ORIGIN OF MONEY

until at last only a single commodity remained, whichwasuni-versallyemployedasa mediumof~xchange;in a word,money.
Thisstage ofdevelopmentin the useofmediaofexchange, the
exclusive employmentofa single economic good,is notyetcom-pletelyattained. In quiteearlytimes, soonerin some placesthan
in others,the extensionofindirect exchangeled to the employment
ofthe two precious metalsgold and silver as common mediaof
exchange. Butthen there wasa long interruption in the steady
contractionofthe groupofgoodsemployedfor that purpose. For
hundreds, even thousands, of years the choice ofmankindhas
waveredundecidedbetweengold and silver. Thechiefcause of
this remarkablephenomenonis to befound in the naturalqualities
ofthe two metals. Beingphysicallyand chemicallyverysimilar,
they are almost equallyserviceable for the satisfaction ofhuman
wants. Forthe manufactureofornaments and jewellery ofall
kindsthe onehasprovedasgoodasthe other. (Itis onlyin recent
times that technological discoveries havebeen madewhichhave
considerably extended the range ofuses ofthe precious metals
andmayhavedifferentiatedtheir utilitymoresharply). Inisolated
communities,the employmentofoneorothermetalassolecommon
mediumofexchangehasoccasionallybeenachieved,butthis short-lived unityhasalways beenlost again as soon as the isolation of
the comnlunity has succumbed to participation in international
trade.
Economichistoryis thestoryofthegradualextensionoftheecono-miccommunitybeyondits originallimits ofthe singlehouseholdto
embracethe nationandthen the world. Buteveryincrease in its
sizehasled to afresh dualityofthe mediumofexchangewhenever
the two amalgamatingcommunitieshavenothadthe samesortof
money. It wouldnotbepossiblefor the final verdictto bepro-nounceduntilall the chiefpartsofthe inhabited earthformed a
single commercial area, for notuntilthen wouldit beimpossible
for othernationswithdifferent monetarysystems to join in and
modifytheinternational organization.
Ofcourse,iftwo ormoreeconomicgoodshadexactlythe same
marketability,so that none ofthem wassuperior to the others
asamediumofexchange,this wouldlimit thedevelopmenttowards
aunifiedmonetarysystem. Weshallnotattemptto decidewhether
thisassumptionholdsgoodofthetwopreciousmetalsgoldandsilver.

