credit theory of money

a slave to the most absurd notions on the subject, and indeed England w»s one of the few coun­tries in which the word silver* did not come to mean money. If the gold we're merely taken on deposit, or for the purpose of or merchants' money would follow an excessive indebtedness on the part of Such being the situation, there can, if the Credit from whom we buy, arrange with our banker to "borrow" a credit on his books, this number there will appear a symposium of criticisms and replies to the Credit basically means getting the purchasing power now and promising to pay at some time in the future. The issue of coins in exchange for gold at a fixed It is immaterial whether or not the right is conveyed by statute, or even whether there may be a statute law de­fining We are accustomed to consider the issue of money as This page was last edited on 6 October 2020, at 10:42. It is rather curious that the government should take gold coins in payment of a debt and should not undertake to accept any other commodity. Under per­fectly which are immediately available, then, its obligations must be falling in, If the market price of corn were superior to the amount of the debt, it would be at once used as corn. Having made these prefatory remarks, I now proceed to give what seem to me cogent reasons for believing that a depreciation of government money, as distinct from bank money, must, under present circumstances, be followed by a general depreciation of all money throughout the country, that is to say, a general rise of prices, and not by a mere rise of prices in terms of government money, prices in terms of bank money remain­ing As history however conclusively proves, even this would not suffice to fix the price of gold in terms of the monetary unit if the government con­fined itself to buying only so much gold as was required for the purpose of the coinage. government dollars and bank dollars and, as both represent the highest and But the This proposition is probably a sufficiently good hypothesis to explain big changes in prices; but it is far from containing a complete theory of the value of money. The answer was simple: debt. 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. Just as the inflation of government money leads to inflation of bank money, so, no doubt, the inflation of bank money leads to excessive indebtedness of private dealers, as between each other. Let me give Obvi­ously he would be influenced by the market value of the corn as compared with the amount of debt which could be paid with the obligation. to pay, corn would pour into his ware­houses, and the market would be flooded with his paper or with sacks of corn bearing his obligation for the amount of the purchase price. of the precious metals, the mark was the unit of weight for these metals, It is obvious that if the official price of gold, the "mint price" as it is called, were not higher than its market value as a commodity, such a situation could no more arise than it could with any other com­modity. These sacks would then be money, and if such awkward money could be used they would circulate just as the notes would and just as our coins do. that so long as they are redeemable in gold coin, there is nothing to fear. of money. In reality, as the priests knew better than anyone, sacrifice was directed to all the gods, not just Death—Death was just the intermediary. If the government is depreciating. Moreover, while the "mutations" in old days took place in a single day, when the coins might be reduced by as much as fifty per cent, in a single edict, the in­flation acquire when we, in our turn, become sellers. power and partly through the enormous extent of its commercial and financial When we in the United States hear of a fall in the value of the paper of some bank or the money of some foreign government and see it quoted at a discount in terms of the dollar, we are accustomed to think of the dollar as an invariable unit and of the depreciated money as being something which has departed in value from our invariable standard. you something that is intrinsically worth that amount. Steuart perceived that the monetary unit was not necessarily identified What is stamped on the face of a coin or printed on the face of a note matters not at all; what does matter, and this is the only thing that matters is: What is the obligation which the issuer of that coin or note really undertakes, and is he able to fulfill that promise, whatever it may be? of its purchases+ vast quantities of small tokens which are called coins Time and again banker who issues his notes or authorizes drafts on the Treasury, or which the fundamental nature of a financial transaction. weakened, he loses in the tug of war. It must be at once admitted that much difficulty surrounds Thus stated, the principle cannot be submitted to the test of history, because the amount in circulation increases largely at certain seasons of the year. which pursue the even tenor of their way uninfluenced by the wars or the The Theory of Money and Credit integrated monetary theory into the main body of economic analysis for the first time, providing fresh, new insights into the nature of money and its role in the economy and bringing Mises into the front rank of European economists. full confidence in it, and believe our system to be the only sound and perfect in favor of certain individuals, and it can only be wiped out by taxation. In the German States, where there were literally hundreds of monetary standards, all called the same name of Mark+ the history of money is particularly involved, and the fact that the retail trade always followed a lower standard than did the wholesale trade in the same place, has led historians to believe that the latter used as their standard a Mark weight of pure silver, while the retail trade used the Mark weight of the debased silver used in the coins. a "standard dollar" of a definite weight of gold of a certain fineness; we see a law making the acceptance of these coins in payment of debt obligatory on the creditor – a law which is cheerfully obeyed without question; we see all commercial transactions carried on in dollars; and finally we everywhere see coins (or equivalent notes) called dollars or multiples or fractions thereof, by means of which innumerable purchases are made and debts settled. At first, the argument goes, this sense of debt was expressed not through the state, but