I wrote a rather lengthy chapter on the theory of money and credit in my Mises biography and in that chapter I dealt with the first edition of this book only to the extent that it was necessary to highlight some major differences that concern in particular the question of the business cycle theory and a few other questions.
In the first edition, Mises held that his analysis of the consequences of an artificial increase of the money supply entailing a decrease of the interest rate and thus entailing inter-temporal disequilibria was just one of the possible causes of a crisis, but not a complete crisis theory.
Whereas in the second edition he was much more adamant and said, well, this is actually a systematic explanation of the business cycle and a full theory in its own right.
Now, preparing my paper, I realized that I had the good sense, the good common sense not to delve into more detail because it's actually a lot of work.
I don't know how many hours I think into this project was something like 150 or 160 or 180 hours. It's just mind-boggling and you can do this only if you're an academic.
If you're working for a private company it would be completely out of the question because the value added is actually not that high, but it's up to you to judge this.
So we'll go through some of the materials.
So this is the outline of my presentation.
We'll first talk a little bit about the logical structure of the Theory of Money and Credit,
which by the way did not change across the different editions,
and it formed the backbone of Mises, not only of Mises' monetary thought,
but in fact of his entire conception of the market process.
So since this is probably what is least interesting about my specific question here,
which is the evolution of Mises' monetary thought,
I will rush through this material rather quickly.
And then some conclude by highlighting the chief contributions that Mises made
in The Theory of Money and Credit right from the first edition in 1912.
Then we will talk about the notable changes that came with the second edition
and notable changes in Mises' monetary thought by 1949, that is by the time he had published Human Action.
And finally I'll get to talk about some of the problems that we find with the English translation
Because, as we shall see, it's less than faithful in certain respects that are, after all, interesting and important.
Okay, so the logical structure of the Theory of Money and Credit, the objective is to walk in Carl Menger's footsteps and deliver a causal analysis of money prices.
That's the big thing. And also, once we have a good explanation of what are the causes of money prices, what are the consequences of money prices,
You can understand all the reactions that come from the side of entrepreneurs who react after all to money prices that presently exist and that are expected to exist in the future and thereby adjust the structure of production and entail production flows of goods, intermediate goods, final goods, but also international trade and so on.
So in order to have a sound causal analysis of prices, we need to trace the causes back to the smallest accessible cause, which is individual human action.
So we get necessarily the principle of methodological individualism.
And not only that, once we realize that we have to start our explanation with individual human action, we necessarily have to try to look at things from the point of view of the acting persons.
and Man-Equating Persons, that is, we have to espouse the point of view, subjectivist point of view.
It's not necessarily relevant how the world really is, but it's relevant how people perceive them, perceive the world, because this informs their actions.
As we know currently in the case of monetary policy, our authorities do not necessarily act with the correct view of how the world is, but how they see it.
Well, so, next thing comes a very important step, it's the realization that different money types are evaluated in different manners.
So the first application of this subjectivist approach consists in creating a system of distinctions, a typology of money from a subjectivist point of view.
and we'll come back on this later right so the thing is not to stick to the
physical appearance and say well for example we have a coin and this coin is
somehow inherently is whatever is the money substituted or we have a gold coin
or silver coin this coin is per se is some always some base money so Mises
says this is not correct because sometimes it is and sometimes it is not
it depends on well the legal status and so it depends on the way these different
Objects are evaluated. Two things that are physically exactly equal might be evaluated
completely differently depending on the context. So this is a major contribution, as struck
Austrians always, but we do not always make the connection with the subjectivist approach.
So this whole typology results from Mises' subjectivism.
Next step consists in analyzing the causes and consequences of the subjective value of
Money in the narrower sense.
There is, of course, a fundamental distinction
that Mises makes from his subjective point of view.
He distinguishes money substitutes, on the one hand,
from money in the narrow sense.
And money substitutes are evaluated
as deriving their value entirely from the fact
that they can be redeemed into money in the narrow sense.
That is, into what we call sometimes today also base money.
So we have a check.
And we evaluate the check in light of the fact
that we can redeem it into base money.
So the manner of evaluating a substitute
is different from the way we evaluate base money.
So first step then, what Mises does,
is to analyze the causes and consequences
of the subjective value of money in the narrow sense.
This is the second part of the book.
And then in the third part of the book,
he talks about the causes and consequences
of the subjective value of money in the broader sense.
