WEBVTT

NOTE 6. Treatise on Money

1
00:00:00.000 --> 00:00:02.740
Treatise on Money

2
00:00:02.740 --> 00:00:08.000
Mises' greatest lifetime achievement was to build an all-encompassing systematic theory

3
00:00:08.000 --> 00:00:14.080
of human action, which he first presented in Nationale économie 1940 and Human Action

4
00:00:14.080 --> 00:00:20.160
1949. His system was the result of two large research projects overlapping in time, the

5
00:00:20.160 --> 00:00:25.180
first one concerning economic science as such, while the second dealt with epistemological

6
00:00:25.180 --> 00:00:30.740
and Methodological Foundations of this science. He published his Reflections on Epistemology

7
00:00:30.740 --> 00:00:37.540
and Methodology in the period from 1929 to 1962. His great economic research project

8
00:00:37.540 --> 00:00:43.940
extended from 1912 to 1940. It started with a treatise on money, in which Mises unfolds

9
00:00:43.940 --> 00:00:50.580
an original theme that he later expands, systemises and eventually brings full circle in national

10
00:00:50.580 --> 00:00:57.020
The great original theme of his economic writings concerned the integration of the theory of

11
00:00:57.020 --> 00:01:02.540
money and banking into the framework of the Mengerian theory of value and prices. Mises

12
00:01:02.540 --> 00:01:06.740
dealt with it in his first treatise, Theory of Money and Credit, which had earned him

13
00:01:06.740 --> 00:01:13.220
the coveted license to teach at Austrian universities. Carl Menger too had obtained a habilitación

14
00:01:13.220 --> 00:01:18.540
for an original theory of money, which he had published as Chapter 8 of Principles.

15
00:01:18.540 --> 00:01:23.780
Mises thus continued a Mengerian tradition by grounding his academic reputation on monetary

16
00:01:23.780 --> 00:01:29.820
analysis. He did not submit only one chapter, though, but a complete treatise.

17
00:01:29.820 --> 00:01:34.220
In his Theory of Money, Carl Menger had been mainly concerned with explaining the origin

18
00:01:34.220 --> 00:01:39.960
of money as a social institution. He stressed that money did not come into being like Athena

19
00:01:39.960 --> 00:01:46.700
from the brow of Zeus, but developed step by step out of a non-monetary commodity. However,

20
00:01:46.700 --> 00:01:51.560
Mises had not applied his marginal value theory to money itself. The reader of principles

21
00:01:51.560 --> 00:01:56.700
could get the distinct impression that value theory only applied to consumers' goods and

22
00:01:56.700 --> 00:02:02.160
factors of production, and that money was not subject to the same rules. What then is

23
00:02:02.160 --> 00:02:07.020
the relationship between marginal value and money? This was the question at the heart

24
00:02:07.020 --> 00:02:12.200
of the Theory of Money and Credit. Mises answered it in the second, the central part of the

25
00:02:12.200 --> 00:02:18.100
the book and thereby brought the Austrian theory of value and prices full circle. Money was

26
00:02:18.100 --> 00:02:24.460
no longer a special case but could be fully accounted for by the new marginal value theory.

27
00:02:24.460 --> 00:02:29.320
In his treatise, Mises went as far as he could to integrate the theory of money and banking

28
00:02:29.320 --> 00:02:35.460
into the general theory of value and prices. From the outset he was aware that his exposition

29
00:02:35.460 --> 00:02:41.240
would be inadequate. He later explained, The greatest difficulty I faced in the preparation

30
00:02:41.240 --> 00:02:46.320
of the book was the fact that I meant to give special attention to merely a limited part

31
00:02:46.320 --> 00:02:51.600
of the total scope of economic problems. But economics necessarily must be a complete and

32
00:02:51.600 --> 00:02:57.720
united whole. In economics there can be no specialisation. To deal with a part, one must

33
00:02:57.720 --> 00:03:03.720
do so on the foundation of a theory that comprises all the problems. But I could not use any

34
00:03:03.720 --> 00:03:09.320
of the existing theories. The systems of Menger and Boehm-Bawerk were no longer wholly satisfactory

35
00:03:09.320 --> 00:03:24.120
According to prevailing opinion at the time, the theory of money could be clearly separated

36
00:03:24.120 --> 00:03:29.600
from the total structure of economic problems. It did not, in fact, even belong with economics.

