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NOTE XVII. Indirect Exchange

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Chapter 17 Indirect Exchange 1. Media of Exchange and Money

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Interpersonal exchange is called indirect exchange if, between the commodities and services, the reciprocal exchange of which is the ultimate end of exchanging, one or several media of exchange are interposed.

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The subject matter of the theory of indirect exchange is the study of the ratios of exchange between the media of exchange on the one hand and the goods and services of all orders on the other hand.

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The statements of the theory of indirect exchange refer to all instances of indirect exchange and to all things which are employed as media of exchange.

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A medium of exchange which is commonly used as such is called money.

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The notion of money is vague as its definition refers to the vague term commonly used.

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There are borderline cases in which it cannot be decided whether a medium of exchange is

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or is not commonly used and should be called money.

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But this vagueness in the denotation of money in no way affects the exactitude and precision

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required by praxeological theory.

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For all that is to be predicated of money is valid for every medium of exchange.

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It is therefore immaterial whether one preserves the traditional term theory of money or substitutes

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for it another term.

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The theory of money was and is always the theory of indirect exchange and of the media

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of exchange.

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The theory of monetary calculation does not belong to the theory of indirect exchange.

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It is a part of the general theory of praxeology.

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2.

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Observations on some widespread errors.

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The fateful errors of popular monetary doctrines, which have led astray the monetary policies

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of almost all governments, would hardly have come into existence if many economists had

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not themselves committed blunders in dealing with monetary issues, and did not stubbornly

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cling to them.

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There is, first of all, the spurious idea of the supposed neutrality of money.

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An outgrowth of this doctrine was the notion of the level of prices that rises or falls

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proportionately with the increase or decrease in the quantity of money in circulation.

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It was not realized that changes in the quantity of money can never affect the prices of all

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goods and services at the same time and to the same extent.

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Nor was it realized that changes in the purchasing power of the monetary unit are necessarily

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linked with changes in the mutual relations between those buying and selling.

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In order to prove the doctrine that the quantity of money and prices rise and fall proportionately,

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recourse was had in dealing with the theory of money to a procedure entirely different

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from that modern economics applies in dealing with all its other problems.

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Instead of starting from the actions of individuals, as catallactics must do without exception,

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formulas were constructed designed to comprehend the whole of the market economy.

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Elements of these formulas were the total supply of money available in the Volkswirtschaft,

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The volume of trade, that is, the money equivalent of all transfers of commodities and services

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as effected in the Volkswirtschaft.

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The average velocity of circulation of the monetary units.

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The level of prices.

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These formulas seemingly provided evidence of the correctness of the price-level doctrine.

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In fact, however, this whole mode of reasoning is a typical case of arguing in a circle.

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For the equation of exchange already involves the level doctrines which it tries to prove.

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It is essentially nothing but a mathematical expression of the untenable doctrine that

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there is proportionality in the movements of the quantity of money and of prices.

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In analyzing the equation of exchange, one assumes that one of its elements, total supply

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Supply of Money, Volume of Trade, Velocity of Circulation, Changes, without asking how

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such changes occur.

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It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft

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as such, but in the individual actor's conditions, and that it is the interplay of the reactions

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of these actors that results in alterations of the price structure.

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The mathematical economists refuse to start from the various individuals' demand for

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and supply of money.

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They introduce instead the spurious notion of velocity of circulation, fashioned according

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to the patterns of mechanics.

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There is at this point of our reasoning no need to deal with the question of whether

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or not the mathematical economists are right in assuming that the services rendered by

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by Money consist wholly or essentially in its turnover, in its circulation.

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Even if this were true, it would still be faulty to explain the purchasing power, the

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price, of the monetary unit on the basis of its services.

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The services rendered by water, whiskey and coffee do not explain the prices paid for

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these things.

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What they explain is only why people, as far as they recognize these services, under certain

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further conditions, demand definite quantities of these things.

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It is always demand that influences the price structure, not the objective value in use.

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It is true that with regard to money the task of catallactics is broader than with regard

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to vendable goods.

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It is not the task of catallactics but of psychology and physiology to explain why people

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are intent on securing the services which the various vendable commodities can render.

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It is a task of catallactics, however, to deal with this question with regard to money.

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Catallactics alone can tell us what advantages a man expects from holding money.

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But it is not these expected advantages which determine the purchasing power of money.

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The eagerness to secure these advantages is only one of the factors in bringing about

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the demand for money.

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It is demand, a subjective element whose intensity is entirely determined by value judgments,

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and not any objective fact, any power to bring about a certain effect, that plays a role

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in the formation of the market's exchange ratios.

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The deficiency of the equation of exchange and its basic elements is that they look at

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market phenomena from a holistic point of view.

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They are deluded by their prepossession with the Volkswirtschaft notion.

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But where there is, in the strict sense of the term, a Volkswirtschaft, there is neither

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a market nor prices and money.

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On a market, there are only individuals or groups of individuals acting in concert.

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What motivates these actors is their own concerns, not those of the whole market economy.

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If there is any sense in such notions as volume of trade and velocity of circulation, then

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they refer to the resultant of the individual's actions.

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It is not permissible to resort to these notions in order to explain the actions of the individual.

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of Individuals.

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The first question that catallactics must raise with regard to changes in the total

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quantity of money available in the market system is how such changes affect the various

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individual's conduct.

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Modern economics does not ask what iron or bread is worth, but what a definite piece

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of Iron or of Bread is worth to an acting individual at a definite date and a definite

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place.

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It cannot help proceeding in the same way with regard to money.

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The equation of exchange is incompatible with the fundamental principles of economic thought.

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It is a relapse to the thinking of ages in which people failed to comprehend praxeological

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phenomena because they were committed to holistic notions.

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It is sterile, as were the speculations of earlier ages concerning the value of iron

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and bread in general.

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The theory of money is an essential part of the catallactic theory.

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It must be dealt with in the same manner which is applied to all other catallactic problems.

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3.

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Demand for Money and Supply of Money

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In the marketability of the various commodities and services there prevail considerable differences.

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There are goods for which it is not difficult to find applicants ready to disperse the highest

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recompense which, under the given state of affairs, can possibly be obtained, or a recompense

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only slightly smaller.

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There are other goods for which it is very hard to find a customer quickly, even if the

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The vendor is ready to be content with a compensation much smaller than he could reap if he could

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find another aspirant whose demand is more intense.

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It is these differences in the marketability of the various commodities and services which

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created indirect exchange.

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A man who, at the instant, cannot acquire what he wants to get for the conduct of his

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in his own household or business, or who does not yet know what kind of goods he will need

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in the uncertain future, comes nearer to his ultimate goal if he exchanges a less marketable

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good he wants to trade against a more marketable one.

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It may also happen that the physical properties of the merchandise he wants to give away, as

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As for instance its perishability or the costs incurred by its storage or similar circumstances

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impel him not to wait longer.

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Sometimes he may be prompted to hurry in giving away the good, concerned because he is afraid

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of a deterioration of its market value.

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In all such cases he improves his own situation in acquiring a more marketable good, even

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Question if this good is not suitable to satisfy directly any of his own needs.

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A medium of exchange is a good which people acquire neither for their own consumption

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nor for employment in their own production activities, but with the intention of exchanging

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it at a later date against those goods which they want to use, either for consumption or

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for production.

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Money is a medium of exchange.

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It is the most marketable good which people acquire because they want to offer it in later

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acts of interpersonal exchange.

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Money is the thing which serves as the generally accepted and commonly used medium of exchange.

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This is its only function.

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All the other functions which people ascribe to money are merely particular aspects of

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of its primary and sole function, that of a medium of exchange.

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Media of exchange are economic goods.

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They are scarce.

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There is a demand for them.

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There are on the market people who desire to acquire them and are ready to exchange goods

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and services against them.

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Media of exchange have value in exchange.

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People make sacrifices for their acquisition.

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They pay prices for them.

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The peculiarity of these prices lies merely in the fact that they cannot be expressed

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in terms of money.

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In reference to the vendable goods and services, we speak of prices or of money prices.

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In reference to money, we speak of its purchasing power with regard to various vendable goods.

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There exists a demand for media of exchange because people want to keep a store of them.

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Every member of a market society wants to have a definite amount of money in his pocket

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or box, a cash holding or cash balance of a definite height.

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Sometimes he wants to keep a larger cash holding, sometimes a smaller.

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In exceptional cases, he may even renounce any cash holding.