And he focuses in particular on the only interesting case,
in which there is a difference between money in the broader sense and money in the narrower sense which can come into place through the issuance of fractional reserve tickets, that is through the existence of fiduciary media.
And this is why the third part of the book is in the German original actually called fiduciary media and their impact on the economy, I believe, whereas in the English translation it is money and credit, which doesn't say anything.
So let me very briefly look at these different positions just in a little bit more detail.
Subjectivism led Mises to the development of the general theory of subjective value.
The state in which he found this general theory of subjective value was not satisfactory.
I will not go much into this because we are mainly interested in Mises' monetary thought.
thought, and it is, by the way, an aspect that I already covered in the Mises biography.
So Mises develops Menger's theory and develops it as it had been in the hands of Boehm-Bawerk
and Wieser, and the main thing that he does is to highlight that subjective value results
from choice, which is always bound up with human choices.
It's not something that is separate from some objective thing outside of choice.
It's always bound up with choice.
and therefore subjective value is always ordinal, it's not cardinal, it's ordinal precisely
because it always relates to the subjective value of another choice alternative.
Now since it's bound up with choice and since we have no way of explaining choice entirely
in terms of constant causes, human beings are free to some extent, we get the typical
consequences of this fact, namely that there are no quantitative relationships in human
in Action and Between Economic Goods, because the subjective evaluation that we make may differ from time to time.
They are not constant across time. It's a direct consequence of the fact that human beings make choices which are not entirely determined by outside factors.
And this is then a fact, a basic fact that Mises highlights again and again in the book and in all of his discussions of the value of money and money pricing.
Money Pricing.
The second but related implication is that there's uncertainty.
It's precisely because we cannot explain choices entirely in terms of causes separate from
choice itself that we are unable to anticipate future choices.
And so there is uncertainty.
In the case of past choices, no problem.
The choice has been made.
It's done.
But future choice we cannot entirely anticipate, at least not with scientific means.
Well, we can guess and we can be right, but we do not know.
So there's uncertainty.
And this is, of course, a fundamental fact
that leads to using money, because one of the uses of money
is to act as a means of deferred payments.
It's a fact that is somewhat neglected by Mises
in the first editions, but then highlighted in Human Action.
Okay, the second part, a few observations
on the second part, the causes and consequences
of the Subjective Value of Money in the narrow sense.
Here, Mises first analyzes the causes of the demand
for and supply of money, which leads him to the discussion
of the regression theorem.
And the point of the regression theorem
is that Mises combines it
with methodological individualism.
So it allows him to explain the price level
from the point of view of,
in terms of individual human actions.
and so he refutes positively the contention by Wieser,
Wichsel and Hefferich that no such application
of methodological individualism would have been possible.
Then he goes on to highlight the impact of changes
in the demand for and supply of money on money prices.
He develops a subjectivist interpretation
of the quantity theory, so which means,
which basically says the following,
the quantity theory has it by and large right,
but only as far as the general tendency is concerned.
An increase of the money supply will entail
a higher price level than otherwise would have existed,
but there's no fixed quantitative relationship.
So the traditional quantity theory was wrong on that account
because it had stipulated that there was
a fixed quantitative relationship.
10% increase of the money supply leads to a 10% increase
of the Price Level or to an 8% increase of the price level.
So that's not true.
So the tendency is there, and then
the exact quantitative relationship
might differ from case to case.
It precisely depends on subjective value.
Mises delivers a critique of the mechanical versions
in this context of the quantity theory, most notably discussing
Jung, Mill, and Fischer.
and then he sets out to discuss a series of complications,
most notably the interlocal price differences
and exchange rates, whereas he neglects interest rates.
So this is actually, so this is the content of the chapters
seven and eight, I believe, in the book
and the important thing here is especially the chapter
on exchange rate because it allows Mises
to translate his framework, to apply it, in fact,
an application of his framework, to the case
of international monetary relations.
And this is a major contribution that Mises makes,
which I completely neglect in my book, in the Mises biography.
And simply because I was just too ignorant, as I felt,
I probably still am, about the history
of international economics.
So this would be a nice doctoral dissertation
for a younger economist, somebody set out,
maybe under the guidance of Professor Salerno
to just revise the history of international economic thought
on international relations and then see
what was the precise contribution that Mises made.
So it's a nice project here.
So Mises focused on this.
