|Originally published: 1912|
THE THEORY OF MONEY AND
Ludwig von Mises
Ludwig von Mises was born in Lemberg, Austria, in 1881. From that year
until his death almost a century later in New York City the world and its
economic underpinnings was turned upside down. Mises, who never won
recognition outside the intellectual and academic circles that were both his
audience and the frequent targets of his criticism, fought difficult battles
on the road to his (then) under-appreciated and under-recognized
achievements. His fidelity to his work was remarkable in light of the
derision, ignorance, and just plain stubbornness of less accomplished but
more popular thinkers. Although a Nobel Prize was never in the wings, he
changed the way that the world thought about money and commercial
relationships. His understanding of the full impact of inflation and the
boom-and-bust cycle of business, among other economic phenomena, were seen
as unfashionable at the time he wrote. His enduring contribution regarding
the nature of money-that it is a commodity like any other-initially caused
consternation. It later elicited mere circumspection and eventually won
Being out of step caused Mises to remain a
peripheral figure among professional economists, thus limiting his personal
prospects. He labored in the backwaters for many years, trying to establish
a comprehensive understanding of all sides of economics, an understanding
roughly analogous to physicist Albert Einstein's goal of a unified theory of
the physical world. The approach of Mises demanded working on a broad range
of issues in a complex agglomeration of disciplines: economics, history,
sociology, and even scholarly methodology. His
achievements, the scope of
which is apparent from his major works, led to inescapable economic
conclusions, which in turn caused a revolution in how governments are
organized and how they approach economic planning and execution.
Mises had a great antipathy toward any attempt to
control human behavior through governmental activity. The individual and his
actions constituted the fundamental building blocks of the economic paradigm
Mises describes. In his preface to the English edition of this work he notes
that a deep knowledge of economics is not necessary to gauge the immediate
effects of monetary or economic policy. The trick, and the substance of The
Theory of Money and Credit, is to determine long-term effects
so that we may avoid such acts as attempt to remedy a present ill by sowing
the seeds for a much greater ill in the future.
Mises maintains that the answer to resolving any
present ill lies in individual human action, not government direction or
control. In his text he offers examples of long-term ills on both the micro-
and macroeconomic stages caused by implementation of short-term (often
politically expedient) solutions; for Mises the law of unintended
consequences was ever in effect.
Relevant to the current debate on the globalization
of most economic sectors, Mises long ago recognized commonplace
misunderstandings of the international division of labor, that it is no
different from the division of labor in any venue-whether that be in a
factory or within a national economy. He also saw and described the negative
effects of nationalism and protectionism. Economic specialization and the
expansion of trade in the early twentieth century were a fulfillment of Adam
Smith's comprehension of human economic activity as seen in the eighteenth
century. Mises understood that governmental shoveling against this natural
tide, in the guise of protective tariffs, was a formula for economic
disaster of the sort that did occur with the Great Depression. Regrettably,
the persons who could have made a difference were unable or unwilling to see
the logic of Smith and Mises.
The policies of John Maynard Keynes that expanded
public enterprise at the expense of the already overburdened private sector
(through untenable increased taxation) were sold wholesale during the first
third of the twentieth century. The world was much the worse off as a
result. The autarky (nationalistic economic self-sufficiency) of the
century and before was seen by Keynesians as a goal rather than
an anachronism. This goal was to be achieved through high tariffs and
jingoistic monetary policy. The effect of these efforts was to extend and
make deeper the economic depression those economists who followed Keynes had
created in the first place. Mises makes several points about economics as a
method of assessing or guiding human activity and how its functional
attributes weren't always used to good effect in the years just prior to the
When Mises steps back to look at economics as a
discipline (certainly more art than science) he finds that once economic
activity passed beyond production for individual consumption, then
economics-the dismal science-was invented. In reality, economics is not
gloomy; it is the method that we use for predicting and then ameliorating
the bad effects, or expanding the good effects, of human economic actions.
Economics as a methodology is scientific in its
observations, but that which it observes is not scientifically organized.
Human economic behavior is random and overall not wholly predictable, thus
the dismal, or frustrating part-the non-science. Mises observes that
economics is not prescriptive (that is, future economic results do not fit
into rules that are immutable), it is projective (economists can guess at
what will happen in the future based on what has happened in the past, but
these are and always will be guesses); we see economic "rules"
only after the fact, and the rules change as fast as the facts change.
Governments and politicians get in trouble when they view the past as a
formula for the future. Economic "laws" don't determine human
action; human action determines economic laws. The chicken did in fact come
before the egg in this instance.