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At any rate, the immense majority of people aim not only to own various vendable goods,

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they want no less to hold money. Their cash holding is not merely a residuum, an unspent

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margin of their wealth. It is not an unintentional remainder left over after all intentional

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acts of buying and selling have been consummated. Its amount is determined by a deliberate demand

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for Cash, and as with all other goods it is the changes in the relation between demand

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for and supply of money that bring about changes in the exchange ratio between money and the

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vendable goods.

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Every piece of money is owned by one of the members of the market economy.

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The transfer of money from the control of one actor into that of another is temporally

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Money can be immediate and continuous. There is no fraction of time in between in which

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the money is not a part of an individual's or a firm's cash holding, but just in circulation.

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Money can be in the process of transportation, it can travel in trains, ships or planes from

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one place to another, but it is, in this case too, always subject to somebody's control.

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It is unsound to distinguish between circulating and idle money.

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It is no less faulty to distinguish between circulating money and hoarded money.

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What is called hoarding is a height of cash-holding which, according to the personal opinion of

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an observer, exceeds what is deemed normal and adequate.

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However, hoarding is cash-holding.

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Money is still money, and it serves in the hoards the same purposes which it serves in

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cash holdings called normal.

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He who hoards money believes that some special conditions make it expedient to accumulate

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a cash holding which exceeds the amount he himself would keep under different conditions,

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or other people keep, or an economist censuring his action considers appropriate.

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And he acts in this way influences the configuration of the demand for money in the same way in

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which every normal demand influences it.

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Many economists avoid applying the terms demand and supply in the sense of demand for and

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supply of money for cash holding because they fear a confusion with the current terminology

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as used by the bankers.

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It is, in fact, customary to call demand for money the demand for short-term loans, and

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supply of money the supply of such loans.

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Accordingly, one calls the market for short-term loans the money market.

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One says money is scarce if there prevails a tendency toward a rise in the rate of interest

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for short-term loans, and one says money is plentiful if the rate of interest for such

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which loans is decreasing.

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These modes of speech are so firmly entrenched that it is out of the question to venture

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to discard them.

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But they have favored the spread of fateful errors.

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They made people confound the notions of money and of capital and believe that increasing

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the quantity of money could lower the rate of interest lastingly.

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But it is precisely the crassness of these errors which makes it unlikely that the terminology

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suggested could create any misunderstanding.

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It is hard to assume that economists could err with regard to such fundamental issues.

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Others maintain that one should not speak of the demand for and supply of money because

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Because the aims of those demanding money differ from the aims of those demanding vendable

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commodities.

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Commodities, they say, are demanded ultimately for consumption, while money is demanded in

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order to be given away in further acts of exchange.

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This objection is no less invalid.

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The use which people make of a medium of exchange consists eventually in its being given away.

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But first of all they are eager to accumulate a certain amount of it in order to be ready

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for the moment in which a purchase may be accomplished.

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Precisely because people do not want to provide for their own needs right at the instant at

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which they give away the goods and services they themselves bring to the market.

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Precisely because they want to wait, or are forced to wait until propitious conditions

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for buying appear.

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They barter not directly but indirectly through the interposition of a medium of exchange.

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The fact that money is not worn out by the use one makes of it, and that it can render

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its services practically for an unlimited length of time, is an important factor in

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the configuration of its supply.

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But it does not alter the fact that the appraisement of money is to be explained in the same way

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as the appraisement of all other goods, by the demand on the part of those who are eager

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to acquire a definite quantity of it.

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Economists have tried to enumerate the factors which, within the whole economic system, may

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increase or decrease the demand for money.

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Such factors are the population figure, the extent to which the individual households

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Institutions provide for their own needs by autarkic production and the extent to which

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they produce for other people's needs, selling their products and buying for their own consumption

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on the market, the distribution of business activity and the settlement of payments over

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the various seasons of the year, institutions for the settlement of claims and counterclaims

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by mutual cancellation such as clearing houses.

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All these factors indeed influence the demand for money and the height of the various individuals

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and firms cash holding.

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But they influence them only indirectly by the role they play in the considerations of

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people concerning the determination of the amount of cash balances they deem appropriate.

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What decides the matter is always the value judgments of the men concerned.

228
00:20:30.980 --> 00:20:36.220
The various actors make up their minds about what they believe the adequate height of their

229
00:20:36.220 --> 00:20:38.700
cash-holding should be.

230
00:20:38.700 --> 00:20:44.340
They carry out their resolution by renouncing the purchase of commodities, securities and

231
00:20:44.340 --> 00:20:52.460
interest-bearing claims, and by selling such assets or conversely by increasing their purchases.

232
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With money, things are not different from what they are with regard to all other goods

233
00:20:57.940 --> 00:21:05.060
and services. The demand for money is determined by the conduct of people intent upon acquiring

234
00:21:05.060 --> 00:21:08.740
it for their cash holding.

235
00:21:08.740 --> 00:21:14.620
Another objection raised against the notion of the demand for money was this. The marginal

236
00:21:14.620 --> 00:21:21.500
utility of the money unit decreases much more slowly than that of the other commodities.

237
00:21:21.500 --> 00:21:27.180
In fact, its decrease is so slow that it can be practically ignored.

238
00:21:27.180 --> 00:21:33.940
With regard to money, nobody ever says that his demand is satisfied, and nobody ever forsakes

239
00:21:33.940 --> 00:21:41.060
an opportunity to acquire more money, provided the sacrifice required is not too great.

240
00:21:41.060 --> 00:21:47.100
It is therefore impermissible to consider the demand for money as limited.

241
00:21:47.100 --> 00:21:53.020
The very notion of an unlimited demand is, however, contradictory.

242
00:21:53.020 --> 00:21:56.700
This popular reasoning is entirely fallacious.

243
00:21:56.700 --> 00:22:02.880
It confounds the demand for money for cash holding with the desire for more wealth as

244
00:22:02.880 --> 00:22:06.220
expressed in terms of money.

245
00:22:06.220 --> 00:22:11.780
He who says that his thirst for more money can never be quenched does not mean to say

246
00:22:11.780 --> 00:22:16.320
that his cash holding can never be too large.

247
00:22:16.320 --> 00:22:21.080
What he really means is that he can never be rich enough.

248
00:22:21.080 --> 00:22:26.300
If additional money flows into his hands, he will not use it for an increase of his

249
00:22:26.300 --> 00:22:31.640
cash balance, or he will use only a part of it for this purpose.

250
00:22:31.640 --> 00:22:38.160
He will expend the surplus either for instantaneous consumption or for investment.

251
00:22:38.160 --> 00:22:44.640
Nobody ever keeps more money than he wants to have as cash holding.

252
00:22:44.640 --> 00:22:50.780
The insight that the exchange ratio between money on the one hand and the vendable commodities

253
00:22:50.780 --> 00:22:57.200
and services on the other hand is determined in the same way as the mutual exchange ratios

254
00:22:57.200 --> 00:23:04.200
between the various vendable goods by demand and supply was the essence of the quantity

255
00:23:04.200 --> 00:23:06.640
theory of money.

256
00:23:06.640 --> 00:23:12.360
This theory is essentially an application of the general theory of supply and demand

257
00:23:12.360 --> 00:23:15.540
to the Special Instance of Money.

258
00:23:15.540 --> 00:23:20.680
Its merit was the endeavor to explain the determination of money's purchasing power

259
00:23:20.680 --> 00:23:25.800
by resorting to the same reasoning which is employed for the explanation of all other

260
00:23:25.800 --> 00:23:27.960
exchange ratios.

261
00:23:27.960 --> 00:23:32.840
Its shortcoming was that it resorted to a holistic interpretation.

262
00:23:32.840 --> 00:23:38.800
It looked at the total supply of money in the Volkswirtschaft and not at the actions

263
00:23:38.800 --> 00:23:48.280
An outgrowth of this erroneous point of view was the idea that there prevails a proportionality

264
00:23:48.280 --> 00:23:54.160
in the changes of the total quantity of money and of money prices.

265
00:23:54.160 --> 00:24:00.120
But the older critics failed in their attempts to explode the errors inherent in the quantity

266
00:24:00.120 --> 00:24:04.960
theory, and to substitute a more satisfactory theory for it.

267
00:24:04.960 --> 00:24:08.600
They did not fight what was wrong in the quantity theory.

268
00:24:08.600 --> 00:24:12.840
They attacked, on the contrary, its nucleus of truth.

269
00:24:12.840 --> 00:24:18.080
They were intent upon denying that there is a causal relation between the movements of

270
00:24:18.080 --> 00:24:22.240
prices and those of the quantity of money.

271
00:24:22.240 --> 00:24:28.580
This denial led them into a labyrinth of errors, contradictions and nonsense.

