy of a doctrine that was unable to say anything about the value of money would naturally have soon become evident.


That the new state theory did compromise itself immediately it was put forward, was due to its unlucky attempt to deal with currency history from an acatallactic point of view. Knapp himself, in the fourth chapter of his work, had briefly related the monetary history of England, France, Germany, and Austria. Works on other countries followed, by members of his seminar. All of these accounts are purely formal. They endeavor to apply Knapp's scheme to the individual circumstances of different states. They provide a history of money in Knappian terminology.


There could be no doubt of the results that were bound to follow from these attempts. They expose the weaknesses of the state theory. Currency policy is concerned with the value of money, and a doctrine that cannot tell us anything about the purchasing power of money is not suitable for dealing with questions of currency policy. Knapp and his disciples enumerate laws and decrees, but are unable to say anything about their motives and effects. They do not mention that there have been parties supporting different currency policies. They know nothing, or nothing of great importance, about bimetallists, inflationists, or restrictionists; for them, the supporters of the gold standard were led by "metallistic superstition," the opponents of the gold standard were those who were free from "prejudices." They studiously avoid all reference to commodity prices and wages and to the effects of the monetary system on production and exchange. Beyond making a few remarks about the "fixed rate of exchange," they never touch upon the connections between the monetary standard and foreign trade, the problem which has played so great a part in currency policy. Never has there been a more miserable and empty representation of monetary history.


As a result of the World War, questions of currency policy have again become very important, and the state theory feels itself obliged to produce something on topical questions of currency policy. That it has nothing more to say about these than about the currency problems of the past is shown by Knapp's article "Die Währungsfrage bei einem deutsch-österreichischen Zollbündnis" in the first part of the work published by the Verein für Sozialpolitik: Die wirtschaftliche Annäherung zwischen dem deu tschen Reiche und seinen Verbündeten. There can hardly be two opinions about this essay.


The absurdity of the results at which the nominalistic doctrine of money is bound to arrive as soon as it begins to concern itself with the problems of monetary policy is shown by what has been written by Bendixen, one of Knapp's disciples. Bendixen regards the circumstance that the German currency had a low value abroad during the war as "even in some ways desirable, because it enabled us to sell foreign securities at a favourable rate."*15 From the nominalistic point of view this monstrous assertion is merely logical.


Bendixen, incidentally, is not merely a disciple of the state theory of money; he is at the same time a representative of that doctrine also which regards money as a claim. In fact, acatallactic views can be blended according to taste. Thus Dühring, who in general regards metallic money as "an institution of Nature," holds the claim theory but at the same time rejects nominalism.*16


The assertion that the state theory of money has been disproved by the events of currency history since 1914 must not be understood to mean that it has been disproved by "facts." Facts per se can neither prove nor disprove; everything depends upon the significance that can be given to the facts. So long as a theory is not thought out and worked up in an absolutely inadequate manner, then it is not a matter of supreme difficulty to expound it so as to explain the "facts"—even if only superficially and in a way that can by no means satisfy truly intelligent criticism. It is not true, as the naive scientific doctrine of the empirico-realistic school has it, that one can save oneself the trouble of thinking if one will only allow the facts to speak. Facts do not speak; they need to be spoken about by a theory.


The state theory of money—and all acatallactic theories of money in general—breaks down not so much because of the facts as because of its inability even to attempt to explain them. On all the important questions of monetary policy that have arisen since 1914, the followers of the state theory of money have maintained silence. It is true that even in this period their industry and zeal have been demonstrated in the publication of ample works; but they have not been able to say anything on the problems that occupy us nowadays. What could they, who deliberately reject the problem of the value of money, have to say about those problems of value and price which alone constitute all that is important in the monetary system? Their peculiar terminology does not bring us a step nearer to a decision about the questions that are agitating the world at present.*17 Knapp is of the opinion that these questions do not need to be solved except by the "economists," and concedes that his doctrine has nothing to say about them.*18 But if the state theory does not help to elucidate the questions that seem important to us, what is its use? The state theory is not a bad monetary theory; it is not a monetary theory at all.*19


To ascribe to the state theory a large share of the blame for the collapse of the German monetary system, does not imply that Knapp directly provoked the inflationary policy that led to it. He did not do that. Nevertheless, a doctrine that does not mention the quantity of money at all, that does not speak of the connection between money and prices, and that asserts that the only thing that is essential in money is the authentication of the state, directly encourages fiscal exploitation of the "right" of creating money. What is to prevent a government from pouring more and more notes into circulation if it knows that this will not affect prices, because all rises in prices can be explained by "disturbed trade conditions" or "disturbances in the home market," but on no account whatever by anything to do with money? Knapp is not so incautious as to speak of the valor impositus of money as did the canonists and jurists of past generations. All the same, his doctrine and theirs lead indifferently to the same conclusions.


