In assessing the importance of the theory of money and credit, I'd like to go back at least briefly giving a quick overview of why it really was a turning point.
If we say that Menger, Boehm-Bawerk and Wieser were the first generation of Austrian economists,
We date Mises as being the second generation, with Hayek and Robbins and Röpke being the third,
and then with Haslett and Rothbard and those associated with Mises' seminar as being the fourth generation.
I think it's fair then to say what was unique about Mises that made him an important transitional figure
I think almost as a stand-alone figure for that second generation.
And I would like to read very briefly from a footnote that appears in Hayek's book,
The Counter-Revolution of Science, which was published in 1952.
And in the footnote, it's on page 52 of the reprint by the Liberty Fund,
he makes an important, very important observation.
And I will quote it verbatim.
This is a development which has probably been carried out
most consistently by Ludwig von Mises.
And I believe most peculiarities of his views,
which at first strike many readers as strange
and unacceptable, trace to the fact
that in the consistent development
of the subjectivist approach,
he has for a long time moved ahead of his contemporaries.
Now the theory of money and credit was clearly and powerfully a defense of subjective value theory
and the application of subjective value theory to the central institution of the modern market economy,
which is the money system.
And Mises was rigorous in applying subjectivism to that area that was so important in the development of his own theory of the division of labor and the rise of the modern market economy.
And you have to keep that in the back of your mind whenever you read The Theory of Money and Credit.
Think to yourself, subjective theory of value, subjective theory of value, he is reconstructing monetary theory in terms of subjectivism.
The book was published, as you know, in 1912.
Twenty years earlier, Menger wrote his final academic essay, that is in 1892,
and it dealt with the theory of money.
It was in a limited sense,
it was an attempt to take subjectivism
and apply it to monetary theory.
But Mises took up that concept
and applied it much more rigorously.
That is, he was extending Menger's original insight
on Subjectivism and extending it beyond that one essay that Menger wrote in 92.
Menger's essay began with a legitimate question, that is, the question of the origin of money.
And he made the observation, which we find probably equally bizarre today, he made the
The observation that why is it that pieces of metal should be at the central part of
the division of labor economy?
Why is it that throughout the world, and it was a better world, that pieces of metal,
gold and silver, would serve internationally across wide geographical areas as the means
of exchange?
said there's nothing innate about that, there's nothing automatic about that, and then he
went back and he said if we look historically, most analysts have said that it is the declaration
by the state that a particular money metal would be used widely in society, and that
it is state sovereignty that is the source of monetary value. Now he opposed that view
You, of course.
But if you look through the history of monetary theory, he took it back to Aristotle at least,
and that state sovereignty is the center of the theory of money.
Well that certainly has not changed in our day.
In fact, it is much more believed today than it was in Menger's day.
So he said, why should this be the case?
And then he made an argument.
It was a legitimate argument, but it had a tendency to backfire.
and that's why I want to mention it.
He said, if we look at historical records,
we cannot find cases where declarations of state sovereignty
fiat money, in other words, fiat declarations,
speaking value into existence, where that ever took place.
There are no records of any such event in society.
So he said, if this was the basis of the origin
of monetary theory, it would have left some records
and there are no such records.
So that, of course, led him to a kind of an Austrian view
There is no center of population which has not, in the very beginnings of civilization, come keenly to desire and eagerly to covet the precious metals.
in primitive times for their utility and particular beauty as in themselves ornamental, subsequently as choice materials for plastic and architectural decoration and especially for ornaments and vessels of every kind.
One sentence, taking it back to the value of the metals for non-exchange purposes, what we might call use in kind.
He said that's where the origin of the metals came from.
Now just one sentence.
But Mises took that, that one sentence insight and developed what we call the regression theorem.
Now why was he so concerned about that? Because he opposed the concept of the sovereignty of the state as being the origin of any value and certainly not a monetary value.
So if it was not the declaration of the state ratifying a particular money metal, if that was not the basis of the origin of money, precious metal in exchange, then what was it?
What was it?
Well, he took it back to where Menger had begun it in the area of life outside of exchange,
in the areas of life of ornaments, and then of course you go much beyond it, especially
in religious symbolism.
Silver and gold have been widely used for as long as we have records.
So that the metals were desirable for uses other than monetary exchange.
And only through practice, in a sense, did the metals begin to perform as the means of
exchange.
Mises used the same reason that Menger used for the origin of the money metals as money,
that they were the most exchangeable or saleable commodities.
Mises defined money as the most marketable commodity.
That insight was originally Menger's.
So, because people imputed value to the metals
in terms of exchange, the metals became used for money.
Now, why did they do that?
On the one hand, there was a future orientation, entrepreneurial saying, probably these metals will be usable in exchange tomorrow and the next day and next week and a hundred years from now.
Why did they believe that? Because they could look behind them and say, well, these metals have been used yesterday and the day before and ten years and a hundred years back,
So we can make a deduction based on history of exchange that the metals will be useful in the future and therefore, as the phrase we really should not use as Austrians but always is used, they become a store of value.
Now what we really ought to say is that they are a valuable thing to store, which they are.