272
00:24:28.580 --> 00:24:33.800
Modern monetary theory takes up the thread of the traditional quantity theory as far

273
00:24:33.800 --> 00:24:39.240
As far as it starts from the cognition that changes in the purchasing power of money must

274
00:24:39.240 --> 00:24:45.000
be dealt with according to the principles applied to all other market phenomena, and

275
00:24:45.000 --> 00:24:51.280
that there exists a connection between the changes in the demand for and supply of money

276
00:24:51.280 --> 00:24:56.400
on the one hand, and those of purchasing power on the other.

277
00:24:56.400 --> 00:25:03.240
In this sense, one may call the modern theory of money an improved variety of the quantity

278
00:25:03.240 --> 00:25:05.460
Theory.

279
00:25:05.460 --> 00:25:12.180
The Epistemological Import of Carl Menger's Theory of the Origin of Money

280
00:25:12.180 --> 00:25:18.960
Carl Menger has not only provided an irrefutable praxeological theory of the origin of money.

281
00:25:18.960 --> 00:25:24.700
He has also recognized the import of his theory for the elucidation of fundamental principles

282
00:25:24.700 --> 00:25:29.500
of praxeology and its methods of research.

283
00:25:29.500 --> 00:25:35.680
There were authors who tried to explain the origin of money by decree or covenant.

284
00:25:35.680 --> 00:25:43.240
The authority, the state, or a compact between citizens has purposively and consciously established

285
00:25:43.240 --> 00:25:46.660
indirect exchange and money.

286
00:25:46.660 --> 00:25:51.360
The main deficiency of this doctrine is not to be seen in the assumption that people of

287
00:25:51.360 --> 00:25:58.420
an age unfamiliar with indirect exchange and money could design a plan of a new economic

288
00:25:58.420 --> 00:26:04.940
Order entirely different from the real conditions of their own age, and could comprehend the

289
00:26:04.940 --> 00:26:07.740
importance of such a plan.

290
00:26:07.740 --> 00:26:12.440
Neither is it to be seen in the fact that history does not afford a clue for the support

291
00:26:12.440 --> 00:26:14.340
of such statements.

292
00:26:14.340 --> 00:26:18.300
There are more substantial reasons for rejecting it.

293
00:26:18.300 --> 00:26:24.540
If it is assumed that the conditions of the parties concerned are improved by every step

294
00:26:24.540 --> 00:26:31.000
that leads from direct exchange to indirect exchange, and subsequently to giving preference

295
00:26:31.000 --> 00:26:37.320
for use as a medium of exchange to certain goods distinguished by their especially high

296
00:26:37.320 --> 00:26:38.680
marketability.

297
00:26:38.680 --> 00:26:45.160
It is difficult to conceive why one should, in dealing with the origin of indirect exchange,

298
00:26:45.160 --> 00:26:52.680
resort in addition to authoritarian decree or an explicit compact between citizens.

299
00:26:52.680 --> 00:26:58.900
A man who finds it hard to obtain in direct barter what he wants to acquire renders better

300
00:26:58.900 --> 00:27:05.680
his chances to acquire what he is asking for in later acts of exchange by the procurement

301
00:27:05.680 --> 00:27:08.600
of a more marketable good.

302
00:27:08.600 --> 00:27:13.540
Under these circumstances there was no need of government interference or of a compact

303
00:27:13.540 --> 00:27:15.600
between the citizens.

304
00:27:15.600 --> 00:27:21.360
The happy idea of proceeding in this way could strike the shrewdest individuals and the less

305
00:27:21.360 --> 00:27:25.100
This resourceful could imitate the former's method.

306
00:27:25.100 --> 00:27:30.480
It is certainly more plausible to take for granted that the immediate advantages conferred

307
00:27:30.480 --> 00:27:37.200
by indirect exchange were recognized by the acting parties than to assume that the whole

308
00:27:37.200 --> 00:27:44.200
image of a society trading by means of money was conceived by a genius, and if we adopt

309
00:27:44.200 --> 00:27:50.420
the covenant doctrine made obvious to the rest of the people by persuasion.

310
00:27:50.420 --> 00:27:55.820
If, however, we do not assume that individuals discovered the fact that they fare better

311
00:27:55.820 --> 00:28:02.780
through indirect exchange than through waiting for an opportunity for direct exchange, and,

312
00:28:02.780 --> 00:28:09.600
for the sake of argument, admit that the authorities or a compact introduced money, further questions

313
00:28:09.600 --> 00:28:11.180
are raised.

314
00:28:11.180 --> 00:28:17.700
We must ask what kind of measures were applied in order to induce people to adopt a procedure,

315
00:28:17.700 --> 00:28:23.040
The utility of which they did not comprehend, and which was technically more complicated

316
00:28:23.040 --> 00:28:25.420
than direct exchange.

317
00:28:25.420 --> 00:28:31.960
We may assume that compulsion was practiced, but then we must ask, further, at what time

318
00:28:31.960 --> 00:28:38.780
and by what occurrences indirect exchange and the use of money later ceased to be procedures

319
00:28:38.780 --> 00:28:44.980
troublesome or at least indifferent to the individuals concerned and became advantageous

320
00:28:44.980 --> 00:28:46.940
to them.

321
00:28:46.940 --> 00:28:53.420
The praxeological method traces all phenomena back to the actions of individuals.

322
00:28:53.420 --> 00:28:59.660
If conditions of interpersonal exchange are such that indirect exchange facilitates the

323
00:28:59.660 --> 00:29:06.700
transactions, and if and as far as people realize these advantages, indirect exchange

324
00:29:06.700 --> 00:29:10.220
and money come into being.

325
00:29:10.220 --> 00:29:15.260
Historical experience shows that these conditions were and are present.

326
00:29:15.260 --> 00:29:21.700
How, in the absence of these conditions, people could have adopted indirect exchange and money

327
00:29:21.700 --> 00:29:27.080
and clung to these modes of exchanging is inconceivable.

328
00:29:27.080 --> 00:29:33.580
The historical question concerning the origin of indirect exchange and money is, after all,

329
00:29:33.580 --> 00:29:36.460
of no concern to praxeology.

330
00:29:36.460 --> 00:29:43.100
The only relevant thing is that indirect exchange and money exist because the conditions for

331
00:29:43.100 --> 00:29:51.020
for their existence were and are present. If this is so, praxeology does not need to resort

332
00:29:51.020 --> 00:29:58.740
to the hypothesis that authoritarian decree or a covenant invented these modes of exchanging.

333
00:29:58.740 --> 00:30:05.260
The atatists may, if they like, continue to ascribe the invention of money to the state,

334
00:30:05.260 --> 00:30:12.080
however unlikely this may be. What matters is that a man acquires a good not in order

335
00:30:12.080 --> 00:30:19.080
All theorems of the catalactic theory of media of exchange and of money refer to the services which a good renders in its capacity as a medium of exchange.

336
00:30:42.080 --> 00:30:43.800
Exchange.

337
00:30:43.800 --> 00:30:48.600
Even if it were true that the impulse for the introduction of indirect exchange and

338
00:30:48.600 --> 00:30:55.160
money was provided by the authorities or by an agreement between the members of society,

339
00:30:55.160 --> 00:31:02.320
the statement remains unshaken that only the conduct of exchanging people can create indirect

340
00:31:02.320 --> 00:31:05.680
exchange and money.

341
00:31:05.680 --> 00:31:11.720
History may tell us where and when for the first time media of exchange came into use

342
00:31:11.720 --> 00:31:17.960
and how, subsequently, the range of goods employed for this purpose was more and more

343
00:31:17.960 --> 00:31:19.640
restricted.

344
00:31:19.640 --> 00:31:24.960
As the differentiation between the broader notion of a medium of exchange and the narrower

345
00:31:24.960 --> 00:31:31.960
notion of money is not sharp, but gradual, no agreement can be reached about the historical

346
00:31:31.960 --> 00:31:37.040
transition from simple media of exchange to money.

347
00:31:37.040 --> 00:31:40.480
This is a matter of historical understanding.

348
00:31:40.480 --> 00:31:46.280
But as has been mentioned, the distinction between direct exchange and indirect exchange

349
00:31:46.280 --> 00:31:52.880
is sharp, and everything that catallactics establishes with regard to media of exchange

350
00:31:52.880 --> 00:32:00.280
refers categorically to all goods which are demanded and acquired as such media.

351
00:32:00.280 --> 00:32:06.160
As far as the statement that indirect exchange and money were established by decree or by

352
00:32:06.160 --> 00:32:12.780
Covenant is meant to be an account of historical events, it is the task of historians to expose

353
00:32:12.780 --> 00:32:14.660
its falsity.