37
00:03:29.600 --> 00:03:34.360
In a certain respect, it was an independent discipline. In accordance with this opinion,

38
00:03:34.360 --> 00:03:38.880
the universities in Anglo-Saxon countries had created special professorships for currency

39
00:03:38.880 --> 00:03:44.840
Strategy and Banking. It was my intention to reveal this position as erroneous and restore

40
00:03:44.840 --> 00:03:50.880
the theory of money to its appropriate position as an integral part of this science of economics.

41
00:03:50.880 --> 00:03:55.720
If I could have worked quietly and taken my time, I would have begun with a theory of

42
00:03:55.720 --> 00:04:00.560
direct exchange in the first volume and then I could proceed to the theory of indirect

43
00:04:00.560 --> 00:04:05.480
exchange. But I actually began with indirect exchange because I believed that I did not

44
00:04:05.480 --> 00:04:27.040
Unfortunately, his forecast proved to be right, and for many years the war and its

45
00:04:27.040 --> 00:04:32.680
aftermath prevented him from systematically elaborating his more general ideas in print.

46
00:04:32.680 --> 00:04:37.240
But these ideas, nurtured through the war experience, came to light more powerfully

47
00:04:37.240 --> 00:04:42.220
in an essay on the problems of economic calculation in socialist regimes, which Mises published

48
00:04:42.220 --> 00:04:48.620
in 1920 in Max Weber's Archiv für Sozialwissenschaft und Sozialpolitik, arguably the most avant-garde

49
00:04:48.620 --> 00:04:54.040
German social science journal of the day. Here he expanded on the difference between

50
00:04:54.040 --> 00:05:00.400
valuation and money-based economic calculations, a difference he had stressed but not elaborated

51
00:05:00.400 --> 00:05:09.200
Mises observed that economic calculation consists of the computation of market prices, prices

52
00:05:09.200 --> 00:05:13.900
that can only emerge in the interaction of private property owners, since an extended

53
00:05:13.900 --> 00:05:19.160
division of labour is possible only because decisions can be based on economic calculus.

54
00:05:19.160 --> 00:05:23.760
It follows that socialist societies, which by definition have no private property in

55
00:05:23.760 --> 00:05:28.440
the means of production and thus no market prices for them, could not possibly enjoy

56
00:05:28.440 --> 00:05:44.300
In the manner of Boehm-Bawerk, Mises had derived crucial political insights from seemingly

57
00:05:44.300 --> 00:05:49.220
arcane theoretical distinctions. He followed his calculation piece with a comprehensive

58
00:05:49.220 --> 00:05:54.960
treatise on socialism, 1922, again thoughts he had kept to himself and developed over

59
00:05:54.960 --> 00:06:01.360
over many years burst forth in the span of a few months. In Nationale Economie 1940 and

60
00:06:01.360 --> 00:06:06.760
Human Action 1949, he finally gave a presentation of the whole body of economic science in light

61
00:06:06.760 --> 00:06:10.880
of the difference between valuation and calculation.

62
00:06:10.880 --> 00:06:15.480
My Nationale Economie finally afforded me the opportunity to present the problems of

63
00:06:15.480 --> 00:06:20.760
economic calculation in their full significance. Thus, I accomplished the project that had

64
00:06:20.760 --> 00:06:27.320
The Nature of Money

65
00:06:27.320 --> 00:06:31.920
As a true disciple of Carl Menger, Ludwig von Mises began the presentation of his Theory

66
00:06:31.920 --> 00:06:36.840
of Money with an analysis of the nature of money itself. He then went on to deal with

67
00:06:36.840 --> 00:06:41.280
the determination of money's purchasing power and with the impact of what he called

68
00:06:41.280 --> 00:06:47.280
Umlaufsmittel, fiduciary media, on the monetary system. In dealing with the nature of money,

69
00:06:47.280 --> 00:06:51.960
Mises relied heavily on the work of Carl Menger. The founder of the Austrian School had shown

70
00:06:51.960 --> 00:06:57.240
that money is not to be defined by the physical characteristics of whatever good is used as

71
00:06:57.240 --> 00:07:01.620
money. Rather, money is characterized by the fact that the good under consideration

72
00:07:01.620 --> 00:07:07.080
is one, a commodity that is, two, used in indirect exchanges, and three, bought and

73
00:07:07.080 --> 00:07:12.580
sold primarily for the purpose of such indirect exchanges. Menger also stressed that money

74
00:07:12.580 --> 00:07:17.420
Money emerges spontaneously on the market as a response to the lack of the double coincidence