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Tota lValue

If it is impossible to measuresubjective use-value, it follows
directlythatitis impracticable to ascribe'quantity' to it. Wemay
say, the valueofthis commodityis greaterthan the valueofthat;
butit is notpermissiblefor us to assert, this commodityis worth
so much.Suchawayofspeakingnecessarilyimplies adefiniteunit.
It really amountsto stating howmanytimes a givenunitis con-tained in the quantityto bedefined. Butthis kindofcalculationis
quiteinapplicable to processesofvaluation.
Theconsistentapplicationofthese principlesimplies a criticism
also ofSchumpcter'sviews onthe total valueofastockofgoods.
Accordingto Wieser,the total valueofastockofgoodsis givenby
multiplYingthe numberofitems orportionsconstitutingthe stock
bytheir marginalutilityatanygivenmoment.Theuntenabilityof
this argumentis shown bythe fact that it wouldprovethat the
totalstockofafreegoodmustalwaysbeworthnothing. Schumpeter
therefore suggests a different formula in whicheach portion is
multipliedbyanindex correspondingto its positiononthe value-scale (which, by the way,is quite arbitrary) and these products
arethen addedtogether orintegrated. Thisattemptatasolution,
like the preceding,hasthe defectofassumingthat it is possibleto
measuremarginalutilityand'intensity' ofvalue. Thefactthatsuch
measurementis impossible renders bothsuggestions equallyuseless.
Masteryofthe problemmustbesoughtinsomeotherway.
Valueis alwaystheresultofaprocessofvaluation. Theprocessof
valuationcomparesthesignificanceoftwocomplexesofcommodities
from the point ofviewoftheindividual makingthevaluation. The
individual makingthevaluationandthecomplexesofgoodsvalued,
i.e. the subject and the objects ofthe valuation, mustenter as
indivisible elementsinto anygivenprocessofvaluation. Thisdoes
notmeanthat they arenecessarilyindivisible in otherrespects as
45
MEASUREMENTOFVALUE
well,whetherphysicallyoreconomically. Thesubjectofanactof
valuationmayquitewellbeagroupofpersons,aStateorsocietyor
family, so long as it actsin this particularcaseas a unit,through
a representative. Andthe objectsthus valuedmaybecollections
ofdistinctunitsofcommodities so long as they haveto bedealt
within this particularcaseasawhole.Thereis nothingto prevent
eithersubject orobjectfrom beinga single unitfor the purposes
ofonevaluationeventhoughinanothertheircomponentpartsmay
beentirelyindependentofeachother. Thesamepeoplewho,acting
together through arepresentative asasingleagent,suchasaState,
makeajudgement as to the relative valuesofa battleshipand a
hospital,arethe independent subjects ofvaluationsofothercom-modities,such as cigars andnewspapers. Itis just the same with
commodities. Modernvaluetheoryis basedonthefactthatitis not
the abstractimportance ofdifferentkindsofneedthat determines
the scales ofvalues, butthe intensity ofspecific desires. Starting
from this, the law ofmarginalutility wasdeveloped in a form
that referred primarilyto the usualsortofcasein whichthe collec-tions ofcommoditiesaredivisible. Butthere arealsocasesin which
the total supplymustbevaluedasitstands.
Supposethat an economically-isolated individual possesses two
cowsandthreehorsesandthattherelevantpartofhisscaleofvalues
(thatitemvaluedhighestbeingplacedfirst) is asfollows: I,acow;
2,ahorse;3,ahorse;4,ahorse; 5,acow. Ifthis individual hasto
choosebetweenonecowandonehorsehewillratherbeinclined to
sacrificethe cowthan the horse. Ifwildanimalsattackoneofhis
cowsandoneofhishorses,anditis impossible forhimto saveboth,
then hewilltry to savethe horse. Butifthe wholeofhisstock of
eitheranimalis indanger,hisdecisionwillbedifferent. Supposing
thathisstableandcowshedcatchfireandthathecanonlyrescuethe
occupantsofoneandmustleave the othersto their fate, then ifhe
valuesthreehorsesless thantwo cowshewillattempttosavenotthe
threehorsesbutthetwocows. Theresultofthatprocessofvaluation
whichinvolves achoicebetweenonecowandonehorseis ahigher
estimationofthehorse. Theresultoftheprocessofvaluationwhich
involves achoicebetweenthe wholeavailablestockofcowsandthe
wholeavailablestockofhorsesis ahigherestimationofthe stockof
cows.
Valuecanrightlybespokenofonlywithregardto specificactsof

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THE VARIOUS KINDS OF MONEY

MoneyandMoney-Substitutes
WHENanindirect exchangeis transacted withthe aidofmoney,it
is not necessary for the moneyto change hands physically; a
perfectlysecure claimto anequivalentsum, payableondemand,
maybetransferred instead ofthe actual coins. In this byitself
thereis nothingremarkableorpeculiarto money.Whatis peculiar,
andonlyto beexplainedbyreference to the specialcharacteristics
ofmoney,is the extraordinaryfrequency ofthis wayofcompleting
monetarytransactions.
Inthe first place,moneyis especiallywelladaptedto constitute
the substance ofa genericobligation. Whereasthe fungibility of
nearlyallothereconomicgoodsis moreorless circumscribedandis
oftenonlyafiction basedonanartificialcommercialterminology,
that ofmoneyis almostunlimited. Onlythat ofshares andbonds
can be compared withit. Thesole factor that could possibly
preventanyofthese from beingcompletelyfungible is the difficulty
ofsubdividing their separate units; and various expedients have
beenadopted, which,atleast as far as moneyis concerned, have
entirelyrobbedthis difficultyofallpracticalsignificance.
Astill moreimportant circumstanceis involved in the natureof
the function that moneyperforms. Aclaim to moneymaybe
transferred overandoveragainin anindefinite numberofindirect
exchanges withoutthe personbywhomit is payableeverbeing
calleduponto settleit. Thisis obviouslynottrue as far as other
economic goods are concerned, for these are always destined for
ultimateconsumption.
Thespecialsuitabilityfor facilitatingindirect exchangespossessed
byabsolutely secure and immediately payableclaims to money,
whichwemaybrieflyrefertoasmoney-substitutes,is furtherincreased
bytheirstandinginlawandcommerce.
5°

