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 The General Economic Conditions for the Use of Money
The Function of Money
THE NATURE OF MONEY
Where the free exchange of goods and services is unknown, money is not wanted. In a state of society in which the division of labor was a purely domestic matter and production and consumption were consummated within the single household it would be just as useless as it would be for an isolated man. But even in an economic order based on division of labor, money would still be unnecessary if the means of production were socialized, the control of production and the distribution of the finished product were in the hands of a central body, and individuals were not allowed to exchange the consumption goods allotted to them for the consumption goods allotted to others.
The phenomenon of money presupposes an economic order in which production is based on division of labor and in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods). In such a society, there is no systematic centralized control of production, for this is inconceivable without centralized disposal over the means of production. Production is “anarchistic.” What is to be produced, and how it is to be produced, is decided in the first place by the owners of the means of production, who produce, however, not only for their own needs, but also for the needs of others, and in their valuations take into account, not only the use-value that they themselves attach to their products, but also the use-value that these possess in the estimation of the other members of the community. The balancing of production and consumption takes place in the market, where the different producers meet to exchange goods and services by bargaining together. The function of money is to facilitate the business of the market by acting as a common medium of exchange.
2 The Origin of Money
Indirect exchange is distinguished from direct exchange according as a medium is involved or not.
Suppose that A and B exchange with each other a number of units of the commodities
n. A acquires the commodity
n because of the use-value that it has for him. He intends to consume it. The same is true of B, who acquires the commodity
m for his immediate use. This is a case of direct exchange.
If there are more than two individuals and more than two kinds of commodity in the market, indirect exchange also is possible. A may then acquire a commodity
p, not because he desires to consume it, but in order to exchange it for a second commodity
q which he does desire to consume. Let us suppose that A brings to the market two units of the commodity
m, B two units of the commodity
n, and C two units of the commodity
o, and that A wishes to acquire one unit of each of the commodities
o, B one unit of each of the commodities
m, and C one unit of each of the commodities
n. Even in this case a direct exchange is possible if the subjective valuations of the three commodities permit the exchange of each unit of
m, n, and
o for a unit of one of the others. But if this or a similar hypothesis does not hold good, and in by far the greater number of all exchange transactions it does not hold good, then indirect exchange becomes necessary, and the demand for goods for immediate wants is supplemented by a demand for goods to be exchanged for others.
Let us take, for example, the simple case in which the commodity
p is desired only by the holders of the commodity
q, while the comodity
q is not desired by the holders of the commodity
p but by those, say, of a third commodity
r, which in its turn is desired only by the possessors of
p. No direct exchange between these persons can possibly take place. If exchanges occur at all, they must be indirect; as, for instance, if the possessors of the commodity
p exchange it for the commodity
q and then exchange this for the commodity
r which is the one they desire for their own consumption. The case is not essentially different when supply and demand do not coincide quantitatively; for example, when one indivisible good has to be exchanged for various goods in the possession of several persons.
Indirect exchange becomes more necessary as division of labor increases and wants become more refined. In the present stage of economic development, the occasions when direct exchange is both possible and actually effected have already become very exceptional. Nevertheless, even nowadays, they sometimes arise. Take, for instance, the payment of wages in kind, which is a case of direct exchange so long on the one hand as the employer uses the labor for the immediate satisfaction of his own needs and does not have to procure through exchange the goods in which the wages are paid, and so long on the other hand as the employee consumes the goods he receives and does not sell them. Such payment of wages in kind is still widely prevalent in agriculture, although even in this sphere its importance is being continually diminished by the extension of capitalistic methods of management and the development of division of labor.
Thus along with the demand in a market for goods for direct consumption there is a demand for goods that the purchaser does not wish to consume but to dispose of by further exchange. It is clear that not all goods are subject to this sort of demand. An individual obviously has no motive for an indirect exchange if he does not expect that it will bring him nearer to his ultimate objective, the acquisition of goods for his own use. The mere fact that there would be no exchanging unless it was indirect could not induce individuals to engage in indirect exchange if they secured no immediate personal advantage from it. Direct exchange being impossible, and indirect exchange being purposeless from the individual point of view, no exchange would take place at all. Individuals have recourse to indirect exchange only when they profit by it; that is, only when the goods they acquire are more marketable than those which they surrender.
Now all goods are not equally marketable. While there is only a limited and occasional demand for certain goods, that for others is more general and constant. Consequently, those who bring goods of the first kind to market in order to exchange them for goods that they need themselves have as a rule a smaller prospect of success than those who offer goods of the second kind. If, however, they exchange their relatively unmarketable goods for such as are more marketable, they will get a step nearer to their goal and may hope to reach it more surely and economically than if they had restricted themselves to direct exchange.