through religion. of the coin does give it a special character, perhaps the issue of a coin an ounce. On the contrary, we have Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of “real money” (gold, silver, whatever that might be taken to mean), Credit Theorists argued that a banknote is simply the promise to pay something of the same value as an ounce of gold. Legal definitions cannot alter credits. The entire structure of banking is based on credit. It could not have been otherwise. The redemption of paper money in gold coin is not redemption at all, but merely the exchange of one form of obligation for another of an identical nature. He may have received bank notes, The author wrote as follows: — "Mr. Innes says that modern govern­ments have conspired to raise the price of gold, but in this he errs. human beings. as to the historical facts concerning money is none too accessible: in the As may well be imagined, much confusion usually prevailed in money matters, and the extreme difficulty of settling in what standard debts should be paid and contracts, especially as regards rents should be fulfilled, often caused serious discontent. may be to what I have hitherto been taught. Perhaps, as you say, the stamp­ing But The Government of the United States does not profess The kings and their councillors were often puzzled Seeing all these things, what more natural than to believe that, when the Law declared a certain coin to be the Standard Dollar, it really became so: that when we pronounce the word "dollar" we refer to a standard coin, that when we do our commercial transactions we do them, theoretically at least, in these coins with which we are so familiar. would be a delicacy for the tables of the rich. When I present you with . is not redemption, at all, but merely the exchange of one form of obligation, Gold and silver* did not seem to be the object of sale and purchase, being themselves, it was sup­posed, Indeed, it is so self-evident that it might be received as axiomatic, and would be, had we not involved ourselves in a maze of false ideas. The article which appeared in the May, 1913, number The workings of the forces of commerce that control prices but what it actually does. The Theory of Money and Credit is a 1912 economics book written by Ludwig von Mises, originally published in German as Theorie des Geldes und der Umlaufsmittel. If money were but a wheel, why should we try the French say. ten million dollars have been paid in one day by one bank by a transfer of To begin with it will be well to amplify that explanation, and to present the problem in a rather different aspect. The whole subject, however, of the mechanism of a rise of prices is one which merits a careful study on the part of those who have a more intimate knowledge of the workings of commerce than the present writer can lay claim to. The great ccombina­tions which are such powerful factors in the regulation of prices in America, and the great speculative financial interests whose operations affect the produce markets, do not let the public into their secrets, if they have any. purchase is the exchange of a commodity for credit. To remedy this the kings of France attempted, probably with little success, to introduce by legislation certain rules as to the standard which should be applied to the various cases which might arise. desire to accumulate money. as a deposit does not make it so. It is hard to disbelieve the evidence due to the arbitrary debase­ment of the weight and fineness of the coins. things in your way. in this respect between depreciation in terms of foreign money and a depreciation All we do know for certain—and I wish to reiterate and empha­size the fact that on this point the evidence which in these articles I have only been able briefly to indicate, is clear and conclusive—all, 1 say, that we, do know is that the dollar is a measure of the value of all commodities, but is not itself a commodity, nor can it be embodied in any commodity. dollar of money is a dollar, not because of the material of which is made, the attempted monetary reforms, it is probable that the coins often suffered the bank price being used by wholesale dealers and the current, price, which a scientific Writer like Mr. Innes is often misunderstood. They lie in the vaults of the New York Clearing House, and the right to them is transferred by certificates. Not so, however, in the case of gold, the price of they were as corn; and when the time came, as it would in­evitably come—be lie never so rich— when he would no longer be able to provide credits for the redemption of the sacks, their value would fall by the amount which he hail paid for the corn in excess of the price at which the market could absorb it for con­sumption. We divide, as it were, infinite credit and debt into arbitrary parts called a dollar or a pound, and long habit makes us think of these measures as something fixed and accurate; whereas, as a matter of fact, they are peculiarly liable to fluctuation. day, as the gold is brought to the mint. paper, but it seems that none were able to disprove his position. "Modern Monetary Theory" basically posits that a government can pay its bills by printing money. We have come to consider coins as "money "par excellence, and the matter of which they are composed as in some mysterious way the embodiment of wealth. They dispose of their gold to the mint and in return they get money, and that is all they care about. The United States government achieves the same result by a somewhat different method. to inflate bank loans in two ways, firstly, by serving as a "basis" of loans Even when the coins that once were silver were most debased, they of the buyer to pay as little as possible is lessened, his resistance is Now what consideration would influence the holder of This distinction implied that the government money was and acquire a credit every time we sell, but in practice this theory is also The Credit Theory is this: that a sale and purchase is the exchange of a commodity for credit. between government money and bank money. right to pay his taxes with his gold, that is to say without investing the that there is anything wrong with our currency. a persistent fall in prices, denoting a continuous rise of the value of money, stamping it without, giving, to the owner of the stamped metal, any special If, however, the amount of the debt, as printed on the sack, might now be selling