354
00:32:14.660 --> 00:32:21.220
As far as it is advanced merely as a historical statement, it can in no way affect the catallactic

355
00:32:21.220 --> 00:32:27.020
theory of money and its explanation of the evolution of indirect exchange.

356
00:32:27.020 --> 00:32:33.120
But if it is designed as a statement about human action and social events, it is useless,

357
00:32:33.120 --> 00:32:36.480
because it states nothing about action.

358
00:32:36.480 --> 00:32:42.640
It is not a statement about human action to declare that one day rulers or citizens assembled

359
00:32:42.640 --> 00:32:48.100
in convention were suddenly struck by the inspiration that it would be a good idea to

360
00:32:48.100 --> 00:32:55.380
exchange indirectly and through the intermediary of a commonly used medium of exchange.

361
00:32:55.380 --> 00:32:59.340
It is merely pushing back the problem involved.

362
00:32:59.340 --> 00:33:04.540
It is necessary to comprehend that one does not contribute anything to the scientific

363
00:33:04.540 --> 00:33:11.660
conception of human actions and social phenomena if one declares that the state, or a charismatic

364
00:33:11.660 --> 00:33:17.980
leader, or an inspiration which descended upon all the people, have created them.

365
00:33:17.980 --> 00:33:23.620
Neither do such statements refute the teachings of a theory showing how such phenomena can

366
00:33:23.620 --> 00:33:30.460
can be acknowledged as the unintentional outcome, the resultant, not deliberately designed and

367
00:33:30.460 --> 00:33:36.860
aimed at by specifically individual endeavors of the members of a society.

368
00:33:36.860 --> 00:33:38.620
4.

369
00:33:38.620 --> 00:33:43.340
The Determination of the Purchasing Power of Money

370
00:33:43.340 --> 00:33:49.060
As soon as an economic good is demanded not only by those who want to use it for consumption

371
00:34:19.060 --> 00:34:39.060
The amount of other goods which can be obtained in giving away a medium of exchange, its price, as expressed in terms of various goods and services, is in part determined by the demand of those who want to acquire it as a medium of exchange.

372
00:34:39.060 --> 00:34:51.060
If people stop using the good in question as a medium of exchange, this additional specific demand disappears, and the price drops concomitantly.

373
00:34:51.060 --> 00:35:08.060
Thus, the demand for a medium of exchange is the composite of two partial demands, the demand displayed by the intention to use it in consumption and production, and that displayed by the intention to use it as a medium of exchange.

374
00:35:08.060 --> 00:35:16.060
With regard to modern metallic money, one speaks of the industrial demand and of the monetary demand.

375
00:35:16.060 --> 00:35:26.060
The value in exchange, purchasing power, of a medium of exchange is the resultant of the cumulative effect of both partial demands.

376
00:35:26.060 --> 00:35:31.060
Now the extent of that part of the demand for a medium of exchange,

377
00:35:31.060 --> 00:35:37.380
which is displayed on account of its service as a medium of exchange, depends on its value

378
00:35:37.380 --> 00:35:39.740
in exchange.

379
00:35:39.740 --> 00:35:45.220
This fact raises difficulties which many economists considered insoluble, so that they

380
00:35:45.220 --> 00:35:49.300
abstained from following farther along this line of reasoning.

381
00:35:49.300 --> 00:35:55.460
It is illogical, they said, to explain the purchasing power of money by reference to

382
00:35:55.460 --> 00:36:01.740
to the demand for money, and the demand for money by reference to its purchasing power.

383
00:36:01.740 --> 00:36:07.560
The difficulty is, however, merely apparent. The purchasing power, which we explain by

384
00:36:07.560 --> 00:36:13.660
referring to the extent of specific demand, is not the same purchasing power, the height

385
00:36:13.660 --> 00:36:20.200
of which determines this specific demand. The problem is to conceive the determination

386
00:36:20.200 --> 00:36:26.000
of the Purchasing Power of the Immediate Future of the Impending Moment.

387
00:36:26.000 --> 00:36:31.340
For the solution of this problem, we refer to the purchasing power of the immediate past,

388
00:36:31.340 --> 00:36:34.160
of the moment just past.

389
00:36:34.160 --> 00:36:37.160
These are two distinct magnitudes.

390
00:36:37.160 --> 00:36:42.480
It is erroneous to object to our theorem, which may be called the regression theorem,

391
00:36:42.480 --> 00:36:45.040
that it moves in a vicious circle.

392
00:36:45.040 --> 00:36:50.920
But, say the critics, this is tantamount to merely pushing back the problem.

393
00:36:50.920 --> 00:36:57.000
For now, one must still explain the determination of yesterday's purchasing power.

394
00:36:57.000 --> 00:37:02.720
If one explains this in the same way by referring to the purchasing power of the day before

395
00:37:02.720 --> 00:37:08.440
yesterday, and so on, one slips into a regressus in infinitum.

396
00:37:08.440 --> 00:37:13.760
This reasoning, they assert, is certainly not a complete and logically satisfactory

397
00:37:13.760 --> 00:37:17.200
Solution of the Problem Involved.

398
00:37:17.200 --> 00:37:22.900
What these critics fail to see is that the regression does not go back endlessly.

399
00:37:22.900 --> 00:37:28.800
It reaches a point at which the explanation is completed, and no further question remains

400
00:37:28.800 --> 00:37:30.420
unanswered.

401
00:37:30.420 --> 00:37:36.040
If we trace the purchasing power of money back step by step, we finally arrive at the

402
00:37:36.040 --> 00:37:42.520
point at which the service of the good concerned as a medium of exchange begins.

403
00:37:42.520 --> 00:37:50.040
At this point, yesterday's exchange value is exclusively determined by the non-monetary,

404
00:37:50.040 --> 00:37:55.280
industrial demand, which is displayed only by those who want to use this good for other

405
00:37:55.280 --> 00:38:00.120
employments than that of a medium of exchange.

406
00:38:00.120 --> 00:38:02.260
But the critics continue.

407
00:38:02.260 --> 00:38:07.720
This means explaining that part of money's purchasing power, which is due to its service

408
00:38:07.720 --> 00:38:14.720
is entirely explained by reference to these specific monetary services, and by reference

409
00:38:37.720 --> 00:38:40.500
and the demand they create.

410
00:38:40.500 --> 00:38:45.240
Two facts are not to be denied, and are not denied by anybody.

411
00:38:45.240 --> 00:38:51.840
First, that the demand for a medium of exchange is determined by considerations of its exchange

412
00:38:51.840 --> 00:38:58.800
value, which is an outcome both of the monetary and the industrial services it renders.

413
00:38:58.800 --> 00:39:04.500
Second, that the exchange value of a good which has not yet been demanded for service

414
00:39:04.500 --> 00:39:10.940
as a medium of exchange is determined solely by a demand on the part of people eager to

415
00:39:10.940 --> 00:39:18.100
use it for industrial purposes, that is, either for consumption or for production.

416
00:39:18.100 --> 00:39:23.980
Now the regression theorem aims at interpreting the first emergence of a monetary demand for

417
00:39:23.980 --> 00:39:30.620
a good which previously had been demanded exclusively for industrial purposes as influenced

418
00:39:30.620 --> 00:39:37.300
by the exchange value that was ascribed to it at this moment, on account of its non-monetary

419
00:39:37.300 --> 00:39:39.780
services only.

420
00:39:39.780 --> 00:39:45.260
This certainly does not involve explaining the specific monetary exchange value of a

421
00:39:45.260 --> 00:39:50.660
medium of exchange on the ground of its industrial exchange value.

422
00:39:50.660 --> 00:39:56.500
Finally, it was objected to the regression theorem that its approach is historical, not

423
00:39:56.500 --> 00:39:58.440
theoretical.

424
00:39:58.440 --> 00:40:01.420
This objection is no less mistaken.

425
00:40:01.420 --> 00:40:08.080
To explain an event historically means to show how it was produced by forces and factors

426
00:40:08.080 --> 00:40:12.600
operating at a definite date and a definite place.

427
00:40:12.600 --> 00:40:18.280
These individual forces and factors are the ultimate elements of the interpretation.

428
00:40:18.280 --> 00:40:25.280
They are ultimate data, and as such not open to any further analysis and reduction.

429
00:40:25.280 --> 00:40:30.860
To explain a phenomenon theoretically means to trace back its appearance to the operation

430
00:40:30.860 --> 00:40:36.900
of general rules which are already comprised in the theoretical system.

431
00:40:36.900 --> 00:40:40.880
The regression theorem complies with this requirement.