75
00:07:17.420 --> 00:07:22.780
of wants. Indirect exchanges are resorted to, for example, by the chairmaker seeking to

76
00:07:22.780 --> 00:07:27.580
buy a dozen eggs from the farmer who already has enough chairs, or by the painter trying

77
00:07:27.580 --> 00:07:32.620
to purchase a glass of beer from the brewer who does not care for art. They first exchange

78
00:07:32.620 --> 00:07:37.680
their products into highly marketable commodities such as salt, wheat or silver coins in order

79
00:07:37.680 --> 00:07:47.280
The significance of this fact was that a monetary system could come into being without a prior

80
00:07:47.280 --> 00:07:53.300
social contract and without government fiat. Although Menger delivered a painstaking analysis

81
00:07:53.300 --> 00:07:57.560
of the process of the emergence of money, a process that was, in his view, the best

82
00:07:57.560 --> 00:08:02.500
illustration of the emergence of social institutions, he was not the first economist to point out

83
00:08:02.500 --> 00:08:07.940
that money does not come into being by social contract. Among Menger's predecessors were

84
00:08:07.940 --> 00:08:20.300
John Law, 1705, Ferdinando Galliani, 1751, Etienne de Condillac, 1776, Adam Smith, 1776,

85
00:08:20.300 --> 00:08:29.700
Antonio Genovese, 1788, Jean-Baptiste Say, 1802, and Richard Watley, 1832. Mises added

86
00:08:29.700 --> 00:08:35.220
to and refined this analysis of the nature of money in four ways. First, he took issue

87
00:08:35.220 --> 00:08:40.860
with the idea that the functions of money, being a means of exchange, a store of value,

88
00:08:40.860 --> 00:08:47.140
a means of payment, a means of deferred payments, a numéreur, measure of value, were of equal

89
00:08:47.140 --> 00:08:52.660
importance. Mises argued that a commodity could play the role of numéreur only because

90
00:08:52.660 --> 00:08:59.060
it was used as a means of exchange, and similarly, a commodity was held as a store of value precisely

91
00:08:59.060 --> 00:09:06.060
Thus, there was a hierarchical order of the functions of money. The means of exchange was

92
00:09:06.060 --> 00:09:12.540
primordial, being a necessary condition for the others. Second, Mises developed a comprehensive

93
00:09:12.540 --> 00:09:18.100
typology of monetary objects, that is, in Mengerian language, of all the things generally

94
00:09:18.100 --> 00:09:23.420
accepted as media of exchange. On the most fundamental level, he distinguished several

95
00:09:23.420 --> 00:09:28.780
from several types of money in the narrower sense from several types of money surrogates

96
00:09:28.780 --> 00:09:30.860
or substitutes.

97
00:09:30.860 --> 00:09:35.100
Money in the narrower sense is a good in its own right.

98
00:09:35.100 --> 00:09:40.280
In contrast, money substitutes were legal titles to money in the narrower sense.

99
00:09:40.280 --> 00:09:45.500
They were typically issued by banks and were redeemable in real money at the counters of

100
00:09:45.500 --> 00:09:47.340
the issuing bank.

101
00:09:47.340 --> 00:09:51.920
In establishing this fundamental distinction between money and money titles, he applied

102
00:09:51.920 --> 00:09:57.580
had crucial insights of Boehm-Bawerk's pioneering work on the economics of legal entities. He

103
00:09:57.580 --> 00:10:04.280
stressed claims are not goods, they are means of obtaining disposal over goods. This determines

104
00:10:04.280 --> 00:10:09.800
their whole nature and economic significance. As his exposition in later parts of the book

105
00:10:09.800 --> 00:10:14.640
would show, these distinctions have great importance for both the integration of money

106
00:10:14.640 --> 00:10:19.440
theory within the framework of Menger's theory of value and prices, and for the analysis

107
00:10:19.440 --> 00:10:23.120
Mises of the role of banking within the monetary system.

108
00:10:23.120 --> 00:10:27.360
At the heart of his theory of banking is a comparative analysis of the economic significance

109
00:10:27.360 --> 00:10:31.760
of two very different types of money substitutes.

110
00:10:31.760 --> 00:10:36.560
Mises observed that money substitutes could be either covered by a corresponding amount

111
00:10:36.560 --> 00:10:42.360
of money, in which case they were money certificates, or they could lack such coverage, in which

112
00:10:42.360 --> 00:10:46.360
case they were fiduciary media, umlaufsmittel.