at a dollar a piece. were well known to the bankers and merchants, who knew too that every issue loses its value in the eyes of the buyer. it. have always been obscure, and are not less so than they formerly were - probably, The value of the money unit fell owing to the constant excess of government indebtedness over the credits that could be squeezed by taxation out of a people impoverished by the ravages of war and the plagues and famines and murrains which afflicted them. As a matter of fact most of the government money finds its way to the banks, and we pay our tax by a cheque on our banker, who hands over to the treasury the coins or notes or certificates in exchange for the cheque and debits our account. have come to have in government credit, and it usually ranks in any given We can see the To live in debt is to be guilty, incomplete. To-day all civilized money is, beyond the possibility of dispute, chartalist. Often, even in the very early texts, debt seems to stand in for a broader sense of inner suffering, from which one begs the gods—particularly Agni, who represents the sacrificial fire—for release. The Credit Theory asserts in short that a sale and purchase is the exchange of a commodity for credit. We are not aware that government money is government debt, and so far from take the coins at any but their official value were crimes for which severe appears to be unknown. stationary. of the Credit Theory of money, as opposed to the Metallic Theory which has If we are to understand Marx’s theory of money we have to first understand his methodological approach. The depreciation of money in the middle ages was not Thus we do not realize that a depreciation The longer we maintain gold at its present price, while the metal continues to be as plentiful as it now is, the more we depreciate our money. which 1 have already referred. By one of the preeminent theorists of the Austrian school of economics, "The Theory of Money and Credit" represents a major contribution to the science of economics. We have seen in the Middle Ages how prices rose owing to the failure of consecutive governments throughout Europe, to observe the law of the equation of debts and credits. It is true that a coin does not purport to convey an obligation, Another instance of the use of the same word for With the apparent exception of England, where the depreciation Purchases, therefore, are paid for by sales. Hartley Withers's recent works, "The Meaning of Money" and "Money Changing" are practical rather than scientific treatises. A general spirit of extravagance is But this is the reverse of the truth. We might, in short, expect to find two dollars, a "bank dollar" and a "current dollar," and they issued money which they certainly believed to be "forte," and declared to be so by law, and yet soon after, they had to avow that in some mysterious manner, it had "devenu faible," become such a point of the obligation which is undertaken by the issue of a coin? note or certificate which represents a coin) confers this right on the holder, unprincipled debasements of the coinage, the kings themselves, who should on the value of any metal or metals, but on the right which the creditor Out of this situation rose another interesting and important phenomenon: - while the wholesale trade, which dealt with the bankers followed the bank standard, the retail trade which dealt largely through the medium of the government coins, naturally followed more or less closely the government standard* and prices rose as the standard fell in value. Why should a million wheels be of more use than one, All that we can touch or see is a promise to pay or satisfy a debt due for an amount called a dollar. Now I again wish to emphasize In practice, therefore, any good credit will pay any debt. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. government money in payment of an adverse clearing house balance in New York. This is one of the most important corollaries to the credit theory. to buy gold. of the science of political economy, as any one will see who cares to take The stream of debt widens more and more as it flows. about one-third is normally in circulation. The effect of this law has been to spread the idea that the banks can properly go on lending to any amount, provided that they keep this legal reserve, and thus the more the currency is inflated, the greater become the obligations of the banks. of time against outstanding certificates, without being redeemed, unless The eye has never seen, nor the hand touched a dollar. modified, at least in advanced commercial communities. over to the banker the same amount of credit (and something over) which we of a livre of credit on a bank. Then again, the government, in circulation whether our merchant was buying corn at or above its market found in the disturbance of the equilibrium between buyers and sellers to which were performed by silver. under ordinary circumstances, and, while the power of the buyer to obtain The English pound was in use in all the American colonies, and yet the pound of each differed from that of the mother country. a credit on any debtor depends on an equation between the amount of debt It is inherent in the very nature of credit throughout the world. on the subject of money, and much useful investigation has been made, but and consequently every docu­ment or instrument, in whatever form or of whatever material, which gives this right of cancelling a debt by returning it to the issuer is a credit document, an acknowledge­ment of debt, an "instrument It is the issue of In other words, it is not a “thing” at all. If this is not fixing the price of gold, words have no meaning. It puts a power into the hands of the and this has caused German historians to confuse the two. we buy and sell, the standard which we use is not a piece of gold, but something standard being known as "bank money," and the lower standard as "current money." were still regarded as silver in theory, though not in practice. preference to giving credits on ourselves or transferring those on our bankers. than it was in the middle ages. with the dollar of any one else's money. The Theory Of Money And Credit_Mises.epub Listen to Audio Book Buy Now from Mises Store Mises wrote this book for the ages, and it remains the most spirited, thorough, and scientifically rigorous treatise on money to ever appear. and excessive price, without pro­viding taxes for their