432
00:40:40.880 --> 00:40:46.820
It traces the specific exchange value of a medium of exchange back to its function as

433
00:40:46.820 --> 00:40:53.620
such a medium, and to the theorems concerning the process of valuing and pricing as developed

434
00:40:53.620 --> 00:40:56.900
by the General Catalactic Theory.

435
00:40:56.900 --> 00:41:02.800
It deduces a more special case from the rules of a more universal theory.

436
00:41:02.800 --> 00:41:08.980
It shows how the special phenomenon necessarily emerges out of the operation of the rules

437
00:41:08.980 --> 00:41:12.580
generally valid for all phenomena.

438
00:41:12.580 --> 00:41:17.700
It does not say, This happened at that time and at that place.

439
00:41:17.700 --> 00:41:22.740
It says, This always happens when the conditions appear.

440
00:41:22.740 --> 00:41:27.960
Whenever a good which has not been demanded previously for the employment as a medium

441
00:41:27.960 --> 00:41:36.180
of exchange begins to be demanded for this employment, the same effects must appear again.

442
00:41:36.180 --> 00:41:42.340
No good can be employed for the function of a medium of exchange which at the very beginning

443
00:41:42.340 --> 00:41:49.420
of its use for this purpose did not have exchange value on account of other employments.

444
00:41:49.420 --> 00:41:55.940
And all these statements implied in the regression theorem are announced apodictically, as implied

445
00:41:55.940 --> 00:41:59.480
in the a priorism of praxeology.

446
00:41:59.480 --> 00:42:02.360
It must happen this way.

447
00:42:02.360 --> 00:42:07.660
Nobody can ever succeed in constructing a hypothetical case in which things were to

448
00:42:07.660 --> 00:42:10.520
occur in a different way.

449
00:42:10.520 --> 00:42:16.720
The purchasing power of money is determined by demand and supply, as is the case with

450
00:42:16.720 --> 00:42:20.760
the Prices of All Vendable Goods and Services.

451
00:42:20.760 --> 00:42:27.500
As action always aims at a more satisfactory arrangement of future conditions, he who considers

452
00:42:27.500 --> 00:42:33.980
acquiring or giving away money is, of course, first of all interested in its future purchasing

453
00:42:33.980 --> 00:42:37.740
power and the future structure of prices.

454
00:42:37.740 --> 00:42:43.320
But he cannot form a judgment about the future purchasing power of money otherwise than by

455
00:42:43.320 --> 00:42:47.620
by looking at its configuration in the immediate past.

456
00:42:47.620 --> 00:42:52.800
It is this fact that radically distinguishes the determination of the purchasing power

457
00:42:52.800 --> 00:42:59.040
of money from the determination of the mutual exchange ratios between the various vendable

458
00:42:59.040 --> 00:43:01.520
goods and services.

459
00:43:01.520 --> 00:43:07.000
With regard to these latter, the actors have nothing else to consider than their importance

460
00:43:07.000 --> 00:43:10.040
for future want satisfaction.

461
00:43:10.040 --> 00:43:16.020
If a new commodity unheard of before is offered for sale, as was, for instance, the case with

462
00:43:16.020 --> 00:43:22.400
radio sets a few decades ago, the only question that matters for the individual is whether

463
00:43:22.400 --> 00:43:28.360
or not the satisfaction that the new gadget will provide is greater than that expected

464
00:43:28.360 --> 00:43:34.380
from those goods he would have to renounce in order to buy the new thing.

465
00:43:34.380 --> 00:43:41.520
Judge about past prices is, for the buyer, merely a means to reap a consumer's surplus.

466
00:43:41.520 --> 00:43:47.520
If he were not intent upon this goal, he could, if need be, arrange his purchases without

467
00:43:47.520 --> 00:43:53.140
any familiarity with the market prices of the immediate past, which are popularly called

468
00:43:53.140 --> 00:43:55.520
present prices.

469
00:43:55.520 --> 00:43:59.040
He could make value judgments without appraisement.

470
00:43:59.040 --> 00:44:05.000
As has been mentioned already, the obliteration of the memory of all prices of the past would

471
00:44:05.000 --> 00:44:12.080
not prevent the formation of new exchange ratios between the various vendable things.

472
00:44:12.080 --> 00:44:18.600
But if knowledge about money's purchasing power were to fade away, the process of developing

473
00:44:18.600 --> 00:44:24.440
indirect exchange and media of exchange would have to start anew.

474
00:44:24.440 --> 00:44:30.640
It would become necessary to begin again with employing some goods more marketable than

475
00:44:30.640 --> 00:44:34.040
the rest as media of exchange.

476
00:44:34.040 --> 00:44:39.320
The demand for these goods would increase and would add to the amount of exchange value

477
00:44:39.320 --> 00:44:46.240
derived from their industrial, non-monetary employment, a specific component due to their

478
00:44:46.240 --> 00:44:49.760
new use as a medium of exchange.

479
00:44:49.760 --> 00:44:57.780
A value judgment is, with reference to money, only possible if it can be based on appraisement.

480
00:44:57.780 --> 00:45:04.760
The acceptance of a new kind of money presupposes that the thing in question already has previous

481
00:45:04.760 --> 00:45:12.320
exchange value on account of the services it can render directly to consumption or production.

482
00:45:12.320 --> 00:45:19.200
Neither a buyer nor a seller could judge the value of a monetary unit if he had no information

483
00:45:19.200 --> 00:45:25.460
about its exchange value, its purchasing power, in the immediate past.

484
00:45:25.460 --> 00:45:30.840
The relation between the demand for money and the supply of money, which may be called

485
00:45:30.840 --> 00:45:36.240
the money relation, determines the height of purchasing power.

486
00:45:36.240 --> 00:45:42.020
Today's money relation, as it is shaped on the ground of yesterday's purchasing power,

487
00:45:42.020 --> 00:45:44.780
determines today's purchasing power.

488
00:45:44.780 --> 00:45:51.620
He who wants to increase his cash holding restricts his purchases and increases his sales, and

489
00:45:51.620 --> 00:45:55.740
thus brings about a tendency toward falling prices.

490
00:45:55.740 --> 00:46:02.100
He who wants to reduce his cash holding increases his purchases, either for consumption or for

491
00:46:02.100 --> 00:46:08.620
production and investment, and restricts his sales, thus he brings about a tendency toward

492
00:46:08.620 --> 00:46:11.700
rising prices.

493
00:46:11.700 --> 00:46:17.820
Individuals in the supply of money must necessarily alter the disposition of vendable goods as

494
00:46:17.820 --> 00:46:21.780
owned by various individuals and firms.

495
00:46:21.780 --> 00:46:27.820
The quantity of money available in the whole market system cannot increase or decrease

496
00:46:27.820 --> 00:46:36.220
otherwise than by first increasing or decreasing the cash holdings of certain individual members.

497
00:46:36.220 --> 00:46:41.940
We may, if we like, assume that every member gets a share of the additional money right

498
00:46:41.940 --> 00:46:47.500
at the moment of its inflow into the system, or shares in the reduction in the quantity

499
00:46:47.500 --> 00:46:49.140
of money.

500
00:46:49.140 --> 00:46:54.580
But whether we assume this or not, the final result of our demonstration will remain the

501
00:46:54.580 --> 00:46:56.000
same.

502
00:46:56.000 --> 00:47:01.600
This result will be that changes in the structure of prices brought about by changes in the

503
00:47:01.600 --> 00:47:13.600
The supply of money available in the economic system never affect the prices of the various commodities and services to the same extent and at the same date.

504
00:47:13.600 --> 00:47:18.600
Let us assume that the government issues an additional quantity of paper money.

505
00:47:18.600 --> 00:47:28.600
The government plans either to buy commodities and services, or to repay debts incurred, or to pay interest on such debts.

506
00:47:28.600 --> 00:47:34.240
However this may be, the Treasury enters the market with an additional demand for goods

507
00:47:34.240 --> 00:47:36.120
and services.

508
00:47:36.120 --> 00:47:41.200
It is now in a position to buy more goods than it could buy before.

509
00:47:41.200 --> 00:47:45.440
The prices of the commodities it buys rise.

510
00:47:45.440 --> 00:47:51.480
If the government had expended in its purchases money collected by taxation, the taxpayers

511
00:47:51.480 --> 00:47:56.240
would have restricted their purchases, and while the prices of the goods bought by the

512
00:47:56.240 --> 00:48:01.360
If the government would have risen, those of other goods would have dropped.