A useful and significant portion of The
Theory of Money and Credit is an investigation of money itself. As a
medium of exchange, some tangible (or today electronic) monetary unit is
necessary for any economic functioning above the direct barter system. Mises
explains that money is that medium. But money's value lies in the eye of the
beholder, and the same amount of money does not mean the same thing to two
different people who are always in different circumstances. A million
dollars on a deserted island is useless, while a hundred dollars to a single
parent may hold a saving grace. Further, Mises comments on two economic
verities: he demonstrates the failure of authoritative
interference in the
markets by governments, and he elaborates on the anarchic nature (because of
human whims) of both production and consumption. He also levels a direct
inflationary governmental policies, which if left unchecked inevitably lead
to totalitarianism because when inflation is not controlled, one failed
policy after another leads to an insistence of even more rather than less
government. He observes that as economic activity disintegrates in the face
of inflation each section of the governmentally controlled house of cards is
built. Government causes inflation with deficit spending or an unrestrained
increase in the supply of money, then claims only it can control inflation
by directing the economy, while simultaneously refusing to recognize that
its actions were the basis of the inflation in the first place. A house of
cards built on inflationary actions and government hubris that it can fix
things often falls with great noise in spite of its slim construction.
Mises's investigation of inflation marks his
transition from economist to political realist. He is adept at pointing out
inflation's economic and political implications, one of which is the
boom/bust roller coaster ride that overly regulated economies often endure.
His ability to call things what they are and to discredit policies
implemented solely to salve the body politic but which do not carry the
seeds of successful course alterations make his economic discussion both
readable and correlative to already-experienced political reality. As
importantly, his observations on economics offer an accurate method of
assessing political promises.
Mises lived through an era of dictators and
collectivist governments. He observes that when the state moves to intervene
in or govern the market, it takes the first step on the precipitous and
slippery slope to economic conflagration. Mises contends that the state has
only a secondary, political interest, in the economic activity of its
citizens; it is the people who have the primary interest. Private property,
in all its forms, belongs to them. This includes ownership of the means of
production-which is the prime moving force of economic activity. Mises holds
that so long as private property exists and the means of production are
allowed their anarchic relationships, state intervention usually can only
negatively influence an economy (capitalist anarchy is the
“creative destruction” described by Joseph Schumpeter [Chapter 38] where
improvement and invention are the rule.
Products and businesses fall by the wayside if they do not match and
exceed their previous efforts and those of the most creative and resourceful
their competitors). The real-world examples of what Mises
predicts (recall, this book was written in 1912) can be seen in the
encyclopedic overview of socialism versus capitalism presented in The
Commanding Heights (Chapter 29), Daniel Yergin and Joseph
Stanislaw's review of this battle. Whichever volume one reads first, the two
together form bookends to the economic history of the twentieth century.
The most severe indictment Mises issues is reserved
for the folly of wage and price controls-government's solution to the
inflation it caused in the first place. When a government begins to set
wages and prices (including minimum wage levels), even in the smallest
measure, its action constitutes an attack on private property and threatens
its very existence. This is because fixing prices is nothing more than the
taking of property without compensation. This is one of the long-term
consequences of an imprudent intervention in the economy for short-term
goals. It is a consequence that politicians do not care to face and thus
ignore when implementing the very wage and price controls that will cause
economic stability to disintegrate. These controls only ensure soaring
inflation when they are lifted, or a free-fall to totalitarian solutions if
they are not. In either case, their certain adjunct is a black market that
further distorts an economy and undermines any government's success at
economic oversight or tax collection. (It should be noted that these
observations are global and do not often directly apply to the U.S. economy.
The fruits of the actions described by Mises can grow anytime, any
place-thus the value of understanding these economic realities irrespective
of what conditions or practices may exist in any given nation at any
On the subject of economic regulation, Mises
observes that every restriction of trade-whether by an excise duty, quotas,
price controls, tariffs, government subsidies, or other mechanisms-creates
vested interests in the beneficiaries thereof. From then on, the
beneficiaries will be opposed to the removal of the initial restraint. No
matter how allegedly laudable the immediate goal, economic interference
inevitably results in cascading negative consequences. When these activities
destroy lives, setting the market aright again often takes all the king's
horses and all the king's men-sometimes literally.
An example of how the human spirit circumvents or
abridges the edicts of economically illiterate governors can be seen in the
later years of the reign of Tsar Alexander I of Russia, grandson of
Catherine the Great (c. 1822). The tsar wanted to reduce Russian dependence
on foreign goods so he set steep tariffs on much that was imported
banned the balance of these items in an attempt to encourage his subjects to
engage in their own manufacturing. Soon the shops were flooded with goods
bearing Russian labels-but there wasn't much else Russian about them. As
Jason Roberts notes in A Sense of the World (2006), making foreign
goods expensive to buy was not the same as making production of native
products affordable. It was more efficient to smuggle foreign goods in and
change the labels than to manufacture such items at home.