He neglected the case of interest rates
because this, he felt, was sufficiently
dealt with in Boehm-Bawerk.
And then, so once he had analyzed the consequences
on Money Prices, he could discuss the consequences of changes in the demand and supply of money
for the distribution of income and wealth.
So there he discussed the cases of inflation, of deflation, of monetary stability,
and also international economic relations.
So this is by and large the content.
Oh, wait a minute, I think one element is missing.
Yeah, there it is, the nature and scope of monetary policy, right?
So once we know what the impact of a changed money supply on money prices is, and therefore on the distribution of income and of wealth,
we can analyze what is the true scope, that is, what are the true consequences of monetary policy.
First you have the general discussion, what are the relationships between the different variables,
and then you apply this monetary policy after all, modifies the money supply,
So what can they do? Well, they certainly affect the distribution of incomes. Can they also increase aggregate wealth? Mises rejected this notion.
Now we're turning to the third part in which Mises analyzes the causes and consequences of the subjective value of money in the broader sense, so most notably taking care of focusing on the case of fiduciary media.
And here he continues, he can build on the debate between the currency school and the banking school.
Mises by and large endorses the principles of the currency school and modifies these principles,
but not really the principles, but some misconceptions that the currency school had made,
For example, the distinction between notes on the one hand and demand deposits on the other hand.
So the currency school had here seen a categorical difference and Mises says,
no, on this point you guys should go wrong. The banking school had it right.
So you have to amend at this point, but it's a comparatively secondary issue.
So the currency school had it right as far as the causes of the demand for and supply of fiduciary media is concerned.
and then Mises sets out to analyze the consequences of changes in the demand for and supply of fiduciary media on money prices and this leads him most notably to develop his famous business cycle theory to other things as well but we don't have time so we cannot go into all of this.
Now, what were the short list of secondary themes that were also developed in The Theory of Money and Credit?
Mises highlights repeatedly the differences between economics and other disciplines.
He makes interesting observations on monopoly theory.
He talks about repeatedly, he makes important statements about government intervention and monetary interventionism in particular.
And then there's one aspect that has occasionally been highlighted in the literature, but in general neglected, namely that Mises was actually the first, at least within the Austrian School, to highlight the pricing process within unorganized markets.
Menger analyzed the pricing process, how the interaction of subjective values of different market participants bring about the equilibrium price. He had analyzed this in a setting that resembled a stock exchange.
You bring all people together and they somehow figure it out and you get an equilibrium price.
Now, Mises comes along and says, well, that's of course not actually how it's going on in most exchanges.
In most exchanges, we have unorganized markets.
For example, you're a baker, you're selling your whatever, your hundred breads that you have baked in the morning,
but you don't have all customers together at the same time.
And you're not actually together with all your other competitors that are also in town.
So the pricing process is here unorganized.
is based on the expectations, right? The baker has a judgment on what the situation on the market is, what is the supply, what are the supply conditions, what are demand conditions, and based on this judgment, he fixes, so to say, a price, that is, he proposes a price of which he thinks it will be the equilibrium price, right? So it's a major breakthrough in the theory of money and credit but not related directly to monetary theory. What are the chief contributions? Well, I feel created a short list of eight
Chief Contributions. The first one would be so the development of the general theory of subjective value, then he has a subjectivist typology of money, and I think actually this is one of the most important contributions, he has a consistent coherent explanation of the subjective value of money on the basis of which he can develop a systematic theory of money prices and apply it most notably to
the case of international monetary relations.
There are then contributions in the form of refutation
of wrong doctrines, which concerns most notably
the banking school, the index number theory,
and the versions, all versions of a mechanical
quantity theory of money.
And finally, of course, is business cycle theory.
Now, what were the major changes that came with the second edition of The Theory of Money and Credit?
So, this is my short list here, it's just this one slide, because it's major changes, right?
So, the first one would be shift in the general framework pertaining so to the general theory of subjective value.
In the first edition, Mises had proposed an odd mixture between purely praxeological reasoning that is in terms of choices, right, I choose to do this and this, thereby demonstrating my subjective values, but he also had said that these choices or these subjective values reflected feelings of pain and pleasure and similar things.
In the first edition, Mises had occasionally, about 8 or 10 times, he had referred to a distinction between economic motives on the one hand and non-economic motives on the other hand, which is a conception that he vigorously criticized in the 1920s, based on the subjective theory of value, where there are only subjective values, they are not economic values or non-economic values, all part of the general theory of value.
is precisely a general theory.