513
00:48:01.360 --> 00:48:07.320
But this fall in the prices of the goods the taxpayers used to buy does not occur if the

514
00:48:07.320 --> 00:48:13.080
government increases the quantity of money at its disposal without reducing the quantity

515
00:48:13.080 --> 00:48:16.180
of money in the hands of the public.

516
00:48:16.180 --> 00:48:22.720
The prices of some commodities, namely of those the government buys, rise immediately,

517
00:48:22.720 --> 00:48:27.920
while those of the other commodities remain unaltered for the time being.

518
00:48:27.920 --> 00:48:30.480
But the process goes on.

519
00:48:30.480 --> 00:48:35.680
Those selling the commodities asked for by the government are now themselves in a position

520
00:48:35.680 --> 00:48:39.440
to buy more than they used previously.

521
00:48:39.440 --> 00:48:44.800
The prices of the things these people are buying in larger quantities therefore rise

522
00:48:44.800 --> 00:48:45.800
too.

523
00:48:45.800 --> 00:48:52.640
Thus the boom spreads from one group of commodities and services to other groups until all prices

524
00:48:52.640 --> 00:48:59.280
Prices and Wage Rates have risen. The rise in prices is thus not synchronous with the

525
00:48:59.280 --> 00:49:06.440
various commodities and services. When eventually, in the further course of the increase in the

526
00:49:06.440 --> 00:49:12.940
quantity of money, all prices have risen, the rise does not affect the various commodities

527
00:49:12.940 --> 00:49:19.760
and services to the same extent, for the process has affected the material position of various

528
00:49:19.760 --> 00:49:23.280
Individuals, to different degrees.

529
00:49:23.280 --> 00:49:28.480
While the process is underway, some people enjoy the benefit of higher prices for the

530
00:49:28.480 --> 00:49:34.840
goods or services they sell, while the prices of the things they buy have not yet risen

531
00:49:34.840 --> 00:49:38.300
or have not risen to the same extent.

532
00:49:38.300 --> 00:49:43.440
On the other hand, there are people who are in the unhappy situation of selling commodities

533
00:49:43.440 --> 00:49:49.680
and services whose prices have not yet risen or not in the same degree as the prices

534
00:49:49.680 --> 00:50:01.840
for the former, the progressive rise in prices is a boon, for the latter, a calamity. Besides,

535
00:50:01.840 --> 00:50:07.280
the debtors are favored at the expense of the creditors. When the process once comes

536
00:50:07.280 --> 00:50:13.240
to an end, the wealth of various individuals has been affected in different ways and to

537
00:50:13.240 --> 00:50:20.200
to different degrees. Some are enriched, some impoverished. Conditions are no longer what

538
00:50:20.200 --> 00:50:26.640
they were before. The new order of things results in changes in the intensity of demand

539
00:50:26.640 --> 00:50:33.640
for various goods. The mutual ratio of the money prices of the vendable goods and services

540
00:50:33.640 --> 00:50:40.320
is no longer the same as before. The price structure has changed apart from the fact

541
00:50:40.320 --> 00:50:46.520
that all prices in terms of money have risen. The final prices to the establishment of

542
00:50:46.520 --> 00:50:51.800
which the market tends after the effects of the increase in the quantity of money have

543
00:50:51.800 --> 00:50:58.800
been fully consummated are not equal to the previous final prices multiplied by the same

544
00:50:58.800 --> 00:51:05.520
multiplier. The main fault of the old quantity theory, as well as the mathematical economist's

545
00:51:05.520 --> 00:51:11.960
The market's equation of exchange is that they have ignored this fundamental issue.

546
00:51:11.960 --> 00:51:17.640
Changes in the supply of money must bring about changes in other data, too.

547
00:51:17.640 --> 00:51:24.580
The market system before and after the inflow or outflow of a quantity of money is not merely

548
00:51:24.580 --> 00:51:31.620
changed in that the cash holdings of the individuals and prices have increased or decreased.

549
00:51:31.620 --> 00:51:37.920
There have been effected also changes in the reciprocal exchange ratios between the various

550
00:51:37.920 --> 00:51:44.320
commodities and services, which, if one wants to resort to metaphors, are more adequately

551
00:51:44.320 --> 00:51:50.720
described by the image of price revolution than by the misleading figure of an elevation

552
00:51:50.720 --> 00:51:54.320
or a sinking of the price level.

553
00:51:54.320 --> 00:51:59.840
We may at this point disregard the effects brought about by the influence on the content

554
00:51:59.840 --> 00:52:04.640
of All Deferred Payments as Stipulated by Contracts.

555
00:52:04.640 --> 00:52:09.840
We will deal later with them, and with the operation of monetary events on consumption

556
00:52:09.840 --> 00:52:17.040
and production, investment in capital goods, and accumulation and consumption of capital.

557
00:52:17.040 --> 00:52:23.200
But even in setting aside all these things, we must never forget that changes in the quantity

558
00:52:23.200 --> 00:52:27.620
of money affect prices in an uneven way.

559
00:52:27.620 --> 00:52:33.660
It depends on the data of each particular case at what moment and to what extent the

560
00:52:33.660 --> 00:52:38.620
prices of the various commodities and services are affected.

561
00:52:38.620 --> 00:52:45.220
In the course of a monetary expansion, inflation, the first reaction is not only that the prices

562
00:52:45.220 --> 00:52:50.220
of some of them rise more quickly and more steeply than others.

563
00:52:50.220 --> 00:52:56.100
It may also occur that some fall at first, as they are for the most part demanded by

564
00:52:56.100 --> 00:53:00.100
by those groups whose interests are hurt.

565
00:53:00.100 --> 00:53:07.100
Changes in the money relation are not only caused by governments issuing additional paper money.

566
00:53:07.100 --> 00:53:13.100
An increase in the production of the precious metals employed as money has the same effects,

567
00:53:13.100 --> 00:53:19.100
although, of course, other classes of the population may be favored or hurt by it.

568
00:53:19.100 --> 00:53:34.100
Prices also rise in the same way if, without a corresponding reduction in the quantity of money available, the demand for money falls because of a general tendency toward a diminution of cash holdings.

569
00:53:34.100 --> 00:53:47.100
The money expended additionally by such a dis-hoarding brings about a tendency toward higher prices in the same way as that flowing from the gold mines or from the printing press.

570
00:53:47.100 --> 00:54:04.100
Conversely, prices drop when the supply of money falls, for example, through a withdrawal of paper money, or the demand for money increases, for example, through a tendency toward hoarding, the keeping of greater cash balances.

571
00:54:04.100 --> 00:54:12.100
The process is always uneven, and by steps, disproportionate and asymmetrical.

572
00:54:12.100 --> 00:54:28.100
It could be and has been objected that the normal production of the gold mines brought to the market may well entail an increase in the quantity of money, but does not increase the income, still less the wealth of the owners of the mines.

573
00:54:28.100 --> 00:54:44.600
These people earn only their normal income, and thus their spending of it cannot disarrange market conditions and the prevailing tendencies toward the establishment of final prices and the equilibrium of the evenly rotating economy.

574
00:54:44.600 --> 00:54:53.600
For them, the annual output of the mines does not mean an increase in riches and does not impel them to offer higher prices.

575
00:54:53.600 --> 00:54:58.600
They will continue to live at the standard at which they used to live before.

576
00:54:58.600 --> 00:55:03.600
Their spending within these limits will not revolutionize the market.

577
00:55:03.600 --> 00:55:10.600
Thus the normal amount of gold production, although certainly increasing the quantity of money available,

578
00:55:10.600 --> 00:55:14.600
cannot put into motion the process of depreciation.

579
00:55:14.600 --> 00:55:18.600
It is neutral with regard to prices.

580
00:55:18.600 --> 00:55:38.120
As against this reasoning, one must first of all observe that within a progressing economy in which population figures are increasing and the division of labor and its corollary, industrial specialization, are perfected, there prevails a tendency toward an increase in the demand for money.

581
00:55:38.120 --> 00:55:43.120
Additional people appear on the scene and want to establish cash holdings.

582
00:55:43.120 --> 00:55:54.120
The extent of economic self-sufficiency, that is, of production for the household's own needs, shrinks, and people become more dependent upon the market.

583
00:55:54.120 --> 00:55:59.120
This will, by and large, impel them to increase their holding of cash.

584
00:55:59.120 --> 00:56:05.960
Thus, the price-raising tendency emanating from what is called the normal gold production

585
00:56:05.960 --> 00:56:12.840
encounters a price-cutting tendency emanating from the increased demand for cash holding.

586
00:56:12.840 --> 00:56:18.620
However, these two opposite tendencies do not neutralize each other.