113
00:10:46.360 --> 00:10:51.360
This is devoted the entire last third of his book to an analysis of the economic consequences

114
00:10:51.360 --> 00:10:56.880
of the use of Umlaufsmittel. Regrettably, this comparative focus of his analysis was

115
00:10:56.880 --> 00:11:01.720
lost in the English translation of the title of the book, Theory of Money and Credit. The

116
00:11:01.720 --> 00:11:07.160
term Umlaufsmittel, which literally translates into means of circulation, was rendered in

117
00:11:07.160 --> 00:11:12.760
the English text as fiduciary media. Consequently, the title of the book should have been Theory

118
00:11:12.760 --> 00:11:18.120
of Money and Fiduciary Media, but the publisher decided that the unusual terminology would

119
00:11:18.120 --> 00:11:24.160
irritate readers and thus opted for the smoother but toothless theory of money and credit,

120
00:11:24.160 --> 00:11:28.280
failing to honour the fact that even in the original German version the expression was

121
00:11:28.280 --> 00:11:30.120
unusual.

122
00:11:30.120 --> 00:11:34.880
Mises was hostile to innovations in language that were not justified by the analyses of

123
00:11:34.880 --> 00:11:39.960
hitherto neglected phenomena, but the difference between money certificates on one hand and

124
00:11:39.960 --> 00:11:45.160
Umlaufsmittel, on the other hand, was such a neglected phenomenon to the point that established

125
00:11:45.160 --> 00:11:49.920
scientific terminology even lacked the means for expressing this difference. Mises thus

126
00:11:49.920 --> 00:11:54.800
introduced the expression Umlaufsmittel for this purpose and even used it in the title

127
00:11:54.800 --> 00:11:57.720
of his book to highlight its importance.

128
00:11:57.720 --> 00:12:04.240
Third, Mises refuted the idea that money prices are a measure of value. Here he relied on

129
00:12:04.240 --> 00:12:09.400
the work of the Czech economist Franz Kuhl, who some years earlier in his Zur Lehrer von

130
00:12:09.400 --> 00:12:14.200
von der Bedürfnissen on the theory of needs, had clarified several fundamental issues of

131
00:12:14.200 --> 00:12:19.140
the new Mengerian price theory. Kuhl was a champion of the psychological theory of marginal

132
00:12:19.140 --> 00:12:24.280
utility, Gosson, Jevons, Weiser, but several of his contributions to the theory of value

133
00:12:24.280 --> 00:12:31.040
and utility proved useful despite that fact. Kuhl refuted Boehm-Bawerk and Weiser's quantitative

134
00:12:31.040 --> 00:12:36.520
claims about marginal utility, which refer to homogenous units of a supply of goods,

135
00:12:36.520 --> 00:12:42.120
where each individual unit provides the same utility. According to Boehm-Bawerk, the utilities

136
00:12:42.120 --> 00:12:47.480
derived from the use of several units could be added to the point that the utility, say,

137
00:12:47.480 --> 00:12:52.840
of consuming fifteen plums equals exactly fifteen times the utility of consuming one

138
00:12:52.840 --> 00:12:58.760
plum. But Kuhl objected that this contradicted the basic idea of the law of diminishing marginal

139
00:12:58.760 --> 00:13:04.320
utility, namely, that the satisfaction derived from the consumption of each additional unit

140
00:13:04.320 --> 00:13:10.540
of the Good is lower than the utility derived from the consumption of the previous unit.

141
00:13:10.540 --> 00:13:15.180
Boehm-Bawerk had made this claim in a long essay on the Theory of Value, his first statement

142
00:13:15.180 --> 00:13:20.700
on value theory. It was this passage that met with criticism in Kuhl and Mises. Mises

143
00:13:20.700 --> 00:13:25.620
said many years later that, in distinct contrast to corresponding passages in Boehm-Bawerk's

144
00:13:25.620 --> 00:13:30.620
Positive Theory of Capital, the statement in Grundzüge was incompatible with the whole

145
00:13:30.620 --> 00:13:35.660
Tenor of Boehm's Theory. This letter raises a certain problem because Mises here said

146
00:13:35.660 --> 00:13:40.240
that Boehm-Bawerk eventually realized his error and expressed the correct formulation

147
00:13:40.240 --> 00:13:45.060
in a later edition of Capital and Interest. But in the second edition of Theorie des Geldes

148
00:13:45.060 --> 00:13:50.520
und der Umlaufmittel, Mises said Boehm-Bawerk had not said anything new on this matter.

149
00:13:50.520 --> 00:13:55.800
Kuhl also made a devastating case against interpersonal comparisons of satisfactions.