It was in this way that those goods that were originally the most marketable became common media of exchange; that is, goods into which all sellers of other goods first converted their wares and which it paid every would-be buyer of any other commodity to acquire first. And as soon as those commodities that were relatively most marketable had become common media of exchange, there was an increase in the difference between their marketability and that of all other commodities, and this in its turn further strengthened and broadened their position as media of exchange.
Thus the requirements of the market have gradually led to the selection of certain commodities as common media of exchange. The group of commodities from which these were drawn was originally large, and differed from country to country; but it has more and more contracted. Whenever a direct exchange seemed out of the question, each of the parties to a transaction would naturally endeavor to exchange his superfluous commodities, not merely for more marketable commodities in general, but for the
most marketable commodities; and among these again he would naturally prefer whichever particular commodity was the most marketable of all. The greater the marketability of the goods first acquired in indirect exchange, the greater would be the prospect of being able to reach the ultimate objective without further maneuvering. Thus there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.
This stage of development in the use of media of exchange, the exclusive employment of a single economic good, is not yet completely attained. In quite early times, sooner in some places than in others, the extension of indirect exchange led to the employment of the two precious metals gold and silver as common media of exchange. But then there was a long interruption in the steady contraction of the group of goods employed for that purpose. For hundreds, even thousands, of years the choice of mankind has wavered undecided between gold and silver The chief cause of this remarkable phenomenon is to be found in the natural qualities of the two metals. Being physically and chemically very similar, they are almost equally serviceable for the satisfaction of human wants. For the manufacture of ornaments and jewelry of all kinds the one has proved as good as the other. (It is only in recent times that technological discoveries have been made which have considerably extended the range of uses of the precious metals and may have differentiated their utility more sharply.) In isolated communities, the employment of one or the other metal as sole common medium of exchange has occasionally been achieved, but this short-lived unity has always been lost again as soon as the isolation of the community has succumbed to participation in international trade.
Economic history is the story of the gradual extension of the economic community beyond its original limits of the single household to embrace the nation and then the world. But every increase in its size has led to a fresh duality of the medium of exchange whenever the two amalgamating communities have not had the same sort of money. It would not be possible for the final verdict to be pronounced until all the chief parts of the inhabited earth formed a single commercial area, for not until then would it be impossible for other nations with different monetary systems to join in and modify the international organization.
Of course, if two or more economic goods had exactly the same marketability, so that none of them was superior to the others as a medium of exchange, this would limit the development toward a unified monetary system. We shall not attempt to decide whether this assumption holds good of the two precious metals gold and silver. The question, about which a bitter controversy has raged for decades, has no very important bearings upon the theory of the nature of money. For it is quite certain that even if a motive had not been provided by the unequal marketability of the goods used as media of exchange, unification would still have seemed a desirable aim for monetary policy. The simultaneous use of several kinds of money involves so many disadvantages and so complicates the technique of exchange that the endeavor to unify the monetary system would certainly have been made in any case.
The theory of money must take into consideration all that is implied in the functioning of several kinds of money side by side. Only where its conclusions are unlikely to be affected one way or the other, may it proceed from the assumption that a single good is employed as common medium of exchange. Elsewhere, it must take account of the simultaneous use of several media of exchange. To neglect this would be to shirk one of its most difficult tasks.
3 The “Secondary” Functions of Money
The simple statement, that money is a commodity whose economic function is to facilitate the interchange of goods and services, does not satisfy those writers who are interested rather in the accumulation of material than in the increase of knowledge. Many investigators imagine that insufficient attention is devoted to the remarkable part played by money in economic life if it is merely credited with the function of being a medium of exchange; they do not think that due regard has been paid to the significance of money until they have enumerated half a dozen further “functions”—as if, in an economic order founded on the exchange of goods, there could be a more important function than that of the common medium of exchange.
After Menger’s review of the question, further discussion of the connection between the secondary functions of money and its basic function should be unnecessary.
*4 Nevertheless, certain tendencies in recent literature on money make it appear advisable to examine briefly these secondary functions—some of them are coordinated with the basic function by many writers—and to show once more that all of them can be deduced from the function of money as a common medium of exchange.
This applies in the first place to the function fulfilled by money
in facilitating credit transactions. It is simplest to regard this as part of its function as medium of exchange. Credit transactions are in fact nothing but the exchange of present goods against future goods. Frequent reference is made in English and American writings to a function of money as a standard of deferred payments.