587
00:56:18.620 --> 00:56:21.700
Both processes take their own course.

588
00:56:21.700 --> 00:56:27.680
Both result in a disarrangement of existing social conditions, making some people richer,

589
00:56:27.680 --> 00:56:29.680
and People Poorer.

590
00:56:29.680 --> 00:56:35.780
Both affect the prices of various goods at different dates and to a different degree.

591
00:56:35.780 --> 00:56:41.720
It is true that the rise in the prices of some commodities caused by one of these processes

592
00:56:41.720 --> 00:56:47.220
can finally be compensated by the fall caused by the other process.

593
00:56:47.220 --> 00:56:53.380
It may happen that at the end, some or many prices come back to their previous height.

594
00:56:53.380 --> 00:56:59.000
But this final result is not the outcome of an absence of movements provoked by changes

595
00:56:59.000 --> 00:57:01.160
in the money relation.

596
00:57:01.160 --> 00:57:07.560
It is rather the outcome of the joint effect of the coincidence of two processes independent

597
00:57:07.560 --> 00:57:13.120
of each other, each of which brings about alterations in the market data as well as

598
00:57:13.120 --> 00:57:18.840
in the material conditions of various individuals and groups of individuals.

599
00:57:18.840 --> 00:57:24.080
The new structure of prices may not differ very much from the previous one, but it is

600
00:57:24.080 --> 00:57:32.500
the resultant of two series of changes which have accomplished all inherent social transformations.

601
00:57:32.500 --> 00:57:38.080
The fact that the owners of gold mines rely upon steady yearly proceeds from their gold

602
00:57:38.080 --> 00:57:44.520
production does not cancel the newly mined gold's impression upon prices.

603
00:57:44.520 --> 00:57:50.120
The owners of the mines take from the market, in exchange for the gold produced, the goods

604
00:57:50.120 --> 00:57:55.260
and services required for their mining, and the goods needed for their consumption and

605
00:57:55.260 --> 00:57:58.760
their investments in other lines of production.

606
00:57:58.760 --> 00:58:04.940
If they had not produced this amount of gold, prices would not have been affected by it.

607
00:58:04.940 --> 00:58:11.300
It is beside the point that they have anticipated the future yield of the mines and capitalized

608
00:58:11.300 --> 00:58:17.100
it, and that they have adjusted their standard of living to the expectation of steady proceeds

609
00:58:17.100 --> 00:58:19.620
from the mining operations.

610
00:58:19.620 --> 00:58:25.780
The effects which the newly mined gold exercises on their expenditure, and on that of those

611
00:58:25.780 --> 00:58:32.680
people whose cash holdings step by step it enters later, begin only at the instant this

612
00:58:32.680 --> 00:58:36.920
gold is available in the hands of the mine owners.

613
00:58:36.920 --> 00:58:42.920
If in the expectation of future yields they had expended money at an earlier date, and

614
00:58:42.920 --> 00:58:48.820
the expected yield failed to appear, conditions would not differ from other cases in which

615
00:58:48.820 --> 00:58:57.000
consumption was financed by credit based on expectations not realized by later events.

616
00:58:57.000 --> 00:59:03.420
Changes in the extent of the desired cash-holding of various people neutralize one another only

617
00:59:03.420 --> 00:59:11.820
to the extent that they are regularly recurring and mutually connected by a causal reciprocity.

618
00:59:11.820 --> 00:59:17.740
Salaried people and wage earners are not paid daily, but at certain paydays for a period

619
00:59:17.740 --> 00:59:20.380
of one or several weeks.

620
00:59:20.380 --> 00:59:26.220
They do not plan to keep their cash holding within the period between paydays at the same

621
00:59:26.220 --> 00:59:27.340
level.

622
00:59:27.340 --> 00:59:33.140
The amount of cash in their pockets declines with the approach of the next payday.

623
00:59:33.140 --> 00:59:38.100
On the other hand, the merchants who supply them with the necessities of life increase

624
00:59:38.100 --> 00:59:41.600
their cash holdings concomitantly.

625
00:59:41.600 --> 00:59:44.300
The two movements condition each other.

626
00:59:44.300 --> 00:59:49.580
There is a causal interdependence between them, which harmonizes them both with regard

627
00:59:49.580 --> 00:59:53.340
to time and to quantitative amount.

628
00:59:53.340 --> 01:00:00.340
Neither the dealer nor his customer lets himself be influenced by these recurrent fluctuations.

629
01:00:00.340 --> 01:00:24.340
It was this phenomenon that led economists to the image of a regular circulation of money, and to the neglect of the changes in the individual's cash holdings.

630
01:00:24.340 --> 01:00:32.340
However, we are faced with a concatenation which is limited to a narrow, neatly circumscribed field.

631
01:00:32.340 --> 01:00:44.340
Only as far as the increase in the cash holding of one group of people is temporally and quantitatively related to the decrease in the cash holding of another group,

632
01:00:44.340 --> 01:00:50.220
and as far as these changes are self-liquidating within the course of a period which the members

633
01:00:50.220 --> 01:00:56.300
of both groups consider as a whole in planning their cash holding, can the neutralization

634
01:00:56.300 --> 01:01:03.700
take place? Beyond this field, there is no question of such a neutralization.

635
01:01:03.700 --> 01:01:11.720
5. The Problem of Hume and Mill and the Driving Force of Money

636
01:01:11.720 --> 01:01:16.460
Is it possible to think of a state of affairs in which changes in the purchasing power of

637
01:01:16.460 --> 01:01:23.000
money occur at the same time and to the same extent, with regard to all commodities and

638
01:01:23.000 --> 01:01:29.000
services, and in proportion to the changes effected in either the demand for or the supply

639
01:01:29.000 --> 01:01:31.160
of money?

640
01:01:31.160 --> 01:01:36.680
In other words, is it possible to think of neutral money within the frame of an economic

641
01:01:36.680 --> 01:01:44.160
System which does not correspond to the imaginary construction of an evenly rotating economy.

642
01:01:44.160 --> 01:01:49.760
We may call this pertinent question the problem of Hume and Mill.

643
01:01:49.760 --> 01:01:55.200
It is uncontested that neither Hume nor Mill succeeded in finding a positive answer to

644
01:01:55.200 --> 01:01:57.000
this question.

645
01:01:57.000 --> 01:02:01.800
Is it possible to answer it categorically in the negative?

646
01:02:01.800 --> 01:02:10.320
We imagine two systems of an evenly rotating economy, A and B. The two systems are independent

647
01:02:10.320 --> 01:02:16.160
and in no way connected with one another. The two systems differ from one another only

648
01:02:16.160 --> 01:02:24.920
in the fact that to each amount of money M in A there corresponds an amount N M in B,

649
01:02:24.920 --> 01:02:31.520
N being greater or smaller than one. We assume that there are no deferred payments and that

650
01:02:31.520 --> 01:02:37.840
The money used in both systems serves only monetary purposes and does not allow of any

651
01:02:37.840 --> 01:02:47.180
non-monetary use. Consequently, the prices in the two systems are in the ratio 1 to N.

652
01:02:47.180 --> 01:02:53.300
Is it thinkable that conditions in A can be altered at one stroke in such a way as to

653
01:02:53.300 --> 01:02:58.360
make them entirely equivalent to conditions in B?

654
01:02:58.360 --> 01:03:02.820
The answer to this question must obviously be in the negative.

655
01:03:02.820 --> 01:03:08.860
He who wants to answer it in the positive must assume that a deus ex machina approaches

656
01:03:08.860 --> 01:03:15.860
every individual at the same instant, increases or decreases his cash holding by multiplying

657
01:03:15.860 --> 01:03:22.920
it by n, and tells him that henceforth he must multiply by n all price data which he

658
01:03:22.920 --> 01:03:26.820
employs in his appraisements and calculations.

659
01:03:26.820 --> 01:03:30.260
This cannot happen without a miracle.

660
01:03:30.260 --> 01:03:35.780
It has been pointed out already that in the imaginary construction of an evenly rotating

661
01:03:35.780 --> 01:03:43.140
economy, the very notion of money vanishes into an unsubstantial calculation process,

662
01:03:43.140 --> 01:03:46.740
self-contradictory and devoid of any meaning.

663
01:03:46.740 --> 01:03:54.060
It is impossible to assign any function to indirect exchange, media of exchange and money

664
01:03:54.060 --> 01:04:01.140
within an imaginary construction, the characteristic mark of which is unchangeability and rigidity

665
01:04:01.140 --> 01:04:03.540
of conditions.

666
01:04:03.540 --> 01:04:10.560
Where there is no uncertainty concerning the future, there is no need for any cash holding.