So this already has gone in the second edition, where
there are no more economic motives.
There are only subjective choices.
There are only subjective values.
In the second edition, he also highlights
a difference between static and dynamic analysis
in an important case in which he discusses
this kind of a conclusion of his refutation
of the Mechanical Versions of the Quantity Theory,
discussing David Hume's thought experiment.
Hume had said, well, if we double the money supply,
then everything else remains the same,
then all prices will be twice as high as before.
And so Mises says, well, that's not necessarily wrong
as a pedagogical device in order to highlight
the general tendency, but it's a static comparison
that does not actually describe or reflect
how things would play out in the real market process.
What happens in the real market process is that,
of course, every individual will tend to evaluate money
less highly than before, and therefore,
money prices will tend to be higher,
but already at different points of time and so on.
But it will not be exactly twice as high at the end
as before, in fact, we cannot know where it will end up.
So you have the dynamic analysis of the market process opposed to this static conception.
And this is important because we see this already in the 1924 edition because Mises would apply later the same argument in the socialist calculation debate.
When he had to confront the conceptions of the mathematical general equilibrium theorists,
I said we are just going to modelize the ideal economy and modelize how the economy would reach a new equilibrium in the future and he would say then at that point well that that's all good and fine that you would devise such a new equilibrium but this is not actually what will work out in practice because the new reality will come through a process and we are completely ignorant of this process because precisely we do not know the subjective values. An important
Another important element is the consideration of anticipations, the role of anticipations.
To some extent, it had already been done in the first edition because, as we have seen,
he had formulated a theory of pricing in unorganized markets, but he develops this further.
So he says, well, as a matter of fact, market participants can anticipate, well, at least
the general tendency that prices will make, and so they can adjust their behavior already
in the present, two changes that will occur in the future.
And one of the conclusions that he draws from this is to say, well, I mean, to the extent
that the market participants really manage to do this, to the extent that they anticipate
this, monetary policy, and in fact, any economic policy, is completely neutralized, it's completely
offset.
So, in other words, he has anticipated the rational expectations revolution that is celebrated in modern mainstream economic thought, taking place in the 1970s.
But all that the rational expectations colleagues have done is to just modelize a process that had already been described in principle by Mises himself.
The next important change is that Mises proposes a full-blown critique of monetary policy in the second edition.
In the first edition he held back. So there is this chapter on monetary policy, or more precisely, value of money policy,
Policy is a very odd term. Geld, Wert, Politik. Policy relating to modifying, manipulating the value of money.
And this is a very odd chapter. And he transformed it so much that it's virtually a completely new chapter in the second edition.
It has the same title. The chapter is completely transformed. So in the first edition, what does he do?
He discusses monetary policy of the past.
That is, he delivers an historical analysis.
Says, how was monetary policy handled in Austria-Hungary?
How was it handled in the United Kingdom?
How was it handled in the US?
These were the three major cases.
And then at the end comes some cautious generalizations
and some statements about the advantages and disadvantages
of inflationary, deflationary policies.
And he ends up with a plea for getting the government out
of money production, which remains
This is completely unconvincing because it's like the proverbial rabbit out of the hat.
It's not prepared by the previous argument.
This is very weak.
And I said, well, to give a...
Also, stylistically, it's not really Mises as we know him, certainly not from Human Action,
but it's also not Mises as he is present in the other chapters.
And I think that the explanation is that we have to keep in mind that Mises was writing a habilitation thesis,
In 1924, a hard-blown critique of monetary policy and he highlights that essentially all of monetary policy has fiscal motivations. The point is always to fill the purse of the government and that the consequences, the aggregate consequences, are not positive but negative.
Okay, I will switch now because I need to hurry up.
Wait a minute.
I just granted myself five more minutes.
Actually, I need five more minutes, so I'm over time.
Okay, important changes in Mises' voluntary thought
as we find it in Human Action.
And here I refer you to Nicolai Gertroth's brilliant article published in the 2004 Journal of Libertarian Studies.
The title of the paper is, De-Omarginizing Mises Monetary Theory, De-Omarginizing Mises Monetary Theory.
So Nicolai here highlights that in The Theory of Money and Credit, Mises explains the value of money as being derived from the subjective value of the goods that can be bought with money.
And this is of course odd because it would insinuate that money is some sort of claim or something like this.