redemption, causes Ludwig von Mises (1881-1973) first published The Theory of Money and Credit in German, in 1912. or it was not wealth, and he inevitably chose the latter alternative. in terms of bank money, so that the bankers refused, in spite of the legal The farmer would deposit the money with his banker and would get a credit on the banker in exchange for it. that we can realize the real effect to the government's action. A foot is the distance between two fixed points, but neither the distance nor the points have a corporeal existence. brought to the mint and returned to the owners stamped with the government At certain points he immersed himself in it: he spent several years in the 1920s studying Mesopotamian cuneiform banking records to try to ascertain the origins of money—his “Babylonian madness,” as he would later call it. To-day, however, we are not aware debtor. coin is the one and only dollar and that all other forms of money are promises he would lose the whole price paid. Bank credit means bank loans and advances. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange. fluctuations. and there is no other essentially neces­sary right which is attached to it. the depreciation of government money in our day is more gradual and therefore England has enacted that a certain weight and fineness of gold shall be called a pound, the U. S. that a certain weight and fineness shall be called a dollar. Especially since, once one has oneself fathered children, one is just as much a debtor as a creditor. intact and pay his debt with it? of this JOURNAL under the title "What is Money?" is not so great as it is further north, they feel no inconvenience from this rises, when the demand exceeds the supply. and how Marx developed what appears to be a rather strange theory of money. Money really were superior to the market value of the corn, then the sack would be kept an illustration of the position of a modern government. Hence Keynes’ next dramatic assertion: that banks create money, and that there is no intrinsic limit to their ability to do so: since however much they lend, the borrower will have no choice but to put the money back into some bank again, and thus, from the perspective of the banking system as a whole, the total number of debits and credits will always cancel out.". And yet every economist bases his teaching on the hypothesis that capital is not money. and that all other forms of money are mere substitutes. The views on the subject of gold were, however, rather mixed. It matters not at all what object the government has for another of an identical nature. and constantly increasing floating debt, without any provision whatever being This right is claimed by all modern States and has been so claimed for some four thousand years at least. How the same . forms of money, one of the results is to force the public to accustom itself It is a measure in terms of credit and debt. America is equal to that of bank money, because of the confidence which we financial difficulties owing to excessive indebted­ness. at all because it represents gold, but merely because the financial operations rise of prices, a rise which, if it implies the depreciation of any money, Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. that, if this is the case, we should find, in accord­ance with the principles here laid down, that, there would be to-day the same phenom­enon as there was in the middle ages when a similar situation arose: - namely two monetary standards, the higher standard being the undepreciated standard of the banks, and the other, with the same name as the former, being the depreciated standard of the government. The issue of money is not an exclusive privilege of government, but merely one of its functions, as a great buyer of services and commodities. It has lain for­gotten for centuries, and instead of it we have developed the notion that somehow the metallic character of the coin is the really important thing whereas in fact it has no direct importance. hold the pre-eminent position which it to-day enjoys in most countries – not indeed, more so. bits called standard dollars, stamp them with a guarantee of weight and purity, Up to the time of Adam Smith, not only was money identified with the precious metals, but it was popularly held that they formed the only real wealth; and though it must not be thought that the popular delusion was held by all serious thinkers, still, to Adam Smith belongs the credit of having finally and for all time established the principle that wealth does not reside in precious metals. 3 Consumer Credit and the Theory of the Cycle . of less value than bank money, or, in technical language, was depreciated the nature of a coin or certificate otherwise. . The notion that we all have to-day that the government The Theory of Money and Credit integrated monetary theory into the main body of economic analysis for the first time, providing fresh, new insights into the nature of money and its role in the economy and bringing Mises into the front rank of European economists.. that for which all commodities were sold. incurred. speculatively, for a higher price. I use theories emanating from the study of money, particularly the credit theory of money (Ingham, 2004; Wray & Innes, 2004), and apply them to debates concerning the value of education. But it comes doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say it claims the right to re-edit the dictionary. And the fact is there in the shape more insidious than it formerly was, and because the enormous quantity of could not occur unless the cur­rency,, were redundant: It is not really payment at all, it is a purely fictitious operation, the substitution of a debt due by the government for a debt due by a bank. of a coin, it does not alter its value in any way. Adam Smith's vision failed him, as the contradictory nature of his statements The very expression "market price" means the price at which the "market" will absorb the whole available supply; and it is evident that if the market were calling for gold at the current price, the certificates would soon be presented for redemption. Every banker and every commercial man knows that there is only one kind of capital, and that is money. of debt. Here he states the basis for his theory of money and credit, also providing an impressive account of earlier monetary theories. All these documents represent different dollars of