The demands of the tsar did not change economic
reality, they only fostered an illegal charade that covered the economic
futility of his plan. What must be understood in order to place the tsar's
incentives and the merchant's counter-actions in perspective were the
penalties for disobeying the government's rules-these were not simply white
collar crimes, punishable by a suspended sentence, a small fine, and
momentary public censure. The price to be paid ended on the gallows; still
the violations were rampant. We see in this example the folly of attempting
to force man to accede to economic policy, and the need to design economic
policy to man's inherent nature. Even the incentive to obey Alexander's laws
(death for violation) was not enough to overcome everyman's need to act
rationally in an economic milieu.
Mises devotes much of this treatise to refuting
various existing economic theories prior to asserting his own. As the
foundations for appreciating this work are self-contained, the reader needs
to devote little effort toward preparation prior to reading it. Mises's
logic flows so smoothly and simply that his account of historical facts
virtually demands his theoretical and prescriptive conclusions. To properly
appreciate the book it is best read as a whole for it does not lend itself
well to being read in stages. That being said, the general reader need cover
only the first sixteen chapters and the last three (21-23). A more detailed
presentation of national and international monetary factors appears in
chapters 17 through 20; this material requires close attention yet adds
little to a general understanding of his theories.
This book represents Mises at his best. He is so
logical, so unrelenting in observing the details (wherein the devil always
lies) that despite its length and intricacies his effort is simply a
masterpiece of analysis and cogent, conclusive prescription. Most valuably,
the reader should recall-as current-day problems are investigated and
weighed against their sometimes inane political solutions-that Mises wrote
this book almost a century ago, yet the answers posited then are still valid
Although Mises does not directly define any of the terms he uses, either
in this book or the two others he wrote that are reviewed in this compendium
(Socialism [Chapter 32] and Human
[Chapter 40]), context usually makes their meaning reasonably clear.
Nonetheless, a distinct understanding of certain words will prove valuable
because some of the terms Mises employs, though in vogue in the early part
of the twentieth century and therefore part of his vocabulary, have long
since gone out of popular usage. The following definitions can be useful in
comprehending all three of the Mises's texts.
aleatory factor: of or depending on chance or luck.
a priori: deductive reasoning, based on logic, without recourse to
experience; prior to and
furnishing a base for understanding experience.
autarky: economic self-sufficiency as a national policy.
bourgeoisie: the social class between the aristocracy and working
class, or proletariat, made up of
shop owners, manufacturers, service providers, etc.
In Marxist theory, the capitalists (i.e.,
bourgeoisie) as a class are antithetical to the
proletariat. In capitalism the bourgeois and
proletariat complement one another.
catallactics: the science of commercial transactions.
chrematism: the science of wealth; the study of the manipulation of
property and wealth.
chreotechnics: the useful arts, especially agriculture,
classical liberalism (now generally termed conservatism in America,
liberalism in Europe): limited
state power, free-market economy, freedom for the
individual, personal responsibility, a society
governed by the rule of law.
commodity money: that money which not only serves as money, but is
also a commodity, i.e.,
gold and silver.
credit money: money, or a claim for money, issued by a government,
entity, or person, but which
cannot be converted into gold or some other
valuable commodity on demand. Credit money
refers to a government's ability to stand behind
its obligations. The value to the citizenry is in
using this money for exchange purposes. Today,
money that is legal tender in almost all countries
is actually credit money by classical definition.
division of labor: the incrementally smaller sphere of work each
person does as specialization and
cooperation make one more efficient.
epistemology: the branch of philosophy that investigates the origin,
nature, methods, and limits of
etatism: the concept that the state is not only the center of
political thought and action, but the only
voice that should control. In monetary theory, the
concept that money, and in particular an
abundance of it and its value in relation to the
money of another state, is the measure of the
economic merit of any state. The more powerful and
rich the state, the more valuable its money.
eudaemonism: the doctrine of happiness, or the system of ethics that
considers the moral value of
actions in terms of their ability to produce
fiat money: money simply created by the state that has certain legal
characteristics. Fiat money has
no correlation to any underlying value; the market
establishes its value through supply and
demand. Fiat money, when used as an economic tool,
is created with the view that more money
means more wealth. This, unfortunately, is a
fallacious presumption because money's value is not
static; its value is always in the eye of the
fiduciary media: notes and credits issued by banking or lending
institutions that are not covered by
cash on hand. The value of the notes and credits
are founded in the reputation and subjective
value and solidity ascribed to the institution
itself. Fiduciary media enable monetary transactions
to occur without the need for money. Fiduciary
media multiply the economic resources of a
Gresham's Law: bad money (cheap money, of less than par value) will
chase good money out of
the marketplace. In colonial times paper money
drove gold and silver coins out of circulation
(the coins were hoarded by individuals, not
withdrawn by the government).
inflation: rising prices caused by an increase in the amount of money
and credit circulating in an
economy. Prices rise as the supply of money
increases because more dollars are chasing the
same amount of goods. Since people have more money
they are willing to pay more for any
given object, causing its price to be bid up. The
increase in the amount of money is the result,
primarily, of a government printing more currency.