Knapp, unlike some of his enthusiastic disciples, was certainly not a government hireling. When he said anything, he said it from genuine personal conviction. That speaks well for his own trustworthiness, but it has no bearing on that of his doctrine.


It is quite incorrect to say that the monetary doctrine of etatism springs from Knapp. The monetary doctrine of etatism is the balance-of-payments theory, which Knapp only refers to casually in speaking of the "pantopolic origin of the exchange rates."*20 The balance-of-payments theory, if an untenable, is at least a catallactic, theory of money. But it was invented long before Knapp's time. It had already been propounded, with its distinction between the internal value (Binnenwert) and the external value (Aussenwert) of money, by the etatists, by Lexis, for example.*21 Knapp and his school added nothing to it.


But the etatist school is responsible for the facility and rapidity with which the state theory of money succeeded in becoming the accepted doctrine in Germany, Austria, and Russia. This school had struck out catallactics, the theory of exchange and prices, as superfluous from the series of problems with which economics was concerned; it undertook the attempt to represent all the phenomena of social life merely as emanations of the exercise of power by princes and others in authority. It is only a logical extension of its doctrine to endeavor eventually to represent money also as being created merely by force. The younger generation of etatists had so little notion even of what economics really was concerned with, that it was able to accept Knapp's paltry discussion as a theory of money.

3 Schumpeter's Attempt to Formulate a Catallactic Claim Theory


To call money a claim is to suggest an analogy to which there is no real objection. Although this comparison, like all others, falls short at certain points, it may nevertheless make it easier for many to form a conception of the nature of money. Admittedly analogies are not explanations, and it would be a gross exaggeration to speak of a claim theory of money, for mere construction of an analogy does not take us even halfway to any sort of monetary theory that can be expressed in intelligible arguments. The only possible way of building a monetary theory upon the claim analogy would be to regard the claim, say, as a ticket of admission to a room of limited size, so that an increase in the number of tickets issued would mean a corresponding diminution of the amount of room at the disposal of each ticketholder. But the danger in this way of thinking is that taking this illustration as a starting point could lead only to the drawing of a contrast between the total amount of money and the total amount of commodities; but this amounts to nothing but one of the oldest and most primitive versions of the quantity theory, the untenability of which needs no further discussion.


Thus until recently the claim analogy led a precarious existence in the expositions of monetary doctrine, without having any greater significance—as was imagined—than that of a means of expression that could easily be understood by all. Even in the writings of Bendixen, who would have been glad to see his obscure arguments designated a claim theory, the claim concept has no greater significance ascribed to it. But very recently an ingenious attempt has been made by Schumpeter to arrive at a real theory of the value of money starting from the claim analogy, that is, an attempt to construct a catallactic claim theory.


The fundamental difficulty that has to be reckoned with in every attempt to construct a theory of the value of money starting from the claim concept is the necessity for comparing the quantity of money with some other total, just as in the ticket illustration the total number of tickets is compared with the total amount of room available. Such a comparison is a necessity for a doctrine which regards money as "claims" whose peculiarity consists in the fact that they do not refer to definite objects but to shares in a mass of goods. Schumpeter seeks to avoid this difficulty by starting, in elaboration of a line of argument first developed by Wieser, not from the quantity of money, but from the sum of money incomes, which he compares with the total prices of all consumption goods.*22 There might be some justification for such a comparison if money had no other use than to purchase consumption goods. But such an assumption is obviously quite unjustifiable. Money bears a relationship, not only to consumption goods, but also to production goods; and—the point is a particularly important one—it does not serve only for the exchange of production goods against consumption goods but very much oftener for the exchange of production goods against other production goods. So Schumpeter is only able to maintain his theory by simply putting out of consideration a large part of that which circulates as money. He says that commodities are actually related only to the circulating portion of the total quantity of money, that only this portion has an immediate connection with the sum of all incomes, that it alone fulfills the essential function of money. Thus "to obtain the quantity of money in circulation, which is what we are concerned with," the following items, among others, have to be eliminated:

1 Hoards
2 "Sums that are unemployed but awaiting employment"
3 Reserves by which we are to understand those sums of money "below which the economic agents never let their holdings fall; in order to be prepared for unexpected demands"