150
00:13:55.800 --> 00:14:00.040
The benefits derived from the consumption of two different goods could be compared only

151
00:14:00.040 --> 00:14:13.080
from the fact that an individual chooses to enjoy satisfaction A rather than B, one can

152
00:14:13.080 --> 00:14:18.000
infer that A yields more satisfaction to this person than B does, because at the time of

153
00:14:18.000 --> 00:14:23.480
the choice both A and B were present and competed directly with one another. Hence the observed

154
00:14:23.480 --> 00:14:28.760
choices of individuals provide evidence about the relative size of enjoyment. But this is

155
00:14:28.760 --> 00:14:33.500
is the only type of evidence available, because it is fundamentally impossible to perceive

156
00:14:33.500 --> 00:14:36.760
the comparative satisfactions of other people.

157
00:14:36.760 --> 00:14:43.800
Cool, call subjective utilities by the unusual name of Eugenzen. In an analogous case, Wilfredo

158
00:14:43.800 --> 00:14:50.000
Pareto called subjective utility Ophilimite. One can only have direct knowledge of the utilities

159
00:14:50.000 --> 00:14:54.780
that the satisfaction of various needs has for oneself. Other people's utilities have

160
00:14:54.780 --> 00:14:59.300
have to be inferred indirectly from their actual decision-making.

161
00:14:59.300 --> 00:15:04.420
It follows that there is no such thing as value calculation or even value measurement.

162
00:15:04.420 --> 00:15:08.900
Even money does not have a constant value and is therefore unable to provide the basis

163
00:15:08.900 --> 00:15:10.980
for a value calculus.

164
00:15:10.980 --> 00:15:16.600
Moreover, since money prices are the result of individual valuation processes, they are

165
00:15:16.600 --> 00:15:21.980
individual historical events always determined by the particular circumstances in which they

166
00:15:21.980 --> 00:15:23.340
emerge.

167
00:15:23.340 --> 00:15:29.140
Contrary to what Balrassi's system of equations suggest, there are no constant relationships

168
00:15:29.140 --> 00:15:32.980
between money prices of different times and places.

169
00:15:32.980 --> 00:15:37.180
It was therefore out of the question to follow Erwin Fischer in his attempt to establish

170
00:15:37.180 --> 00:15:41.940
a quantitative law such as in physics of the relationship between the quantity of money

171
00:15:41.940 --> 00:15:44.700
and money prices, the price level.

172
00:15:44.700 --> 00:15:49.540
Mises placed great emphasis on this crucial implication of value theory for the methodology

173
00:15:49.540 --> 00:15:51.720
of economics.

174
00:15:51.720 --> 00:15:55.920
Because there are no constant relations in the field of human action, the equations of

175
00:15:55.920 --> 00:16:01.560
mathematical catallactics cannot be made to serve practical problems in the same way the

176
00:16:01.560 --> 00:16:06.480
equations of mechanics solve problems through the use of data and constants that have been

177
00:16:06.480 --> 00:16:12.000
ascertained empirically. In my book on money, I did not say one controversial word against

178
00:16:12.000 --> 00:16:16.980
the mathematical school. I presented the correct doctrine and refrained from attacking the

179
00:16:16.980 --> 00:16:29.260
I refuted mathematical economics by proving that the quantity of money and the purchasing

180
00:16:29.260 --> 00:16:34.700
power of the monetary unit are not inversely proportional. This proof demonstrated that

181
00:16:34.700 --> 00:16:39.580
the only constant relationship which was believed to exist between economic quantities is a

182
00:16:39.580 --> 00:16:46.940
variable determined by the data of each individual case. It thus exploded the equations of exchange

183
00:16:46.940 --> 00:16:55.640
Mises' criticism of the mechanical version of the quantity theory had an impact well

184
00:16:55.640 --> 00:17:01.100
beyond the theory of money, for this version of the quantity theory represented a larger

185
00:17:01.100 --> 00:17:08.020
agenda, a quantitative view of social science in general. Mises showed that there are no

186
00:17:08.020 --> 00:17:14.180
quantitative constants linking human actions to repercussions in the social realm. An increased

187
00:17:14.180 --> 00:17:18.780
Demand for Apples would in all cases lead to higher Apple prices than would otherwise

188
00:17:18.780 --> 00:17:24.340
have existed, but there is no law that tells us that a 10% increase of the Apple demand

189
00:17:24.340 --> 00:17:31.460
will cause, say, an 8% or a 14% increase of Apple prices. Actual quantities will always

190
00:17:31.460 --> 00:17:37.020
depend on the particular circumstances of each individual case.