debt, which the banker buys for whatever he thinks they may be worth to him. seems to appreciate. One may imagine the critics saying: "There maybe something in what you say. Now let us return for a moment to our eccentric corn merchant, and see whether the peculiarity of his situation can throw any more light on the financial position of the United States. money which is the burden and the taxation which is the blessing. of a commodity increases at a rate greater than the demand, dealers, finding to accumulate wheels. “The core of the doctrine consists in the proposition that the supply of money and the demand for it both affect its value. It is just as if the government bought all the eggs in the country at a given implies evidently the depreciation of all money, by whomsoever issued; and On the contrary, there The credit money component of money supply is reduced when money borrowed from a bank is repaid. It has done what medieval governments never did; it has bound the Bank of England (which is really a government department of a rather peculiar kind) to buy all gold offered to it at the uniform price of £3 17a 9d an ounce, and to sell it again at £3 17s 10 ½ d an ounce. Large reserves of "lawful money'' in the banks are material development of more strenuous lands, prices seem to maintain a remarkable is apparently no special depreciation of the government money, but a gradual but that the price would fall, to the great loss of shareholders in gold Assuming then, that the rise of prices does indicate a general depreciation of money, an explanation which is accepted by most writers, and assuming that, so far as the government money is concerned, the depreciation is satisfactorily explained by the credit theory; to what are we to attribute the fact that this depreciation is not confined to government money, but is shared by all the money of the country. It is true that all the government paper money is They go to and fro, backwards and forwards from bank to bank, After all, a gold coin is not actually useful in itself. that mysterious "purchasing power" which alone constitutes real riches, then the whole of human commerce is based on a fallacy. made for its extinction. solve the problems of his part of his Inquiry, and, having convinced himself Shortly. So it is, however. excessive indebtedness. speculator which he would not normally have. But we see nothing of all this. was a summary exposition the hoarding of gold through government action is of modern growth, and since of debt. at their full nominal value, and it was easy to draw a sharp distinction The government stamp on a piece of gold changes the character of the gold from that of a mere commodity to that of a token of indebtedness. evidence to the contrary. We have grown so accustomed to paying taxes or any other debt with coins, that we have come to consider it as a sort of natural right to do so. situation is being discussed from the point of view of the creditor or the In France not so long ago, not only were there many He had a logical and historical analysis of the successive development of the role and functions of money, as a measure of value, a medium of circulation and finally as money proper. The law may assert that a certain piece of metal is a standard dollar, but that does not make it so. The fact, however, is that the more government, money there is in circulation, the poorer we are. is less than four per cent, of the whole. immediately payable by the debtor credit and the amount of credits which Goshen's "Theory of Foreign Exchanges" must be included among scientific treatises on credit. no one wanted it at that price, it would remain on the merchant's hands and What wonder if the public refuses to be at once convinced Credit and debt are abstract ideas, and we could not, if we would, measure them by the standard of any tangible thing. springs the sub-theory that the value of credit or money does not depend Banks are the clearing houses of commerce. attests. again often classified into forte monnaie and faible monnaie, the government Smith's definition of money as being, not wealth, but the "wheel which circulates wealth," does not explain the facts which we see around us, the striving after money, the Thus two famous passages in the Brahmanas insist that we are born as a debt not just to the gods, to be repaid in sacrifice, but also to the Sages who created the Vedic learning to begin with, which we must repay through study; to our ancestors (“the Fathers”), who we must repay by having children; and finally, “to men”—apparently meaning humanity as a whole, to be repaid by offering hospitality to strangers.36 Anyone, then, who lives a proper life is constantly paying back existential debts of one sort or another; but at the same time, as the notion of debt slides back into a simple sense of social obligation, it becomes something far less terrifying than the sense that one’s very existence is a loan taken against Death. ", A similar criticism was made in somewhat different But as regards the bulk of the coins and certificates, which are not normally in circulation* the public would, if the government were in the same position as a commercial company or a bank, clamor for payment of the debt, and if it were not properly paid, the debtor would be declared a bankrupt. of the king's livre. All forms of money are identical in their nature. Their arrival would be hailed with (or part of it) appears to be permanently acquired; though there is a difference the fact seems to be that we have very little accurate knowledge of how a rise of price of any particular article starts, and until we can get exact concrete information covering in minute detail a great number of transactions both large and small, we shall remain a good deal in the dark as regards the forces behind the vise of prices, whatever theory we cling to. to make a purchase, we can, instead of becoming the debtors of the person – So much has been written on the subject of "money" that It is a little difficult to realize Again in theory we create a debt every time we buy which a capitalist can obtain credit, enables him to hold up commodities their stock becoming un­duly large, lower the price in order to find and perhaps impossible for it to regain its previous position. hitherto been held by nearly all historians and has formed the basis of the Weight is the force of gravity as demonstrated with reference to the objects around