*5 But the original purpose of this expression was not to contrast a particular function of money with its ordinary economic function, but merely to simplify discussions about the influence of changes in the value of money upon the real amount of money debts. It serves this purpose admirably. But it should be pointed out that its use has led many writers to deal with the problems connected with the general economic consequences of changes in the value of money merely from the point of view of modifications in existing debt relations and to overlook their significance in all other connections.
The functions of money as a
transmitter of value through time and space may also be directly traced back to its function as medium of exchange. Menger has pointed out that the special suitability of goods for hoarding, and their consequent widespread employment for this purpose, has been one of the most important causes of their increased marketability and therefore of their qualification as media of exchange.
*6 As soon as the practice of employing a certain economic good as a medium of exchange becomes general, people begin to store up this good in preference to others. In fact, hoarding as a form of investment plays no great part in our present stage of economic development, its place having been taken by the purchase of interest-bearing property.
*7 On the other hand, money still functions today as a means for transporting value through space.
*8 This function again is nothing but a matter of facilitating the exchange of goods. The European farmer who emigrates to America and wishes to exchange his property in Europe for a property in America, sells the former, goes to America with the money (or a bill payable in money), and there purchases his new homestead. Here we have an absolute textbook example of an exchange facilitated by money.
Particular attention has been devoted, especially in recent times, to the function of money
as a general medium of payment. Indirect exchange divides a single transaction into two separate parts which are connected merely by the ultimate intention of the exchangers to acquire consumption goods. Sale and purchase thus apparently become independent of each other Furthermore, if the two parties to a sale-and-purchase transaction perform their respective parts of the bargain at different times, that of the seller preceding that of the buyer (purchase on credit), then the settlement of the bargain, or the fulfillment of the seller’s part of it (which need not be the same thing), has no obvious connection with the fulfillment of the buyer’s part. The same is true of all other credit transactions, especially of the most important sort of credit transaction—lending. The apparent lack of a connection between the two parts of the single transaction has been taken as a reason for regarding them as independent proceedings, for speaking of the payment as an independent legal act, and consequently for attributing to money the function of being a common medium of
payment. This is obviously incorrect. “If the function of money as an object which facilitates dealings in commodities and capital is kept in mind, a function that includes the payment of money prices and repayment of loans…there remains neither necessity nor justification for further discussion of a special employment, or even function of money, as a medium of payment.”
The root of this error (as of many other errors in economics) must be sought in the uncritical acceptance of juristical conceptions and habits of thought. From the point of view of the law, outstanding debt is a subject which can and must be considered in isolation and entirely (or at least to some extent) without reference to the origin of the obligation to pay. Of course, in law as well as in economics, money is only the common medium of exchange. But the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question, What is money? it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.
Über Wert, Kapital und Rente (Jena, 1893; London, 1933), pp. 50 f.
Schumpeter is surely mistaken in thinking that the necessity for money can be proved solely from the assumption of indirect exchange (see his
Wesen und Hauptinhalt der theoretischen Nationalökonomie [Leipzig, 1908], pp. 273 ff.). On this point, cf. Weiss,
Die moderne Tendenz in der Lehre vom Geldwert, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 19, pp. 518 ff.
Untersuchungen über die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (Leipzig, 1883), pp. 172 ff.;
Grundsätze der Volkswirtschaftslehre, 2d ed. (Vienna, 1923), pp. 247 ff.
Grundsätze, pp. 278 ff.
A Treatise on Money and Essays on Present Monetary Problems (Edinburgh, 1888), pp. 22 ff.; Laughlin,
The Principles of Money (London, 1903), pp. 22 f.
Grundsätze, pp. 284 ff.
Geld und Kredit, 2d ed. [Berlin, 1885], vol. 1, pp. 233 ff.) has laid stress upon the function of money as interlocal transmitter of value.
Grundsätze, pp. 282 f.
Philosophie des Geldes, 2d ed. (Leipzig, 1907), p. 35; Schumpeter,
Wesen und Hauptinhalt der theoretischen Nationalökonomie (Leipzig, 1908), p. 50.
Jahrbücher für Nationalökonomie und Statistik (1886), New Series, vol. 13, p. 48.
Zur Lehre von den Bedürfnissen (Innsbruck, 1906), pp. 186 ff.; Weiss,
Die moderne Tendenz in der Lehre vom Geldwert, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 19, pp. 532 ff. In the last edition of his masterpiece
Capital and Interest, revised by himself, Böhm-Bawerk endeavored to refute Cuhel’s criticism, but did not succeed in putting forward any new considerations that could help toward a solution of the problem (see
Kapital und Kapitalzins, 3d ed. [Innsbruck, 1909-12], pp. 331 ff. Exkurse, pp. 280 ff.).