But even the elimination of these sums is not enough; we must go still farther. For the total incomes theory is "not concerned even with the total quantity of money in circulation." In addition we must exclude "all those sums that circulate in the 'income-distributing' markets, in the real estate, mortgage, security and similar markets."*23


These limitations do not merely serve, as Schumpeter thinks, to demonstrate the impossibility of dealing statistically with the notion of money in effective circulation; they also cut away the ground from beneath his own theory. All that needs to be said about the separation of hoards, unemployment sums, and reserves, from the remaining amount of money has already been mentioned above.*24 It is inadmissible to speak of "sums that are unemployed but awaiting employment." In a strict and exact sense—and theory must take everything in a strict and exact sense—all money that is not changing owners at the very moment under consideration is awaiting employment. Nevertheless, it would be incorrect to call such money "unemployed"; as part of a reserve it satisfies a demand for money, and consequently fulfills the characteristic function of money. And when Schumpeter further proposes to eliminate the sums in circulation in the income-distributing markets, we can only ask, What then remains?


Schumpeter has to do violence to his own theory in order to make it appear even fairly tenable. It cannot be compared with the point of view which opposes the total stock of money to the total demand for it (that is, to the total demand of economic agents for reserves), because it does not really attempt to solve more than a small part of the problem. To be of any use, a theory must try to explain the whole of the problem that is before us. Schumpeter's theory arbitrarily splits up the stock of money and the demand for money in order to institute a comparison that would otherwise be impossible. If Schumpeter starts from the statement that the total quantity of money is distributed between three spheres, the sphere of circulation, that of hoards and reserves, and that of capital, then, if he wishes to provide a complete theory of money, the comparison which he makes for the sphere of circulation between total incomes and total amount of consumption goods should be repeated for the two other spheres also; for these also are not without significance in the determination of the value of money. Variations in the amount of money demanded or available for hoards and reserves—to retain this vague distinction—or for the sphere of capital, influence the value of money just as much as variations in the sphere of circulation. No theory of the value of money with pretensions to completeness dare omit an explanation of the influence on the value of money exerted by processes in the sphere of hoards and reserves and in that of capital.


We see, then, that even Schumpeter has not been able to make a complete catallactic theory of money out of the claim theory. The fact that his attempt to make the claim theory into a catallactic theory of money obliged him to set such extraordinary limits to the problem is the best proof that a comprehensive catallactic theory of money cannot be constructed on the basis of the claim analogy. His having arrived in the course of his admirable discussion at conclusions for the rest which do not differ essentially from those which have been discovered in other ways and with other instruments by the catallactic doctrine of money is merely to be ascribed to his having found them in the theory of money already and having therefore been able to adopt them. They by no means follow from the fragmentary theory of money that he himself has put forward.

4 "Metallism"


It is no longer necessary to continue to argue against the nominalistic theory of money. For theoretical economics it has long been finished with. Nevertheless, the nominalist controversy has propagated errors in the history of doctrine that need to be weeded out.


First of all, there is the use of the term metallism. The expression comes from Knapp. "Those writers who start from weight and fineness and see in the stamp nothing but an attestation of these properties," Knapp christens metallists. "The metallist defines the unit of value as a certain quantity of metal."*25


This definition of metallism given by Knapp is by no means a clear one. It should be pretty well known that there can hardly have been a single writer worth mentioning who has thought of the unit of value as consisting of a quantity of metal. But it must be remembered that, with the exception of the nominalists, there has never been a school so easily satisfied in the interpretation of the concept of value as that of Knapp, for whom the unit of value "is nothing but the unit in which the amount of payments is expressed."*26


But it is easy to see what Knapp means by metallism even if he does not explicitly say it. For Knapp metallism is all the theories of money that are not nominalistic;*27 and since he formulates the nominalistic doctrine with precision, it is clear what he understands by metallism. That those theories of money which are not nominalistic have no uniform characteristic, that there are catallactic and acatallactic theories among them, that each of these two groups is again divided into various opposed doctrines, is either unknown to Knapp, or willfully overlooked by him. For him, all nonnominalistic theories of money are but one. Nowhere in his writing is there anything to suggest that he knows of the existence of other monetary doctrines than that which regards metallic money as material valuable "in itself." He even completely ignores the existence of economic theories of value—not merely the existence of any particular theory but the existence of all of them. He invariably polemizes against the only theory of money known to him, which he believes to be the only theory opposed to nominalism, and which he calls metallism. His arguments are useless because they apply only to this one acatallactic doctrine which, with all other acatallactic theories, including nominalism, was long ago overthrown by economic science.