When the supply of money increases, the
value of each unit of money decreases. In general,
governments print more money in order to
balance their budgets or to purchase foreign goods
not available within the country because of
the negative consequences of
government policy. An
unbalanced budget arises when governments spend more money
in. Allowed to continue unchecked, inflation causes the monetary system to
and the currency to become worthless, as happened in Germany in 1923 and in
America in 1781.
inflationism: any program that seeks to increase the quantity of
money in an attempt to increase
the economic well-being of a given society. An
inflationary policy does not create more wealth;
such a policy devalues the goods and services
latifundia (plural of latifundium): large landed estates, as in
liberalism or collectivist liberalism: in the U.S. and in socialist
dogma, the opposite of classical
liberalism or European liberalism; state economic
control, interventionist state actions that limit
individual freedom, a highly progressive tax
marginal utility: the value of a commodity (or service) based on
subjective considerations of the
person holding or acquiring it. If one does not
have an automobile, the marginal utility (and thus
the value) to a potential possessor is greater than
an automobile to a person who already has
meliorism: the belief that the world naturally tends to get better,
and especially that it can be made
better by human effort.
mercantilism: the doctrine or theory that the economic interests of a
nation as a whole are more
important than the interests of the individuals who
make up the nation, and that exports are
desirable because the payments that come in over
the cost of imports supposedly make the
nation wealthier. In fact, such an imbalance
changes nothing. The excess of exports over imports
(though brought into equilibrium by an inflow of
money) creates no new wealth; that is, the
exports equal the imports plus the cash difference.
Also known as commercialism.
metaphysics: the branch of philosophy that deals with first
principles; the systematic investigation
of the nature of first principles, and problems of
Midas theory: in international trade, the fallacious notion that
exports that exceed imports make a
nominal value: that value of money decreed by the state, e.g., a U.S.
dollar is worth one hundred
cents. Nominalism's opposite, commercial value, is
the value established by the market when
money is used for exchange.
nominalism: a doctrine that all universal or abstract terms are
ephemeral, existing in name only.
Nominalism is the opposite of realism.
normative: of or establishing a norm or standard, what should be as
opposed to what is; the
opposite of that which is positive, which already
praxeology: the general theory of human action, rooted in economics.
The foundation of
economics is acts of choice (causes), and their
results (effects). Economics is not about things
but about people's actions and reactions to their
world. Economics itself does not have an
ethical or moral base; economics is only about
choices and actions. Praxeology is the study of
those actions. Praxeology is indifferent to the
goals of actions; it is a science of means, not ends.
proletariat: the working class in socialistic jargon; in socialism,
the antithesis of the bourgeoisie.
ratiocination: the act or process of reasoning; rational thinking;
deducting consequences from
romanticism: man's dismissal of or revolt against reason, as well as
the conditions under which
nature has compelled him to live. He uses his
imagination to disregard the laws of logic and
syndicalism: a theory and movement of trade unionism whereby the
means of production and
distribution are controlled by the workers. Workers
achieve their goals by direct action, by
striking. The general strike, akin to a
revolutionary attack, is the workers' ultimate (economic)
tautology: needless repetition of an idea in a different word, phrase
or sentence; redundancy that
adds nothing to the sense of the matter under
teleology: the study of final causes, a belief that natural phenomena
are determined not only by
mechanical causes, but by an overall design or
purpose in nature.
velocity of money: the speed with which money changes hands by
traversing through the market.
The greater the speed, the faster profits are
created, the faster money is made available for
continued economic activity, including taxation.
About the Author
Ludwig von Mises was a product of antipathy to nineteenth-century European
economic dogma; he became a prime creator of twentieth-century economic
science. Born in 1881 in Austria, educated in Vienna, and chased to Geneva,
Switzerland by the Nazis in the 1930s, he finally settled in the U.S. in
1940. His battles were never ending. Even in the United States, his views
were so widely disputed by the ultimately discredited Keynesians that he
could not secure regular employment. He eventually landed a job at New York
University, but his salary was paid by outside interests not the school, and
he never became a regular member of the faculty. During his career he wrote
twenty-five books and hundreds of scholarly articles; his students changed
economic thinking and policy in the twentieth century, literally around the
world. Mises died in New York City in 1973.
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