The Theory of Money and Credit. Людвиг фон Мизес

of the technical conditions that make any particular good suitable for use as money. The relative scarcity of the precious metals, great enough to give them a high objective exchange value but not so great as that of the precious stones or radium and therefore not great enough to make their exchange value too high, must indeed be reckoned, along with such of their other characteristics as their practically unlimited divisibility, their malleability, and their powers of resistance to destructive external influences, as among the factors that were once decisive in causing them to be recognized as the most marketable goods and consequently to be employed as money. But nowadays, as monetary systems have developed, the particular level of value of the precious metals no longer has any important bearing on their use as money. The modern organization of the clearing system and the institution of fiduciary media have made commerce independent of the volume and weight of the monetary material.

2 The Objective Exchange Value of Money

      It follows from what has been said that there can be no discussion of the problem of the value of money without consideration of its objective exchange value. Under modern conditions, objective exchange value, which Wieser also calls Verkehrswert (or value in business transactions), is the most important kind of value, because it governs the social and not merely the individual aspect of economic life. Except in its explanation of the fundamentals of value theory, economics deals almost exclusively with objective exchange value.⁷ And while this is true to some extent of all goods, including those which are useful apart from any exchange value which they possess, it is still truer of money.

      “The objective exchange value of goods is their objective significance in exchange, or, in other words, their capacity in given circumstances to procure a specific quantity of other goods as an equivalent in exchange.”⁸ It should be observed that even objective exchange value is not really a property of the goods themselves, bestowed on them by nature, for in the last resort it also is derived from the human process of valuing individual goods. But the exchange ratios that are established between different goods in commercial transactions, and are determined by the collective influence of the subjective valuations of all the persons doing business in the market, present themselves to separate individuals, who usually have an infinitesimal influence on the determination of the ratios, as accomplished facts, which in most cases have to be accepted unconditionally. It has thus been easy for false abstraction from this state of affairs to give rise to the opinion that each good comes to the market endowed with a definite quantity of value independent of the valuations of individuals.⁹ From this point of view, goods are not exchanged for one another, by human beings; they simply exchange.

      Objective exchange value, as it appears in the subjective theory of value, has nothing except its name in common with the old idea developed by the Classical School of a value in exchange inherent in things themselves. In the value theory of Smith and Ricardo, and in that of their successors, value in exchange plays the leading part. These theories attempt to explain all the phenomena of value by starting from value in exchange, which they interpret as labor value or cost-of-production value. For modern value theory their terminology can claim only a historical importance, and a confusion of the two concepts of exchange value need no longer be feared. This removes the objections that have recently been made to the continued use of the expression “objective exchange value.”¹⁰

      If the objective exchange value of a good is its power to command a certain quantity of other goods in exchange, its price is this actual quantity of other goods. It follows that the concepts of price and objective exchange value are by no means identical. “But it is, nevertheless, true that both obey the same laws. For when the law of price declares that a good actually commands a particular price, and explains why it does so, it of course implies that the good is able to command this price, and explains why it is able to do so. The law of price comprehends the law of exchange value.”¹¹

      By “the objective exchange value of money” we are accordingly to understand the possibility of obtaining a certain quantity of other economic goods in exchange for a given quantity of money; and by “the price of money” this actual quantity of other goods. It is possible to express the exchange value of a unit of money in units of any other commodity and speak of the commodity price of money; but in actual life this phraseology and the concept it expresses are unknown. For nowadays money is the sole indicator of prices.

3 The Problems Involved in the Theory of the Value of Money

      The theory of money must take account of the fundamental difference between the principles which govern the value of money and those which govern the value of commodities. In the theory of the value of commodities it is not necessary at first to pay any attention to objective exchange value. In this theory, all phenomena of value and price determination can be explained with subjective use-value as the starting point. It is otherwise in the theory of the value of money; for since money, in contrast to other goods, can fulfill its economic function only if it possesses objective exchange value, an investigation into its subjective value demands an investigation first into this objective exchange value. In other words, the theory of the value of money leads us back through subjective exchange value to objective exchange value.

      Under the present economic system, which is founded on the division of labor and the free exchange of products, producers as a rule do not work directly on their own behalf but with a view to supplying the market. Consequently their economic calculations are determined not by the subjective use-values of their products, but by their subjective exchange values. Valuations which ignore the subjective exchange value, and consequently the objective exchange value, of a product and take account only of its subjective use-value, are nowadays most exceptional. They are on the whole limited to those cases in which the object has a sentimental value. But if we disregard those things to which certain individuals attach a symbolical significance because they remind them of experiences or persons that they wish to remember, while in the eyes of others for which they have not this personal interest the things possess a very much lower value or even no value at all, it cannot be denied that human valuations of goods are based upon their exchange value. It is not use-value, but exchange value, that appears to govern the modern economic order. Nevertheless, if we trace to its deepest springs, first the subjective and then the objective exchange value of commodities, we find that in the last resort it is still the subjective use-value of things that determines the esteem in which they are held. For, quite apart from the fact that the commodities acquired in exchange for the products are always valued according to their subjective use-value, the only valuations that are of final importance in the determination of prices and objective exchange value are those based on the subjective use-value that the products have for those persons who are the last to acquire them through the channels of commerce and who acquire them for their own consumption.

      The case of money is different. Its objective exchange value cannot be referred back to any sort of use-value independent of the existence of this objective exchange value. In the origins of monetary systems, money is still a commodity which eventually ceases to circulate on reaching the hands of a final buyer or consumer.¹² In the early stages of the history of money there were even monetary commodities whose natural qualities definitely precluded their employment as money for more than a short time. An ox or a sack of corn cannot remain in circulation for ever; it has sooner or later to be withdrawn for consumption if that part of its value which does not depend on its employment as money is not to be diminished by a deterioration of its substance. In a developed monetary system, on the other hand, we find commodity money, of which large quantifies remain constantly in circulation and are never consumed or used in industry; credit money, whose foundation, the claim to payment, is never made use of; and possibly even fiat money, which has no use at all except as money.

      Many of the most eminent economists have taken it for granted that the value of money and of the material of which it is made depends solely on its industrial employment and that the purchasing power of our present-day metallic money, for instance, and consequently the possibility of its continued employment as money, would immediately disappear if the properties of the monetary material as a useful metal were