All controversial writers have to set themselves limits. In any field that has been much worked over it is impossible to confute all opposing views. The most important opposing opinions, the typical ones, those which seem to threaten most one's own point of view, must be selected, and the rest passed over in silence. Knapp writes for the German public of the present day, which, under the influence of the etatistic version of political economy, acquainted only with acatallactic theories of money, and even among these only with those which he calls metallistic. The success that he has met with here shows that he was right in directing his criticism only against this version, which is hardly represented in literature, and on the other hand in ignoring Bodin, Law, Hume, Senior, Jevons, Menger, Walras, and everybody else.


Knapp makes no attempt at all to determine what economics says about money. He only asks, "What does the educated man think of when he is asked about the nature of money?"*28 He then criticizes the views of the "educated man," that is, apparently, the layman. Nobody will deny him the right to do this. But it is not permissible, having done it, to set up these views of the educated man as those of scientific economics. Nevertheless, this is what Knapp does when he describes the monetary theory of Adam Smith and David Ricardo as "entirely metallistic" and adds: "This theory teaches that the unit of value (the pound sterling) is definable as a certain weight of metal."*29 The mildest thing that can be said about this assertion of Knapp's is that it is entirely unfounded. It most bluntly contradicts the views of Smith and Ricardo on the theory of value, and it does not find the least support in any of their writings. It will be obvious to all who have even only a superficial acquaintance with the value theory of the Classicals and their theory of money that Knapp has here committed an incomprehensible error.


But neither were the Classicals "metallists" in the sense that their only contribution to the problems of paper money was "indignation."*30 Adam Smith expounded the social advantages arising from the "substitution of paper in the room of gold and silver money" in a manner that has hardly been equaled by any writer before or after him.*31 But it was Ricardo, in his pamphlet "Proposals for an Economical and Secure Currency," published in 1816, who elaborated this point of view and recommended a monetary system under which precious-metal money should be entirely eliminated from actual domestic circulation. This suggestion of Ricardo's was the basis of that monetary system, first established at the end of the last century in India, then in the Straits Settlements, then in the Philippines, and finally in Austria-Hungary, that is usually known nowadays as the gold-exchange standard. Knapp and his fellow enthusiasts for "modern monetary theory" could easily have avoided the mistakes they made in explaining the policy followed by the Austro-Hungarian Bank between 1900 and 1911, if they had taken note of what Smith and Ricardo had said in these passages.*32

5 The Concept of "Metallism" in Wieser and Philippovich


Knapp's mistakes in the history of theory have unfortunately already been accepted by other writers. This started with the attempt to expound Knapp's theory in the most kindly manner possible, that is, to judge its weaknesses gently and if possible to credit it with some sort of usefulness. But this was not possible without reading into the state theory things that simply cannot be found in it, things in fact which definitely contradict both its spirit and its letter, or without taking over Knapp's mistakes in the history of theory.


First, Wieser must be mentioned. Wieser draws a contrast between two monetary theories. "For the metallists, money has an independent value, arising from itself, from its substance; for modern theory, its value is derived from that of the objects of exchange, the commodities."*33 Again, in another place, Wieser says: "The value of the monetary material is a conflux from two different sources. It is constituted from the use value which the monetary material obtains by reason of its various industrial employments—for jewelry, for utensils, for technical uses of all kinds—and from the exchange value which the money obtains by reason of being a means of payment ... The service performed by the coins as a medium of exchange and that performed by the money in its industrial uses, lead in combination to a common estimate of its value ... We may ... assert, that each of the two services is independent enough to be able to go on existing even if the other ceased. Just as the industrial functions of gold would not cease if gold were no longer coined, so its monetary functions would not come to an end if the state decided to forbid its use in industry and requisitioned it all for minting ... The dominant metallistic opinion is different. From this point of view, the metal value of the money means the same thing as the use value of the metal; it has only the one source—industrial employment—and if the exchange value of the money coincides with its metal value, then it is nothing but a reflection of the use value of the metal. According to the prevailing metallistic opinion, money made from valueless material is inconceivable; for, it is said, money could not measure the value of commodities if it was not valuable itself, by virtue of the material from which it is made."*34


Here Wieser contrasts two theories of the value of money: the modern and the metallistic. The theory which he calls the modern is the monetary theory that logically follows from that theory of value which traces value to utility. Now since the utility theory has only recently received scientific exposition (to have contributed to which is one of Wieser's great merits), and since it undoubtedly may nowadays be regarded as the prevailing doctrine (pace Wieser himself, who calls metallism the prevailing doctrine), it may well be admissible to call that monetary theory which is based upon it the modern theory Greek kat esechun. But in so doing we must not forget that, just as the subjective theory of value can look back over a long history, so also the theory of money corresponding to it is already more than two hundred years old. For example, as early as the year 1705 John Law had expressed it in classical form in his Money and Trade. A comparison of Law's arguments with those of Wieser will demonstrate the fundamental agreement between their views.*35


But this theory, which Wieser calls the modern, is certainly not the doctrine of Knapp; in Knapp, not the slightest suggestion of it can be discovered. All that it has in common with his nominalism, which ignores the problem of the value of money, is the fact that neither is "metallistic."