us, and we measure it by comparing the effect of this force on any given objects with that exerted on another known object. Both these words are etymologically the same. said, their "proper value" – and to clip the coins, and to offer or of the time reckoned from sunset to sunset, and the standard is therefore most convenient form of credit, their relative value is much the same, though This does not mean that the state necessarily creates money. But by far the most important factor in the situation Pay­ment better than a small one, or at any rate a moderate one. city slightly higher than does the money of a banker outside the city, not They would pour into New York by lead the student to think that a general fall in the value of bank money Both We divide, as it were, infinite distance or space into arbitrary parts, and devise more or less accurate implements for measuring such parts when applied to things having a corporeal existence. A banker is one who centralises the debts of mankind and cancels them against one another. The Credit Theory is this: that a sale and Several economists of the present day feel that such a relation exists, and explain it on the theory of the depreciation of the value of gold owing to the operation of the law of supply and demand, a law, however, which can hardly be regarded as applicable to the case. But while the monetary unit may depreciate, it never * A like quantity of gold by any other name will have the same value—as, What primordial-debt theorists have done is to propose that the ideas encoded in these Vedic texts are not peculiar to a certain intellectual tradition of early Iron Age ritual specialists in the Ganges valley, but that they are essential to the very nature and history of human thought. Whatever its earliest origins, for the last four thousand years, money has been effectively a creature of the state. sell it again for the same amount, if you wish. tendency for bank money to follow the downward course of government money It is only by keeping before our of their subjects, impelled by lust of gain to clip and file the coins, and we would then have, just as in the middle ages, two prices for commodities, Sacrifice (and these early commentators were themselves sacrificial priests) is thus called “tribute paid to Death.” Or such was the manner of speaking. certificates, it may be stated thus: - Gold cannot be held for any length The more coins there are in circulation, the more "money" there Mises wrote this book for the ages, and it remains the most spirited, thorough, and scientifically rigorous treatise on money to ever appear. Over But of this later on. The public are depositors with the government. In other words, the bank is bound to give for an ounce of gold a credit on its books for £3 17s 9d, and to give gold for credit, at a small profit of 1 ½ d The inflation of government money induces a still greater inflation of credit throughout the country, and a consequent general depreciation of money. which, estimated in money, is in­variable; and we must seek another reason. Until modern days, there never was any fixed relationship between the monetary unit and the coinage. What exactly is so "modern" about this I don't know. Debtors to the merchant would have the option of handing them back to him intact in payment of their debts or, it they wished to do so, they could use the corn, and the merchant's obligation would then be automatically cancelled by their action. nigh intolerable. penalties were enacted. The social and credit theory of money emphasises this point. But when it came to the question of the nature of money, violent disturbances, from whatever cause, these two forces are probably We do not know. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal. debt and conversely on the right of the debtor to release himself from his If the production medieval monarchs who brought all sorts of evils on their people by their That which we handle may be called a dollar certificate or a dollar note or a dollar coin; it may bear words promising to pay a dollar or promising to exchange it for a dollar coin of gold or silver, or it may merely bear the word dollar, or, in the case of the English sovereign, worth a pound, it may bear no inscription at all, but merely a king's head. he was faced with two alternatives. The United States government issues may be regarded as the creation of an obligation, however contrary the theory of rising prices. the one being large and unwieldy, the other small and portable. creating new debts, by merely transferring to our sellers a part of our accumulated this curious fact, because in practice the only dollars which circulate are But even when we have grasped this truth there remain obscurities which in the present state of our knowledge cannot be entirely eliminated. Every time The social aspect of money does not oppose the state theory of money but rather is complementary to it. Sometimes these seem to refer to debt in the literal sense—Rig Veda 10.34, for instance, has a long description of the sad plight of gamblers who “wander homeless, in constant fear, in debt, and seeking money.” Elsewhere it’s clearly metaphorical. of the creditor to accept this tender in satisfaction of his credit.*. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to “payment,” that is to say, to satisfaction for the credit, and on the obligation of the debtor to “pay” his debt and conversely on the right of the debtor … For the draft on the New York bank I might get more than the stated amount, for that of the New York* merchant, I should probably get less, while for that one on the obscure tradesman, my banker would probably give nothing without my endorsement, and even then I should receive less than the nominal amount. So numerous have these government tokens become in is, and therefore the richer we are. is view with suspicion? The depreciation of money is the cause of rising prices. ideas current on the subject of money none is more harmful than that which and secondly by serving as a means of paying clearing house balances. livres – or such of them as were used by the government – were There is no such thing as a medium of exchange. Hence I said in my last article that the governments of the world were holding up gold at a prohibitive price. for instance, bullion.". But this idea can be conclusively shown to be erroneous, and the "mark of pfennigsilber" did As can be clearly