667
01:04:10.560 --> 01:04:16.480
As money must necessarily be kept by people in their cash holdings, there cannot be any

668
01:04:16.480 --> 01:04:17.560
money.

669
01:04:17.560 --> 01:04:23.980
The use of media of exchange and the keeping of cash holdings are conditioned by the changeability

670
01:04:23.980 --> 01:04:26.740
of Economic Data.

671
01:04:26.740 --> 01:04:30.120
Money in itself is an element of change.

672
01:04:30.120 --> 01:04:36.780
Its existence is incompatible with the idea of a regular flow of events in an evenly rotating

673
01:04:36.780 --> 01:04:39.280
economy.

674
01:04:39.280 --> 01:04:45.340
Every change in the money relation alters, apart from its effects upon deferred payments,

675
01:04:45.340 --> 01:04:49.620
the conditions of the individual members of society.

676
01:04:49.620 --> 01:04:52.640
Some become richer, some poorer.

677
01:04:52.640 --> 01:04:58.580
It may happen that the effects of a change in the demand for and supply of money encounter

678
01:04:58.580 --> 01:05:04.600
the effects of opposite changes occurring by and large at the same time and to the same

679
01:05:04.600 --> 01:05:06.140
extent.

680
01:05:06.140 --> 01:05:11.860
It may happen that the resultant of the two opposite movements is such that no conspicuous

681
01:05:11.860 --> 01:05:15.440
changes in the price structure emerge.

682
01:05:15.440 --> 01:05:22.720
But even then, the effects on the conditions of the various individuals are not absent.

683
01:05:22.720 --> 01:05:29.000
Each change in the money relation takes its own course and produces its own particular

684
01:05:29.000 --> 01:05:30.280
effects.

685
01:05:30.280 --> 01:05:37.480
If an inflationary movement and a deflationary one occur at the same time, or if an inflation

686
01:05:37.480 --> 01:05:43.880
is temporally followed by a deflation in such a way that prices finally are not very much

687
01:05:43.880 --> 01:05:51.360
Much Changed, the social consequences of each of the two movements do not cancel each other.

688
01:05:51.360 --> 01:05:57.160
To the social consequences of an inflation, those of a deflation are added.

689
01:05:57.160 --> 01:06:02.880
There is no reason to assume that all or even most of those favored by one movement will

690
01:06:02.880 --> 01:06:07.200
be hurt by the second one, or vice versa.

691
01:06:07.200 --> 01:06:13.680
Money is neither an abstract numérère nor a standard of value or prices.

692
01:06:13.680 --> 01:06:20.080
It is necessarily an economic good, and as such it is valued and appraised on its own

693
01:06:20.080 --> 01:06:26.120
merits, that is, the services which a man expects from holding cash.

694
01:06:26.120 --> 01:06:30.320
On the market there is always change and movement.

695
01:06:30.320 --> 01:06:34.260
Only because there are fluctuations is there money.

696
01:06:34.260 --> 01:06:40.520
Money is an element of change not because it circulates, but because it is kept in cash

697
01:06:40.520 --> 01:06:41.960
holdings.

698
01:06:41.960 --> 01:06:47.840
Only because people expect changes about the kind and extent of which they have no certain

699
01:06:47.840 --> 01:06:52.240
knowledge whatsoever, do they keep money.

700
01:06:52.240 --> 01:06:59.360
While money can be thought of only in a changing economy, it is in itself an element of further

701
01:06:59.360 --> 01:07:00.800
changes.

702
01:07:00.800 --> 01:07:05.960
Every change in the economic data sets it in motion and makes it the driving force of

703
01:07:05.960 --> 01:07:07.840
new changes.

704
01:07:07.840 --> 01:07:13.560
Every shift in the mutual relation of the exchange ratios between the various non-monetary

705
01:07:13.560 --> 01:07:21.400
goods not only brings about changes in production and in what is popularly called distribution,

706
01:07:21.400 --> 01:07:27.800
but also provokes changes in the money relation and thus further changes.

707
01:07:27.800 --> 01:07:33.560
Nothing can happen in the orbit of vendible goods without affecting the orbit of money,

708
01:07:33.560 --> 01:07:39.460
And all that happens in the orbit of money affects the orbit of commodities.

709
01:07:39.460 --> 01:07:45.320
The notion of a neutral money is no less contradictory than that of a money of stable purchasing

710
01:07:45.320 --> 01:07:47.040
power.

711
01:07:47.040 --> 01:07:53.480
Money without a driving force of its own would not, as people assume, be a perfect money.

712
01:07:53.480 --> 01:07:56.180
It would not be money at all.

713
01:07:56.180 --> 01:08:02.620
It is a popular fallacy to believe that perfect money should be neutral and endowed with unchanging

714
01:08:02.620 --> 01:08:08.300
and Purchasing Power, and that the goal of monetary policy should be to realize this

715
01:08:08.300 --> 01:08:10.340
perfect money.

716
01:08:10.340 --> 01:08:16.020
It is easy to understand this idea as a reaction against the still more popular postulates

717
01:08:16.020 --> 01:08:20.380
of the inflationists, but it is an excessive reaction.

718
01:08:20.380 --> 01:08:26.500
It is in itself confused and contradictory, and it has worked havoc because it was strengthened

719
01:08:26.500 --> 01:08:33.180
and by an inveterate error inherent in the thought of many philosophers and economists.

720
01:08:33.180 --> 01:08:39.080
These thinkers are misled by the widespread belief that a state of rest is more perfect

721
01:08:39.080 --> 01:08:41.220
than one of movement.

722
01:08:41.220 --> 01:08:48.140
Their idea of perfection implies that no more perfect state can be thought of, and consequently

723
01:08:48.140 --> 01:08:51.420
that every change would impair it.

724
01:08:51.420 --> 01:08:56.420
The best that can be said of a motion is that it is directed toward the attainment of a

725
01:08:56.420 --> 01:09:01.820
The State of Perfection in which there is rest, because every further movement would

726
01:09:01.820 --> 01:09:05.580
lead into a less perfect state.

727
01:09:05.580 --> 01:09:11.460
Motion is seen as the absence of equilibrium and full satisfaction, as a manifestation

728
01:09:11.460 --> 01:09:13.780
of trouble and want.

729
01:09:13.780 --> 01:09:20.500
As far as such thoughts merely establish the fact that action aims at the removal of uneasiness,

730
01:09:20.500 --> 01:09:25.880
and ultimately at the attainment of full satisfaction, they are well founded.

731
01:09:25.880 --> 01:09:32.320
But one must not forget that rest and equilibrium are not only present in a state in which perfect

732
01:09:32.320 --> 01:09:38.280
contentment has made people perfectly happy, but no less in a state in which, although

733
01:09:38.280 --> 01:09:44.880
wanting in many regards, they do not see any means of improving their condition.

734
01:09:44.880 --> 01:09:49.680
The absence of action is not only the result of full satisfaction.

735
01:09:49.680 --> 01:09:55.760
It can no less be the corollary of the inability to render things more satisfactory.

736
01:09:55.760 --> 01:10:00.160
It can mean hopelessness as well as contentment.

737
01:10:00.160 --> 01:10:06.680
With the real universe of action and unceasing change, with the economic system which cannot

738
01:10:06.680 --> 01:10:14.040
be rigid, neither neutrality of money nor stability of its purchasing power are compatible.

739
01:10:14.040 --> 01:10:20.600
A world of the kind which the necessary requirements of neutral and stable money presuppose would

740
01:10:20.600 --> 01:10:23.700
be a world without action.

741
01:10:23.700 --> 01:10:29.780
It is therefore neither strange nor vicious that in the frame of such a changing world,

742
01:10:29.780 --> 01:10:34.260
money is neither neutral nor stable in purchasing power.

743
01:10:34.260 --> 01:10:39.560
All plans to render money neutral and stable are contradictory.

744
01:10:39.560 --> 01:10:44.900
Money is an element of action and, consequently, of change.

745
01:10:44.900 --> 01:10:49.900
Changes in the money relation, that is, in the relation of the demand for and the supply

746
01:10:49.900 --> 01:10:56.800
of Money affect the exchange ratio between money on the one hand and the vendable commodities

747
01:10:56.800 --> 01:10:58.840
on the other hand.

748
01:10:58.840 --> 01:11:04.740
These changes do not affect at the same time and to the same extent the prices of the various

749
01:11:04.740 --> 01:11:07.140
commodities and services.

750
01:11:07.140 --> 01:11:13.140
may consequently affect the wealth of the various members of society in a different way.