Wieser himself sees quite clearly that his theory has nothing to do with that of Knapp. Unfortunately however, he takes over from Knapp the opinion that according to the "prevailing metallistic opinion," the "metal value of the money means the same as the use value of the metal." Several serious mistakes in the history of theory are here all mixed up together.


The first thing to observe is that by metallism Wieser means something different from Knapp. Wieser contrasts the "modern" theory of the value of money with the "metallistic," and describes exactly what he understands by the terms. According to this, the two views are opposed to each other; the one excludes the other. But, for Knapp, the theory that Wieser calls the modern theory is just as metallistic as the others. The truth of this can easily be demonstrated.


In his principal book, Knapp never mentions the names of any writers who themselves have dealt with the problem of money; neither does he quote any work on the subject. He nowhere argues against any of the trains of thought that are usually met with in the abundant literature of money. His quarrel is always only with the metallism that he sets up as the general opinion on money. In his preface, it is true, he refers expressly to two writers as metallists: Hermann and Knies.*36 But both Hermann and Knies expounded theories very similar to the "modern" theory expounded by Wieser. This should not appear strange, for both of these writers take their stand on the subjective theory of value,*37 from which the "modern" doctrine of the value of money logically follows, so that both regard the foundation of the use-value of the precious metals as lying both in their monetary uses and their "other" uses.*38 Between Wieser and Knies there is a difference, it is true, concerning the effect on the monetary function of the possibility of cessation of the "other" functions. Yet Knapp could not have regarded this as the decisive characteristic, or he would have been sure to mention it somewhere, and in fact he has nothing more to say about it than about any other problem of the value of money.


It is, indeed, not among the economists that we must seek the metallists, as they are portrayed by Knapp and his school. Knapp knows very well why he always argues only against this arbitrary caricature of a metallist, and prudently refrains from quoting chapter and verse for the opinions that he puts in the mouth of this metallist. In fact the metallist that Knapp has in mind is none other than Knapp himself; not the Knapp that wrote the State Theory of Money, but the Knapp that, "disregarding all theory" as he himself testifies, used to lecture on the "pragmatic" of the monetary system;*39 the Knapp that, as one of the standard-bearers of historicism in political economy, had thought that a substitute for thinking about economic problems could be found in the publication of old documents. If Knapp had not looked down so arrogantly on the work of the much abused "theorists," if he had not disdained to have anything to do with it, he would have discovered that he had been entertaining an entirely false opinion of its content. The same is true of Knapp's disciples. Indeed, their leader Bendixen openly admits that he was once a "metallist."*40


It is by no means desirable to follow Wieser's example in giving the title of prevailing doctrine to the view that the value of the monetary material arises solely from its industrial employment. Surely a view concerning money that has been rejected by Knies cannot be regarded as the prevailing doctrine.*41 There can be no question that the whole literature of money, so far as it is based on the conclusions of modern theory is not metallistic in Wieser's sense; but neither, for that matter, is any other catallactic theory of money.


In fact Wieser's opinion of the monetary theories of his precursors has been distorted by his acceptance of the expression metallism. He himself did not fail to notice this; for he supplements the remarks quoted above with the following words: "The dominant doctrine does not remain true to itself, for it ... develops a special theory to explain the exchange value of money. If the value of money was always limited by the use value of the metal, what influence would remain to be exerted by the demand for money the velocity of circulation, or the amount of credit substitutes?" The solution of this apparent contradiction must be sought in the fact that what Wieser calls the prevailing metallistic doctrine is in the very sharpest contrast to those catallactic theories which "develop a special theory to explain the exchange value of money."


Like Wieser, Philippovich also draws a contrast between two theories of the value of money; the nominalistic (represented by Adam Müller, Knapp, and others; Philippovich also includes Adolf Wagner in this group); and those which reject the nominalistic attitude. As representing this second group, he names only my Theorie des Geldes und der Umlaufsmittel.*42 He adds the remark that, in discussing the value of money, I had been forced to admit that the value of commodity money only bears upon the theory of the value of money insofar as it depends upon its function as a common medium of exchange.*43 In this, through following the historical views of Knapp, Philippovich falls into the same errors as Wieser.