191
00:17:37.020 --> 00:17:42.620
Fourth and finally, Mises dealt more explicitly than Menger with the claims of the monetary

192
00:17:42.620 --> 00:17:48.720
by Statists or Charterists. Whereas Menger had argued that money could emerge spontaneously

193
00:17:48.720 --> 00:17:54.240
on the market, the statist scholars asserted that money was a creation of the state. Debate

194
00:17:54.240 --> 00:17:58.880
on this topic can be traced back to the times of Plato and Aristotle. It ran all through

195
00:17:58.880 --> 00:18:03.480
the Middle Ages and was only settled for a short while by classical economists who had

196
00:18:03.480 --> 00:18:10.200
argued along Nigerian lines. But at the time of the 19th century the statist struck back.

197
00:18:10.200 --> 00:18:15.720
Cernucci in France, Neupalper in Austria and Lexis in Germany reasserted the view that

198
00:18:15.720 --> 00:18:19.920
money is what the state declares to be such.

199
00:18:19.920 --> 00:18:24.400
But the most famous champion of this view was Georg Knapp, the same Knapp who had pioneered

200
00:18:24.400 --> 00:18:29.060
the studies on Germanic rule as a liberating force for East European peasants.

201
00:18:29.060 --> 00:18:33.560
In his Stadtliche Theorie des Geldes, State Theory of Money, Knapp argued that money

202
00:18:33.560 --> 00:18:38.180
was a creation of the legal order, and that the theory of money therefore had to be studied

203
00:18:38.180 --> 00:18:43.220
as a branch of legal history. According to Knupp, money came into being through government

204
00:18:43.220 --> 00:18:48.520
proclamation, the state says that this or that is money, and it suddenly becomes a token

205
00:18:48.520 --> 00:18:53.220
for some corresponding amount of real goods. The essence of money was therefore to be a

206
00:18:53.220 --> 00:18:58.920
government-proclaimed token, charter, in Latin, that could be used as a legally valid means

207
00:18:58.920 --> 00:19:04.900
of payment. Knupp thought he had to create an entirely new vocabulary to adequately deal

208
00:19:04.900 --> 00:19:15.300
Knupp's views were not well received at first, in particular Andreas Voigt, one of the leaders

209
00:19:15.300 --> 00:19:20.940
of the small but growing cadre of anti-Schmoller economists, gave Knupp an unfavourable review,

210
00:19:20.940 --> 00:19:26.020
but did find early support from prominent bankers, and eventually won many converts

211
00:19:26.020 --> 00:19:31.180
to the State Theory of Money. His chartalist theory did, after all, perfectly complement

212
00:19:31.180 --> 00:19:36.180
The Statist Convictions Already Prevalent Among German Economic Professors, as Mises

213
00:19:36.180 --> 00:19:41.340
later observed. The Statist School of German Economics has probably reached its high point

214
00:19:41.340 --> 00:19:46.500
in Georg Friedrich Knapp's State Theory of Money. It is not per se remarkable that

215
00:19:46.500 --> 00:19:51.540
this theory has been formulated, after all its tenets have been championed for centuries

216
00:19:51.540 --> 00:19:57.700
in the writings of canonists, jurists, romantics and certain socialists. What was remarkable

217
00:19:57.700 --> 00:20:02.220
Typical was rather the success of the book. Mises referred to Anderson's verdict that

218
00:20:02.220 --> 00:20:08.180
Knapp's book has had wide influence on German thinking on money. It is typical of the tendency

219
00:20:08.180 --> 00:20:12.640
in German thought to make the state the centre of everything.

220
00:20:12.640 --> 00:20:17.260
He also quoted Carl Menger's exasperated comment on the success of the state theory

221
00:20:17.260 --> 00:20:18.260
of money.

222
00:20:18.260 --> 00:20:22.600
It is the logical development of Prussian police science. What are we to think of a

223
00:20:22.600 --> 00:20:27.420
nation whose elite, after two hundred years of economics, admire such nonsense which is

224
00:20:27.420 --> 00:20:30.340
is not even new as Highest Revelation.