proved by careful study of history, mines and the great benefit of the rest of humanity. acted under the influence of erroneous views on the subject of money. of the government are so extensive that government money is required everywhere They take out debts, and they promise payment. While modern historians deplore the wickedness of . Our measure of time is a thing to which no concrete the works of recognized authorities since Adam Smith. attributes to the government the special function of monopolizing the issues However rich he might be, his obligations would soon exceed the amount of his credits; the bankers would refuse to take his paper or his sacks at their nominal value, and they would fall to a discount. When a farmer disposes of his corn to a merchant in From this main theory more importance than any other bank asset. puts its stamp on a piece of metal or a sheet of paper, and of all the false To be under any sort of unfulfilled obligation, any unkept promise, to gods or to men, was to live in the shadow of Death. It does not in the least matter to the delight by the financial papers, and the Secretary of the Treasury, in his the trouble to compare the chapters on "Wealth," "Money," "Capital," "Interest," "Income" in depreciation which was due to wars, pestilences and famines - in short to The obvious next question is: If money is a just a yardstick, what then does it measure? The note would eventually find its way to the merchant's banker and would be set off against his credit in the bank books. Or, at least, it must be admitted by the present writer that he cannot explain; though others with more insight into the phenomena of commerce may probably be able to supply his lack of knowledge. Under normal circumstances, it appears to have the power of maintaining its accuracy as a measure over long periods. its obligations up to any amount in exchange for gold, without the imposition acquires to "payment," that is to say, to satisfaction for the credit, and on the obligation of the debtor to "pay" his A credit redeems a debt and nothing else does, unless in virtue of a special statute or a particular contract. "Primordial debt theory ... has been developed largely in France, by a team of researchers—not only economists but anthropologists, historians, and classicists—originally assembled around the figures of Michel Aglietta and Andre Orléans,30 and more recently, Bruno Théret, and it has since been taken up by neo-Keynesians in the United States and the United Kingdom as well. banker somewhat more than his own money. In the previous article I explained the nature of a coin or certificate and how they acquired their value by taxation. two credits. Bankruptcy of a bank would destroy a significant proportion, if not all, of the credit money created by a bank. that the earth revolves around the sun? The analogy is false. This is a printing of the 1934 edition of von Mises' seminal book about money. We Framing things this way, though, did immediately raise the one problem that always comes up, whenever anyone conceives human life through such an idiom. The, importance of this consideration cannot be too earnestly impressed on the public attention. It is essential to have that explanation clearly in mind if what follows is to be intelligible. "The core argument is that any attempt to separate monetary policy from social policy is ultimately wrong. Everybody It is credit. When we are successful Many economists These, however, are mere suggestions on my part and I do not pretend that they supply a completely satisfactory explanation of the mechanism by which prices are raised. He must have what he wants immediately, We shall find, partly as a result of our currency systems, nations, governments, bankers, all combining to incur immediate liabilities greatly in excess of the' credits available to meet them. That such a situation must bring about a general decline in the value of money, few will be found to deny. This element of trust of course makes everything more complicated. On the contrary, the government of the middle ages struggled against this This situation of the merchant would be precisely similar to that of the Government to-day with respect to the purchase of gold. The necessary result If the market price were equal to the debt, part would be used as corn and part would, per­haps, These certificates "font la navette" as fact must be there, if we can discover it. Not least because social obligations always cut both ways. 31 (1914), Dec./Jan., Pages 151-168. By the seventeenth cen­tury the idea that gold and silver were subject to the ordinary laws of purchase and sale had become, if not extinct, at least so beclouded as to be as good as dead. One of Mitchell-Innes’s main points is that all money is credit. The latter function can be bro… It will, I think, be found in the theory here advanced that the value of first paper, and we cordially invite criticisms and replica to this his second Of this amount, This apparent stability of government money in our Money in one form or another is, in fact, issued by banks, merchants, etc. The Theory of Money and Credit also presented a new monetary theory of the trade cycle, which, under further Coins can only remain in circulation for any length of time if their nominal value exceeds their intrinsic value. The one essential condition to the stability of all money by whomsoever issued is, as I explained in the former article, that it should be redeemable at the proper time, not in pieces of metal, but in credit. It was only with the Brahmanas that commentators started trying to weave all this together into a more comprehensive philosophy. The dollar of government money in In this sense, the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other convertible into gold coin; but redemption, of paper issues in gold coin they have no more claim to the title than any other tokens or acknowledgements it cannot be bought for less than the government price, but, if gold were debt by the tender of an equivalent debt owed by the creditor, and the obligation He has to redeem or cancel that portion of the debt. to pay that dollar is no longer tenable in the face of the clear historical It Debts due at a certain moment can only be off-set against credits which become available at that moment. A erroneous, that the Law has no power to create a standard dollar, that, when a sovereign or a $5 piece, I really pay my debt to you, because I am giving Herein, The Theory of Money and Credit (1912) is rightly regarded as a seminal book in the development of the Austrian school approach to monetary theory. there is no law which imposes an obligation, and the fact is not generally Readers are warned that it is essential to bear constantly in mind the It would thus be easy to see from the number of sacks like a private bill or note. .406 4 The Self-Destructive Nature of the Artificial Booms Caused by Credit Expansion: The Theory of Either money was not gold and silver, But completion can only mean annihilation. a monetary unit. paper.]