While Wieser rejects the chartal and nominal theory of money, Philippovich confesses his allegiance to it, but at the same time interprets it in a way that entirely effaces the difference between the catallactic and the nominalistic conception. On the one hand, he declares that "the essential thing about the monetary unit is its nominal Geltung or validity as a unit of value." And on the other hand, he says that "the monetary unit is not really this technically defined quantity of precious metal, but its power of purchase or payment."*44 These are two theses that cannot be reconciled. We have already met the former, as Knapp's definition; the latter is the starting point of all catallactic theories of money. A sharper contrast could hardly be imagined.


That the identification of the monetary unit with purchasing power, so far from expressing Knapp's views, completely contradicts them, may be clearly deduced from several passages in his writings.*45 The very thing that characterizes nominalism—like all acatallactic theory in general—is the fact that it does not speak of the value, the purchasing power, of money. It is easy to show how irreconcilable are the two theses that Philippovich propounds. Within the limits of his own theory, Knapp is formally correct when he defines the mark as "the third part of the preceding unit of value, the thaler."*46 However uninformative this definition may be, it contains nothing contradictory in itself. It is otherwise when Philippovich declares that "the silver mark, as the third part of the thaler, was previously the unit of money for reckoning purposes, which, in the experience of economic agents, represented a certain purchasing power. This purchasing power had to be retained in the unit of coinage of the new metal; that is, the mark as a gold coin had to represent the same quantity of value as had previously been represented by the silver mark. The technical determination of the unit of coinage therefore has the aim of maintaining the value of the monetary unit."*47 These sentences, in connection with those previously quoted, can apparently only mean that the reform of the German monetary system had aimed to establish the purchasing power of the thaler at its transmitted level. But this can hardly be Philippovich's real opinion.


There is yet another historical error that has been taken over by Philippovich from Knapp, namely, the belief that the catallactic doctrine of money disregards actual experience, "which provides examples enough of the forced circulation of state paper money."*48 Any catallactic writing, including the first edition of the present book, which is the only work referred to by Philippovich in this connection, would prove the contrary. It is possible to assert that the catallactists have not solved the problem of such paper money in a satisfactory manner—that is still an open question; but it will not do to assert that they have disregarded its existence. This is a particularly important point, because many of Knapp's disciples think that catallactic theories of money have been confuted by the paper-money economics of the war period; as if this was not a problem that has been dealt with by all monetary theories since Ricardo.


When Knapp's mistakes about the views on monetary theory of earlier and contemporary economists have been accepted by two such eminent experts in the history and literature of political economy as Wieser and Philippovich, it should not surprise us if the majority of those now at work in Germany on monetary problems base their history of theory entirely on Knapp.

6 Note: The Relation of the Controversy About Nominalism to the Problems of the Two English Schools of Banking Theory


A writer identifies the metallistic theory with the currency principle and calls the chartal theory "a variety of the old banking principle."*49 Again, another writer is of the opinion that there is "a certain justification for giving the name of economic nominalism to the doctrine of the Currency School, so far as it is based upon a like treatment of both metallic and paper money."*50 Both would appear to be mistaken. The opposition between the two famous schools of the theory of credit lies in quite another sphere.*51 Knapp and his disciples have never so much as perceived the problems with which they were concerned, much less attempted to solve them.


Bendixen's doctrine of the creation of money, which is connected only accidentally and loosely with Knapp's nominalism, is admittedly nothing but an exaggerated and extremely naive version of the Banking principle. It is a particularly characteristic sign of the low state of German economic theory that for many years Bendixen's doctrine could have been regarded as something new without it being remarked that it was at most only in the way in which it was expounded that it differed from the doctrine that had been predominant in Germany for decades.