Now the problem with this observation and the use that Mises put Menger's observation for,
the problem is there's no historical evidence because of the nature of the evidence.
That is you didn't have the science of accounting before you had money.
Now there's no question that if you look into the ancient records you find a great deal
The deal of accounting material, in fact, as I've said, it's almost mind-numbing, the amount of documentation that survived through the ages on this account versus that account interests all the aspects of money.
Most historical records are tied to monetary transactions of one kind or another.
Well, the question is how they leave those kinds of records in the transition period before money became the means of exchange and records became possible.
The answer is we don't have the records.
Now, the problem then is, does the critique of Menger against those who said the sovereignty of the state is the origin of money, but there's no record, said Menger.
Does that then, in effect, torpedo Mises's regression theorem?
Because there's not a wide body of historical materials to support his theory either.
So how do we deal with it?
It's a problem of epistemology, ultimately.
Epistemology being what does man know and how can he know it?
How do we know that money really did have its origin in this transfer of subjective
value from ornaments and religious objects over to monetary exchange?
We don't have the records for it.
Mises never implied that there were records for it.
And yet the logic of it, according to Austrian categories, is that this must have been how
money came into existence.
Because value had to originate in the individual
who made subjective valuations,
but it couldn't have been a subjective valuation of money
because the metals didn't function as money.
Now, we Missesians, we look at the regression theorem
and says, well, that's just common sense.
But yet in the history of discussions of money,
it's not common sense.
That's why the theory of money and credit
and the regression theorem was a breakthrough
because it was not common sense.
Mises went instead of saying that
the state was the origin of value of money,
he said individual imputation was the source
and that was a radical subjectivist position
and it was a major breakthrough in the theory of money.
So how are we gonna sort this out?
If you go to Mises, especially in Human Action,
And now that we can do searches digitally, look up the phrase, apodictic.
Oh, he loved to use that one. Apodictic certainty.
That probably angered the methodologists in the rival fields more than just about anything else the man ever said.
Apodictic certainty. It sends them into a kind of near paralysis of anger when they see a phrase like that.
What did he mean? He meant, because he was a deductivist, he meant something like, as the price increases, less of it will be demanded.
Well, of course, your standard economist says, yes, yes, yes, we know that, but Mises would say that's a statement of apodictic certainty.
It's a deduction from the nature of human action.
And Mises, in a sense, made or broke his reputation in the academic world with that very approach, methodologically, to studying economics.
And it was all about apodictic certainty.
Then there's historical evidence, and there is historical evidence, and he talked about that,
but he didn't give the same weight of importance to historical evidence that he did to the
logic of economics as a deductivist system.
So if it's not historical evidence with footnotes of this and that society all going from religious
objects over to the use of gold and silver in exchange, if it's not that kind of history
and clearly it isn't, but if it's also not apodictic certainty in terms of an extension
of the categories of human action, then what is it?
What do we call this thing?
In the late 1960s, I studied sociology with Robert Nisbett and I was very much influenced
by his writing, no question about it, and especially by his book, Social Change in History.
In that book, he made an important observation about exactly the kind of knowledge that we're
talking about when we talk about the regression theorem.
Here's what he said, the emphasis is not upon the past as conceived as a genealogy
of happenings and persons, but upon more or less timeless sequences of emerging changes.
If event is the key to the historiographic perspective, change is the key concept in
the developmental perspective.
Time in the very broad sense matters, of course, but the developmentalist, whether social or
biological, is far more interested in arriving at a correct before and after relationships
in his changes and types than in the probably futile search for dates as to when exactly
a certain change occurred.
He talks about developmentalism or evolutionism or social evolutionism as a separate category
of knowledge and he said we go back to it over and over and social theory goes back
to it over and over.
It's not based on all the footnotes of this event and that event and somebody exchanged
It's not that kind of knowledge, but it's also not apodictic certainty.
It's something in the middle.
And in fact, most of what we do as economists and as historians, most of what we know about
the past is much more developmentalist than it is the pile of footnotes or the brilliant
logic of analysis.
It's somewhere in between.
And I think if I have anything to say that's important, and it's not radically important,
it's just to say that this is back to a problem of epistemology, and we Austrians are always
caught up in these questions of epistemology, really more than most of the other schools
of thought, and that's because of what Mises did beginning in The Theory of Money and Credit.
In applying radically the deductivist approach, based on logical categories, which you might
might call the Parmenidean model versus the Heraclitus model
of one thing after another, you can't put your foot
into the same river twice and so forth.
The sweep of history and the logical categories
we find in our work as economists
and just about every, even entrepreneurs,
we're dealing in that middle area,
but we're not dealing with the historical footnotes,
we're not dealing with apodictic certainty,
we're dealing with something much more
like the regression analysis.
That is, what we think must have happened, but we can't prove it from the historical record.
But you have to come to this conclusion if you don't say that the state, by fiat diktat,
established value of money as Austrians, we are, in a sense, stuck with some version of the regression analysis.
It's not that I'm opposed to it. I think it's logical, but we've got to know what we're doing.
It's not based on historical documentation, it's not also based on apodictic certainty.
It's that area of epistemology of applied economics in between the two that we come
to the concept of the regression theorem.