Mathematical Investigations in the Theory of Value and Prices, Transactions of the Connecticut Academy (New Haven, 1892), vol. 9, pp. 14 ff.
op. cit., p. 538.
op. cit., p. 290.
op. cit., pp. 534 ff.
Essentials of Economic Theory (New York, 1907), p. 41. In the first German edition of the present work, the above argument contained two further sentences that summarized in an inadequate fashion the results of investigation into the problem of total value. In deference to certain criticisms of C. A. Verrijn Stuart (
Die Grundlagen der Volkswirtschaft [Jena, 1923], p. 115), they were omitted from the second edition.
Die Gemeinwirtschaft: Untersuchungen über den Sozialismus(Jena, 1922), pp. 100 ff.
Rechte und Verhältnisse (Innsbruck, 1881), pp. 120 ff.
Beiträge zur Lehre von den Banken (Leipzig, 1857), pp. 34 ff.
Das Geld, 6th ed. (Leipzig, 1923), pp. 267 ff.; English trans.,
Money (London, 1927), pp. 284 ff.
The Principles of Money (London, 1903), pp. 516 ff.
Englands Übergang zur Goldwährung im 18. Jahrhundert (Strassburg, 1895), pp. 64 ff.; Schmoller, “Über die Ausbildung einer richtigen Scheidemünzpolitik vom 14. bis zum 19. Jahrhundert,”
Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich 24 (1900): 1247-74; Helfferich,
Studien über Geld und Bankwessen (Berlin, 1900), pp. 1-37.
Cours complet d’économie politique pratique, 3d ed. (Paris, 1852), vol, 1, p. 408; and Wagner,
Theoretische Sozialökonomik (Leipzig, 1909), Part II pp. 504 ff. Very instructive discussions are to be found in the memoranda and debates that preceded the Belgian Token Coinage Act of 1860. In the memorandum of Pirmez, the nature of modern convertible token coins is characterized as follows: “With this property (of convertibility) the coins are no longer merely coins; they become claims, promises to pay. The holder no longer has a mere property right to the coin itself [
jus in re]; he has a claim against the state to the amount of the nominal value of the coin [
jus ad rem], a right which he can exercise at any moment by demanding its conversion. Token coins cease to be money and become a credit instrument [
une institution de crédit], banknotes inscribed on pieces of metal …” (see
Loi décrétant la fabrication d’une monnaie d’appoint … précédée des notes sur la monnaie de billon en Belgique ainsi que la discussion de la loi à la Chambre des Représentants [Brussels, 1860], p. 50).
Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich 33 (1909): 985-1037; “Zum Problem gesetzlicher Aufnahme der Barzahlungen in Österreich-Ungarn,”
ibid. 34 (1910): 1877-84; “The Foreign Exchange Policy of the Austro-Hungarian Bank,”
Economic Journal 19 (1909): 202-11; “Das vierte Privilegium der Österreichisch-Ungarischen Bank,”
Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 21 (1922): 611-24.
Die Hauptprinzipien des Geld-und Währungswesens und die Lösung der Valutafrage (Vienna, 1891), pp. 7 ff.; Gesell,
Die Anpassung des Geldes und seiner Verwaltung an die Bedürfnisse des modernen Verkehres (Buenos Aires, 1897), pp. 21 ff.; Knapp,
Staatliche Theorie des Geldes, 3d ed. (Munich, 1921), pp. 20 ff.
Allgemeine Münzkunde und Geldgeschichte des Mittelalters und der neureren Zeit (Munich, 1904), P. 215; Babelon,
La théorie féodale de la monnaie (
Extrait des mémoires de l’Académie des Inscriptions et Belles-Lettres, vol. 38, Part I [Paris, 1908], p. 35).
op. cit., p. 35.
Jahrbücher für Nationalökonomie und Statistik (1894), 3d. Series, vol. 7, p. 688.
Grundzüge der Volkswirtschaftslehre, trans. into German by Altschul (Leipzig, 1918), p. 357.
Studien in der romanisch-kanonistischen Wirtschafts-und Rechtslehre bis gegen Ende des 17. Jahrhunderts (Berlin, 1874), vol. 1, pp. 180 ff.
Cours d’économie politique, III., La monnaie (Paris, 1850), pp. 21 ff; Goldschmidt,
Handbuch des Handelsrechts (Erlangen, 1868), vol. 1, Part II, pp. 1073 ff.