Notes for this chapter

See Endemann, Studien in der romanisch-kanonistischen Wirtschafts- und Rechtslehre bis gegen Ende des 17. Jahrhunderts (Berlin, 1874-1883), vol. 2, p. 199.
See Voigt, "Die staatliche Theorie des Geldes," Zeitschrift für die gesamte Staatswissenschaft 62: 318 f.
Bendixen, Währungspolitik und Geldtheorie im Lichte des Weltkriegs (Munich and Leipzig, 1916), p. 37 (2d ed., 1919, p. 44).
Dühring, Cursus der National-und Sozialökonomie, 3d ed. (Leipzig, 1892), pp. 42 ff., 401.
See also Palyi, Der Streit um die staatliche Theorie des Geldes (Munich and Leipzig, 1922), pp. 88 ff.
Knapp, Staatliche Theorie des Geldes, 3d ed. (1921), pp. 445 ff.
To imagine that the state theory is a juristic theory, is to be ignorant of the purpose that a juristic theory of money has to fulfill. Anybody who holds this opinion should refer to any work on the law of contract and note what questions are there dealt with in the chapter on money.
Knapp, op. cit., pp. 206, 214.
Lexis, "Papiergeld," in Handwörterbuch der Staatswissenschaften, 3d. ed., vol. 6, pp. 987 ff.
Schumpeter, "Das Sozialprodukt und die Rechenpfennige," Archiv für Sozialwissenschaft und Sozialpolitik 44: 635, 647 ff.
Ibid., pp. 665 f.
See above, pp. 168 ff.
Knapp, op. cit., p. 281; "Die Beziehungen Oesterreichs zur staatlichen Theorie des Geldes," Zeitschrift für Volkswirtschaft, &c. 17: 440.
Knapp, Staatliche Theorie, pp. 6 f.
"Alle unsere Nationalökonomen sind Metallisten," Knapp, "Über die Theorien des Geldwesens," Jahrbuch für Gesetzgebung, &c. 33: 432.
Knapp, "Die Währungsfrage vom Staat aus betrachtet," Jahrbuch für Gesetzgebung, &c. 41: 1528.
Knapp, "Über die Theorien des Geldwesens," p. 430.
Ibid., p. 432.
See also pp. 332 f. above.
From the pamphlet of Ricardo's referred to above it may suffice to quote the following passage only: "A well-regulated paper currency is so great an improvement in commerce that I should greatly regret if prejudice should induce us to return to a system of less utility. The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps toward the improvement of commerce and the arts of civilized life; but it is no less true, that, with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied" (Works, 2d ed. [London, 1852], p. 404). Thus the real appearance of Ricardo's "metallistic indignation."
Wieser, Über die Messung der Veränderungen des Geldwerts, p. 542.
Wieser, "Theorie der gesellschaftlichen Wirtschaft," Grundriss der Sozialökonomik (Tübingen, 1924), p. 316.
See the passages quoted on pp. 125 f. above.
See Knapp, Staatliche Theorie, 1st ed., pp. 5, 7.
See Zuckerkandl, Zur Theorie des Preises mit besonderer Berücksichtigung der geschichtlichen Entwicklung der Lehre (Leipzig, 1899), pp. 98, 115 f.
See Hermann, Staatswirtschaftliche Untersuchungen, 2d ed. (Munich, 1870), p. 444; Knies, Das Geld, 2d ed. (Berlin, 1885), p. 324.
Knapp, Staatliche Theorie, p. 5.
Bendixen, op. cit., p. 134.
See Wieser, "Theorie der gesellschaftlichen Wirtschaft," p. 317.
[Of which the present work is a translation. H.E.B.]
Philippovich, Grundriss (Tübingen, 1916), p. 275.
See esp. Knapp, Schriften des Vereins für Sozialpolitik, vol. 132, pp. 560 ff.
Knapp, Geldtheorie, staatliche in H. d. S., 3d ed.
Philippovich, op. cit.
Ibid., pp. 272 ff.
Lansburgh, Kriegskostendeckung (Berlin, 1915), pp. 52 ff.
Bortkiewicz, Frage der Reform, A. s. P. G., vol. 6, p. 98,
See pp. 379 ff. above.

End of Notes

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Translator's Note on the Translation of Certain Technical Terms


It is never possible to be certain that the full significance of a technical term has been brought out in a translation. A short list of the original German terms for the kinds of money and money substitutes mentioned in the present work, and of the English expressions which have been used to translate them, is therefore appended.


The word Umlaufsmittel presented a peculiarly difficult problem. There is no established English equivalent for the sense in which Professor Mises uses the term. "Circulating medium," the literal translation, is clearly inappropriate, for it suggests associations with currency which are quite foreign to Professor Mises' meaning. "Bank money" is inadequate, for Umlaufsmittel includes, not merely bank deposits, but also money substitutes issued by the state (such as token money). "Credit instrument," which at first sight might appear satisfactory, is inconsistent with Professor Mises' insistence on the difference between Umlaufsmitteln and bills of exchange; and, furthermore, Professor Mises explicitly argues that the issue of Umlaufsmitteln is not a credit transaction in the more fundamental sense. For want of a better equivalent, therefore, the expression "fiduciary medium" has been adopted. It accords with Professor Mises' definition of Umlaufsmitteln as money substitutes not covered by money,*52 and it evokes associations with the controversies about the Peel Act of 1844 that are in harmony with Professor Mises' attitude. It also draws attention to Professor Mises' emphasis upon the similarity between uncovered bank deposits and uncovered notes.