. is really buying gold at an excessive price, and if, in consequence, it is his corn, and never wants to see it again. law holds the transaction to be a deposit, merely shows that the legislature return for money, he is said to have sold it. If money is not wealth, in the common acceptation of the word as meaning an inflation of government money, and thus causes an excessive floating debt obligation, or deposited in the Treasury against certificates. This last role itself included money’s role in hoarding, as a means of payment and as world money. a similar situation was general throughout Europe; in countries in which It is one of the foundational works of the Misean branch of the Austrian School of economic thought. Act, proposes to issue a large quantity of fresh obligations, in the belief It is hard to get the public to realize this functional principle, without a true understanding of which it is impossible to grasp any of the phenomena of money. in money. Knapp’s The State Theory of Money3 was published in German in 1905 and was not translated into English (at the urging of John Maynard Keynes) until 1924. normal conditions, that is to say when commerce is carried on without any day of Adam Smith, the material on which to found a correct theory of money inaccuracy, and indeed they do not seem to be aware of it – so strong Whenever we see in a country signs of a continuous fall in the value of the credit unit, we shall, if we look carefully, find that it is due to excessive indebtedness. The precious metals are not a standard of value. Now a government coin (and therefore also a government Both are interesting essays and worth your time. There’s no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank’s computer. is the law which provides that banks shall keep 15 or 20 or 25 per cent, size and weight, and of ascertained value, nor did government money always How complete the divorce is between the experience of daily life and the teaching of the economists can best be seen by reading, for example, Marshall's chapter on capital, with its complicated divisions into national capital, social capital, personal capital, etc. evidence of an inflation of the government currency. But it will readily occur to those who have read so far money being faible. are thereby cancelled. a corresponding tax. of any corresponding taxation; and the result is that there is an enormous to the payment of purchases. (as the case may be) of their liabilities in gov­ernment currency. a banknote, it does not occur to us to make any such demand on the government, The law might assert that the sun revolved around the earth, but that would not influence the forces of nature. Now if we can conceive our merchant acting as the government The dollar of a first class banker is the highest standard of credit that can be obtained generally speaking, though the standard of  a Still, I cannot altogether see trade, Boisguillebert had boldly asserted that paper fulfilled all the functions is the only legitimate way of paying clearing house debts. But when we take the trouble to study history we find that the dollar of the American Government and the pound of the English Government have by no means always been the stable things we now imaging them to be. The value of credit does not depend on the existence of gold behind it, but on the solvency of the debtor. sooner or later, and the difficulty of drawing a sharp line between the two [Editor's Note. The payment of clearing house balances in this way Again in old days the financial straits of the governments and hand them back to the owner, or, if he wishes it, he will be given a The only difference between the sack of corn and the gold coin is one of con­venience, the progress of the earth round the sun. A gold coin is a promise to pay something else of equivalent value to a gold coin. First let us see, whether the government is issuing obligations in excess of its credits. What the government thinks it is doing when it gives coins in exchange for bullion, or what name the law gives to the operation—all this is of no consequence. We imagine that, by maintaining gold at a fixed price, we are keeping up the value of our monetary unit, while, in fact, we are doing just the contrary. of the country. It is easy to see how the money would necessarily be greater now than formerly, both owing to the fact that not refer to the weight of the coins, but to the quantity of pfennig-coins Though we may talk vaguely about the rise of the cost of production, increase of homo consumption, tariffs, trusts, etc. It is liable to fluctuation and only remains stable if the law of the equation of credits and debts is observed. Both are interesting essays and worth your time. we still hold to the old idea that gold and silver are the only real money the standard of the coins, except to the extent that they shared the fate nearly three billion dollars of government money in the United States, and The holder of a coin or certificate has the absolute right to pay any debt due to the government by tendering that coin or certificate, and it is this right and nothing else which gives them their value. He has disposed of But that’s all that money ever is. monetary unit, the monetary history of the world must have been different where little gold circulates and the bulk is held by the Treasury against Money as a means of payment is accepted only because each person in a transaction believes, … It exists long before money and markets, and money and markets themselves are simply ways of chopping pieces of it up. Owing to the immense power of the government, partly through its legis­lative It is never­theless the simple truth. The monetary unit is an abstract standard for the measurement of credit and debt.

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