225
00:20:30.340 --> 00:20:34.700
Knopp's fundamental error was in failing to see that government orders can only be

226
00:20:34.700 --> 00:20:40.220
relevant in the context of presently existing contracts involving deferred payments. Exposed

227
00:20:40.220 --> 00:20:45.020
governments can determine what should be counted as money and hence what should be counted

228
00:20:45.020 --> 00:20:49.780
as payment, but it does not have the power to impose on market participants the future

229
00:20:49.780 --> 00:20:55.960
use of any means of exchange. Business usage alone can transform a commodity into a common

230
00:20:55.960 --> 00:21:09.080
Integration of Value Theory and The Theory of Money

231
00:21:09.080 --> 00:21:13.160
Although the new, marginalist approach to the theory of value and prices had thoroughly

232
00:21:13.160 --> 00:21:18.080
transformed economic science, the theory of money had been left virtually untouched.

233
00:21:18.080 --> 00:21:24.000
Here, Menger, Jevons and Walras championed the same view as the classical economists,

234
00:21:24.000 --> 00:21:28.560
Stressing that money is merely instrumental in acquiring real goods, goods which have

235
00:21:28.560 --> 00:21:34.220
some beneficial impact on human life without itself being such a good.

236
00:21:34.220 --> 00:21:39.000
From an individual perspective, they argued the ultimate purpose of market exchanges is

237
00:21:39.000 --> 00:21:44.000
never to exchange real goods against money, but to exchange real goods against other real

238
00:21:44.000 --> 00:21:45.280
goods.

239
00:21:45.280 --> 00:21:49.660
And taking the perspective of the national economy, they emphasized that the quantity

240
00:21:49.660 --> 00:21:54.940
The Theory of Money did not affect the overall available quantity of goods. From these insights

241
00:21:54.940 --> 00:22:00.140
they concluded that money was irrelevant to the wealth of the nation, and that political

242
00:22:00.140 --> 00:22:04.380
economy which dealt with the economic interests of the whole nation could afford to ignore

243
00:22:04.380 --> 00:22:09.360
money when analysing the nation's welfare. This particular standpoint for evaluating

244
00:22:09.360 --> 00:22:14.860
social problems is also reflected in the standard German names for the disciplines of economics

245
00:22:14.860 --> 00:22:22.020
Economics, nationale économie, national economics, and volkswirtschaftslehre, Theory of the Economy

246
00:22:22.020 --> 00:22:28.620
of the Nation. The most famous metaphor for this view was the veil of money, the notion

247
00:22:28.620 --> 00:22:34.740
that money is merely an intermediate layer between the human person and the real economy.

248
00:22:34.740 --> 00:22:40.220
John Stuart Mill had given clear expression to this perspective. Things which by barter

249
00:22:40.220 --> 00:22:45.860
The word exchange for one another will, if sold for money, sell for an equal amount of

250
00:22:45.860 --> 00:22:51.460
it, and so will exchange for one another still, though the process of exchanging them will

251
00:22:51.460 --> 00:22:56.500
consist of two operations instead of only one. The relations of commodities to one another

252
00:22:56.500 --> 00:23:03.460
remain unaltered by money. The only new relation introduced is their relation to money itself.

253
00:23:03.460 --> 00:23:09.020
How much or how little money they will exchange for, in other words, how the exchange value

254
00:23:09.020 --> 00:23:13.940
The Theory of Money itself is determined. Money, according to Mill, did not influence

255
00:23:13.940 --> 00:23:19.780
the wealth of nations whatsoever, it just reflected or corresponded to the underlying

256
00:23:19.780 --> 00:23:26.620
non-monetary reality. Menger, Jevons and Walras also endorsed this view, and consequently

257
00:23:26.620 --> 00:23:32.420
they accorded all their attention to the supposedly real factors of the economy, to the neglect

258
00:23:32.420 --> 00:23:37.700
of the monetary theory. Neither champions nor opponents of the new economic theory failed

259
00:23:37.700 --> 00:23:44.100
The Swedish economist Knut Wichsel observed that the new discoveries in value theory had

260
00:23:44.100 --> 00:23:49.780
not been applied to money, and the brilliant German economist Karl Helfrich even thought

261
00:23:49.780 --> 00:23:54.020
the new marginalist approach could not be applied to money.

262
00:23:54.020 --> 00:23:59.060
In his book Das Geld, the future director of Deutsche Bank and German Minister of Finance

263
00:23:59.060 --> 00:24:04.260
argued that in the marginal utility approach, which in his understanding explained the market

264
00:24:04.260 --> 00:24:08.660
market prices of goods as a consequence of the psychological utility of the various services

265
00:24:08.660 --> 00:24:14.460
of these goods, the price determining utility of a good depended exclusively on the available

266
00:24:14.460 --> 00:24:16.700
quantity of the good.

