The Theory of Money and Credit
By Ludwig Mises
Ludwig von Mises (1881-1973) first published
The Theory of Money and Credit in German, in 1912. The edition presented here is that published by Liberty Fund in 1980, which was translated from the German by H. E. Batson originally in 1934, with additions in 1953. Only a few corrections of obvious typos were made for this website edition. One character substitution has been made: the ordinary character “C” has been substituted for the “checked C” in the name Cuhel.
H. E. Batson, trans.
First Pub. Date
Indianapolis, IN: Liberty Fund, Inc. Liberty Classics
First published in German. Foreword by Murray Rothbard and Introduction by Lionel Robbins not available online
The text of this edition is under copyright. Picture of Ludwig von Mises: file photo, Liberty Fund, Inc.
- Historical Prefaces
- Part I,Ch.1
- Part I,Ch.2
- Part I,Ch.3
- Part I,Ch.4
- Part I,Ch.5
- Part I,Ch.6
- Part II,Ch.7
- Part II,Ch.8
- Part II,Ch.9
- Part II,Ch.10
- Part II,Ch.11
- Part II,Ch.12
- Part II,Ch.13
- Part II,Ch.14
- Part III,Ch.15
- Part III,Ch.16
- Part III,Ch.17
- Part III,Ch.18
- Part III,Ch.19
- Part III,Ch.20
- Part IV,Ch.21
- Part IV,Ch.22
- Part IV,Ch.23
- Appendix A
- Appendix B
1 Interlocal Price Relations
The Problem of the Existence of Local Differences in the Objective Exchange Value of Money
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
, stood at different levels in different parts of the world, passed for established truth in even economic literature.
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.
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.
Three Lectures on the Cost of Obtaining Money, pp. 1 ff.
Schriften des Vereins für Sozialpolitik 132: 531 f.
Money and Foreign Exchange After 1914 (London, 1922), p. 181 f.
Three Lectures on the Transmission of the Precious Metals from Country to Country and the Mercantile Theory of Wealth (London, 1828), pp. 5 ff.
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.
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.]
Grundsätze der Volkswirtschaftslehre, 2d ed. (Vienna, 1923), pp. 298 ff.
The Principles of Money (London, 1903), pp. 213—21; Kinley,
Money (New York, 1909), pp. 253 ff.
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.
Die moderne Tendenz in der Lehre vom Geldwert, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 19, p. 546.
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).
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.
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.
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.
Essentials of Economic Theory (New York, 1907), pp. 541 ff.
The Measurement of General Exchange Value (New York, 1901), pp. 80 ff.; Zi&zbreve;ek,
Die statistischen Mittelwerte (Leipzig, 1908), pp. 183 ff.
Geldentwertung und Gesetzgebung (Berlin, 1923), p. 24.
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).
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.
Letters to Malthus, ed. Bonar (Oxford, 1887), p. 10.
Essays, ed. Frowde (London), p. 294 ff.
Untersuchungen über die Theorie des Preises (Leipzig, 1889), p. 65.