So it's this tension there in his thought.
And this is completely gone in human action.
Second, in Human Action, Mises stresses that the physical characteristics of money are not a secondary aspect or not irrelevant.
It is precisely one of the advantages of a gold standard or silver standard that it has this physical characteristic of being costly in production.
It cannot be manipulated as well, whereas he had constantly downplayed this aspect in The Theory of Money and Credit.
And finally, this is also an aspect that is highlighted in Gurchev's paper. Policy-induced increases of the money supply are not beneficial.
Mises had made various exceptions to this rule, to which Amadeus Gabriel had already referred.
So the money supply is irrelevant from an aggregate point of view in economy.
That was the principle. This is the principle that Mises took over from the currency school, but he made various exceptions.
The reception was that he said, well, as Smith and Ricardo, we can save resources by using fiat money, so all the resources that we would have needed to produce gold and silver coins can be used now to produce other nice things.
He also said that fiduciary media were instrumental in promoting commercial banking and took it for granted that this was per se a good thing.
And finally, fiduciary media were also helpful because they prevented deflationary tendencies, which Mises characterized as convulsions within the price structure.
So all of this is gone in human action. There's no such justification of policy-induced increases of the money supply.
Now, finally, let's conclude by considering some problems of the English edition of The Theory of Money and Credit and, of course, these concern essentially inaccurate, respectively misleading translations.
I'll start with a minor thing, which is the translation of Währungspolitik, respectively Geldwertpolitik.
So Währungspolitik is translated as currency policy and Geldwertpolitik as monetary policy.
Policy. Actually, in German, it's really about the same, right? So today, nobody speaks of Geld-Wert-Politik, we speak of Geld-Politik, so monetary policy. You have monetary policy on the one hand, and then Währungspolitik, but they're exactly synonymous. They're exactly the same thing. So by using these two terms, Mises was essentially just making his prose
The theory of money and the means of circulation is literally the theory of money and fiduciary media.
It has been translated as the theory of money and credit, which is awkward because it's not...
Mises wants to highlight the fact that the money is the source of all the money.
The money is the source of all the money.
Mises wants to highlight the role of money on prices and therefore on the economic structure of the economy and single out the particular impact coming from fiduciary media, therefore the title also of the book.
Here it sounds as though the impact were to come from credit in general, but that is not the case. It's not credit in general.
Mises distinguishes between fiduciary credit based on fiduciary media and commodity credit.
Commodity credit has no particular impact on the economy at all.
It's only fiduciary credit that creates these things.
All of this is lost in the title.
In fact, as I shall show you here, it's in fact systematic.
The third part has the title Money and Banking.
What Mises has in the original title is fiduciary media and their relationship to money.
Compensation System
circulation, circulation of fiduciary media, credit circulation, fiduciary credit and the term is used in the translation, in the text, in the chapter heading it is bank credit, it's all nonsense, so it's completely misleading.
So no wonder you have people who have been black sheep, who have been led on the wrong way,
rather than thinking of poor George Selgin and others, who are just reading the English edition.
And then finally we have, this confusion is also reflected on the diagram that we find on page 526 of the English edition,
so those of you who have studied it have come across this diagram.
Diagram, you see here the problem is that the first
distinctions are correct, right, there's money in the
broader sense, it's composed of money in the narrow sense
and money substitutes, and then the thing is, again,
fiduciary media is correct, are different from money
certificates, that's correct too, but then here the
insinuation is that token money and bank deposits and so on
are essentially fiduciary media.
Now, that's not correct, right?
So the point of this whole distinction
is that it runs across the physical differences, right?
So let me give you a more appropriate diagram
to list this.
So what you see here, for example,
is that different physical objects can serve as fiat money.
You can have fiat notes, you can have fiat bank deposits,
and fiat token coins, right?
It was different physical support, but it's fiat money.
The same objects, the same physical support can also be,
depending on the legal situation,
can also be money certificates,
and they can also be fiduciary media.
So it's precisely not by looking at the physical stuff
that we know what economic role it plays
and how it is evaluated and so on.
All of this, unfortunately,
but of course you still have it in the text,
so I didn't check the text word by word,
but this is of course very misleading, very confusing.
It gets us beside one of the main contributions
that we find in Mises Theory of Money and Credit.
Whew, where's my time's up?
Okay, thank you for your attention.
Thank you very much.