The following equivalents for other technical terms have also been adopted:*53

Money in the broader sense (Geld im weiteren Sinne)
Money in the narrower sense (Geld im engeren Sinne)
Money substitute (Geldsurrogat)
Commodity money (Sachgeld)
Credit money (Kreditgeld)
Fiat money (Zeichengeld)
Token money (Scheidemünzen)
Money certificate (Geldzertifikat)
Commodity credit (Sachkredit)
Circulation credit (Zirkulationskredit)


The following diagram shows the relationships between some of these terms in Professor Mises' system:

Relations between terms. Click to enlarge in new window.

Notes for this chapter

See p. 155 above.
See also pp. 146 n and 247 n above.

End of Notes

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Biographical Note


Ludwig von Mises (1881-1973) was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. A library of his books would total twenty-one volumes if confined to first editions, forty-eight volumes if all revised editions and translations were included, and still more if the Festschriften and other volumes containing contributions by him were added.


Von Mises' writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. His contributions to economic theory include important clarifications on the quantity theory of money, the theory of the trade cycle, the integration of monetary theory with economic theory in general, and a demonstration that socialism must fail because it cannot solve the problem of economic calculation. Mises was the first scholar to recognize that economics is part of a larger science of human action, a science which Mises called "praxeology".


Ludwig von Mises received doctorates in law and economics from the University of Vienna in 1906. In 1909 he became Economic Advisor to the Austrian Chamber of Commerce (comparable to the U.S. Department of Commerce). After serving in World War I, he became Professor of Economics at the University of Vienna and, in 1934, Professor of International Relations at the Graduate Institute of International Studies in Geneva. In 1945 he became Visiting Professor at New York University where he remained until his retirement in 1969. In a lecturing and teaching career that spanned many continents and more than half a century, Mises numbered among his students one Nobel Laureate, F. A. Hayek, two presidents of the American Economic Association, Gottfried Haberler and Fritz Machlup, and many other economists of international reputation.


His major works are The Theory of Money and Credit (1912), Socialism (1922), Human Action (1949), Theory and History (1957), Epistemological Problems of Economics (1960), and The Ultimate Foundations of Economic Science (1962).


Murray N. Rothbard, who wrote the Introduction, is Professor of Economics at the Polytechnic Institute of New York. He is the author of Man, Economy, and State, America's Great Depression, and many other books, essays, and articles.

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Silver Demereteia of Syracuse

(480-479 B.C.)

Silver Demereteia of Syracuse.  Click to enlarge in new window.


The silver Demereteia, which is used in the jacket design, was struck by Gelon, Lord of Syracuse, celebrating his victory over the Carthaginians in the decisive battle of Himera in Sicily. On one side of the coin is a charioteer, symbolizing Gelon's forces, with the winged goddess of Victory, Nike, crowning the chariot with laurel. The lion in flight below represents the defeated Carthaginians. On the other side is a head, possibly that of the goddess Arethusa, since the dolphins surrounding her stand for the sea around the island of Ortygia on which the goddess was worshipped. Or, the head could be that of Gelon's queen, Demerete, whose name was given to the coin (Demereteia) and all others of the same issue (Demereteion) in honor of her gift of personal jewelry to the treasury of Syracuse in the war with Carthage. Another legend has it that Demerete gained favorable terms for the vanquished Carthaginians and received from them a hundred talents of gold which she contributed to financing the striking of the Demereteia.


The Greeks had learned the art of coinage from the Lydians who had invented it around 700 B.C. The Lydian Empire comprised most of what is now Turkey. The first Lydian coinage was developed by private individuals—goldsmiths, bankers, merchants—not by authority of the Emperor. The need for coinage as a reliable medium of exchange derived from Lydia's position as the industrial power of the ancient world. Prior to the development of coinage, media of exchange were clumsy bars or pieces of metal.


The Greek city states adopted coinage but habitually and shamelessly debased their coins. Said Demosthenes: "the majority of states are quite open in using silver coins diluted with copper and lead." Only Athens, excepting its one major devaluation by Solon, maintained throughout its history the purity of its coinage, a fact which does much to explain the extension of Athenian commercial and political power over all of Greece.


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