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PREFACE TO ENGLISH EDITION

'shortage offoreign exchange'('Devisennot') arisesinthesecountries.
Foreignexchangeis infactunobtainableattheprescribedprice,and
the centralbankis debarredfrom recourse to the illicit marketin
whichforeign exchange is dealtin atits properpricebecauseit
refuses to paythis price. This'shortage' is then madethe excuse
for talk about transfer difficulties andfor prohibitionsofinterest
andamortizationpaymentsto foreign countries. Andthis hasprac-tically brought international credit to a standstill. Interest and
amortization are paidonolddebtseitherveryunsatisfactorilyor
notatall,and,asmightbeexpected,newinternationalcredittrans..
actionshardlycontinueto beasubjectofseriousconsideration. We
are no longer far removed from a situation in whichit willbe
impossibletolendmoneyabroadbecausetheprinciplehasgradually
become accepted that any governmentis justified in forbidding
debt-payments to foreign countries at any time on grounds of
'foreign-exchange policy'. Therealmeaningofthisforeign-exchange
policyis exhaustively discussed in the present book. Herelet it
merelybe pointed out that this policy has muchmoreseriously
injured international economicrelations duringthe last three years
than protectionismdidduringthe wholeofthe precedingfifty or
sixty years, the measuresthat weretaken duringthe WorldWar
included. This throttling ofinternational credit can hardly be
remedied otherwisethan bysetting asidethe principlethat it lies
withinthe discretionofeverygovernment,byinvoking theshortage
offoreign exchangethat hasbeencausedbyits ownactions,to stop
payinginterest to foreign countriesandalsoto prohibitinterest and
amortizationpaymentsonthe partofits subjects. Theonlywayin
whichthis canbeachievedwillbebyremovinginternational credit
transactions from the influence ofnationallegislatures andcreating
a special international codefor it, guaranteedandreallyenforced
bythe LeagueofNations.Unlessthese conditionsarecreated, the
grantingofnewinternational creditwillhardlybepossible. Since
allnationshaveanequalinterest in the restoration ofinternational
credit,it mayprobablybeexpectedthat attemptswillbemadein
this directionduringthe nextfew years,providedthatEuropedoes
notsinkanylower through warandrevolution. Butthe monetary
systemthatwillconstitutethe foundation ofsuchfuture agreements
mustnecessarilybeonethat is.basedupongold. Goldis notan
ideal basisfor a monetarysystem. Likeall humancreations, the

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INTRODUCTION

highly ingenious series ofapproximations, from a discussion of
the valueofmoneyundersimpleconditionsin whichthere is only
onekindofmoneyandnobankingsystem,throughananalysisofthe
phenomena of parallel currency and foreign exchanges, to an
extensive treatment ofthe problems ofmodernbankingand the
effectsofcreditcreationonthe capitalstructure andthe stability
ofbusiness. Incontinentalcirclesit haslong beenregarded asthe
standardtextbookonthesubject. Itis hopedthatitwillfill asimilar
rolein English-speakingcountries. I knowfew workswhichconvey
a moreprofoundimpression ofthe logical unityandthe powerof
moderneconomicanalysis.
Itwouldbeagreatmistakehoweverto supposethat systematiza-tion ofthe subjectconstitutedthe only,orindeed the chief,meritof
thiswork.Somanyofthepropositionswhichitfirstintroducedhave
nowfoundtheirwayintothecommoncurrencyofmodernmonetary
theory that the Englishreader, comingto it for the first time more
than twenty years after its first pul::Hication, maybeinclined to
overlook its meritsas an original contribution to knowledge- a
contributionfromwhichmuchofwhatis mostimportantandvitalin
contemporarydiscussionstakes its rise. Whoin 1912hadheardof
forced saving,ofdisparitiesbetweenthe equilibriumandthemoney
ratesofinterestandofthecycleoffluctuationsintherelationsbetween
the pricesofproducers' goodsandconsumers' goodswhichis the
result ofthe instability ofcredit? Theyareall here, notas obiter
dictaonwhatareessentiallysideissues, asis occasionallythe casein
the earlier literature, butas central parts ofa fully articulated
theoretical system- a system whichthe authorhashadthe some-whatmelancholysatisfaction ofseeing abundantlyverifiedbythe
marchofsubsequent events, first in the great inflations ofthe
immediately post-war periodand later in the events whichgave
rise to the depressionfrom whichthe worldis nowsuffering. Nor
should weoverlookits contributionsto the moreabstractpartsof
the theory ofthe valueofmoney. ProfessorvonMisesshareswith
Marshallandoneortwo othersthe meritofhavingassimilatedthe
treatmentofthis theory to thegeneralcategoriesofthe puretheory
ofvalue:andhisemphasisin the courseofthis assimilationonthe
relation betweenuncertaintyand the size ofthe cashholdingand
the dependence ofcertain monetaryphenomena onthe absence
offoresight, anticipatesmuchthat hasprovedmostfruitful in more

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The Theory of Money and Credit

OFall branches ofeconomic science, that partwhichrelates to

moneyand credit has probablythe longest historyand the most

extensiveliterature. Theelementarytruths ofthe QuantityTheory

wereestablished at a time whenspeculation on other types of

economic problemhadhardlyyetbegun. Bythe middleofthe

nineteenthcenturywhen,in the generaltheory ofvalue, a satis-factory statical system hadnotyetbeenestablished, the pamphlet

literature ofmoneyandbankingwastackling, oftenwithmarked

success, manyofthe subtler problemsofeconomic dynamics. At

thepresentday,withallourdifferences,thereis nopartofeconomic

theory whichwefeel to bemoreefficientto lend practicalaidto the

statesman andto the manofaffairs,than the theory ofmoneyand

credit.

Yetfor allthis thereis nopartofthesubjectwheretheestablished

results ofanalysis and experience havebeenso little systematized

and broughtinto relation withthe maincategories oftheoretical

economics. Specialmonographsexist bythe hundred. Thepam-phletliteratureis soextensiveastosurpassthepowerofanyoneman

completelyto assimilateit. Yetin English,atanyrate, there has

beensolittleattemptatsynthesisofthis kindthat, whenMr.Keynes

cameto writehis TreatiseonMoney,hewascompelledto lament the

absence, notonlyofanestablished tradition ofarrangement,but

evenofasingleexampleofasystematictreatmentofthe subjecton

a scale and ofa quality comparable withthat ofthe standard

discussionsofthe centralproblemsofpureequilibriumtheory.

Inthese circumstancesitis hopedthatthepresentpublicationwill

meetarealneedamongEnglish-speakingstudents. Forthe workof

whichit is atranslation, the TheoriedesGeldesund der Umlaufsmittel

ofProfessorvonMisesofVienna,doesmeetjust this deficiency. It

deals systematically withthe chiefpropositions ofthe theory of

moneyandcredit,andit bringsthem into relation bothwiththe

mainbodyofanalyticaleconomicsandwiththe chiefproblemsof

contemporarypolicyto whichthey arerelevant. Commencingwith

a rigid analysisofthe natureandfunction ofmoney,it leads bya

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