267
00:24:16.700 --> 00:24:21.860
But in the case of money, this exclusive dependency could never be given. While the services derived

268
00:24:21.860 --> 00:24:26.400
from any other good were independent of its market price, the services derived from the

269
00:24:26.400 --> 00:24:31.120
use of money depended directly on its market prices, that is, its purchasing power. In

270
00:24:31.120 --> 00:24:35.500
In other words, the marginal utility of money depends not only on its quantity but also

271
00:24:35.500 --> 00:24:40.520
on its market prices. Therefore, any attempt to explain the value of money on the basis

272
00:24:40.520 --> 00:24:46.160
of the marginalist approach involved an inescapable circle. The market price for money could not

273
00:24:46.160 --> 00:24:52.360
be inferred from its marginal utility, because its utility itself depended on its market

274
00:24:52.360 --> 00:24:59.640
price. It is noteworthy that in his exposition Helferich conflates physical and value terms.

275
00:24:59.640 --> 00:25:05.000
Wiese's Theory of Money The first reaction from the Austrian camp came

276
00:25:05.000 --> 00:25:09.880
from Friedrich von Wiese when he chose the value of money as the topic for his inaugural

277
00:25:09.880 --> 00:25:16.960
lecture at the University of Vienna on October 26th, 1903. The lecture was published under

278
00:25:16.960 --> 00:25:22.220
the title Der Geld wird und seine geschichtlichen Veränderungen, The Value of Money and Its

279
00:25:22.220 --> 00:25:27.880
Historical Changes. It was the first statement of Wiese's ideas on how the theory of money

280
00:25:27.880 --> 00:25:34.320
related to the Austrian Theory of Value. Monetary theory remained at the centre of Mises economic

281
00:25:34.320 --> 00:25:41.600
research until his death in 1926. He wrote two more lengthy papers for the 1909 Vienna

282
00:25:41.600 --> 00:25:47.020
meeting of the Rhein für Sozialpolitik and also the lengthy entry on money for the post-war

283
00:25:47.020 --> 00:25:53.580
edition of the standard German social science dictionary, the Handwerter Buch der Staatswissenschaften.

284
00:25:53.580 --> 00:25:57.840
He worked on this last piece until he was virtually on his deathbed.

285
00:25:57.840 --> 00:26:02.340
These publications, which presented the first attempt to integrate marginal value theory

286
00:26:02.340 --> 00:26:08.200
and monetary theory, reserved for Wieser a place of great authority among German-language

287
00:26:08.200 --> 00:26:13.260
monetary economists. His impact on German monetary thought was reinforced, of course,

288
00:26:13.260 --> 00:26:17.900
by his authority as one of the founding fathers of the Austrian School, but the main reason

289
00:26:17.900 --> 00:26:23.020
he rose to pre-eminence in monetary economics was that his ideas on money fit well with

290
00:26:23.020 --> 00:26:27.980
the established notions of the great majority of his colleagues. Far better than the theory

291
00:26:27.980 --> 00:26:34.020
of money that Mises was about to present in 1912. Mises was a representative of the banking

292
00:26:34.020 --> 00:26:39.340
school, whose ideas reigned supreme in turn of the century Germany. Mises developed the

293
00:26:39.340 --> 00:26:43.460
theory of the currency school. Mises later explained that the tenets of the currency school

294
00:26:43.460 --> 00:26:47.780
were unacceptable to the Cattela socialist mindset, because it seemed to leave no scope

295
00:26:47.780 --> 00:26:52.980
for government intervention. The German professors favoured the banking school. The victim was

296
00:26:52.980 --> 00:26:58.040
The history of the historical school practically brought excommunication of the currency school.

297
00:26:58.040 --> 00:27:06.040
Karl Marx, Adolf Wagner, Helferich, Hilferding, Havnstein and Ben Dixon held to the doctrines

298
00:27:06.040 --> 00:27:09.860
of the banking school. Even after the First World War, the mainstream

299
00:27:09.860 --> 00:27:14.340
opinion among German monetary economists was that the banking school had won the debate

300
00:27:14.340 --> 00:27:19.540
with the currency school on virtually all substantive issues. The fact that John Stuart

301
00:27:19.540 --> 00:27:24.620
Mill, arch-advocate of the Vale of Money theory, endorsed the banking theory with only slight

302
00:27:24.620 --> 00:27:30.700
modifications, played a crucial role in its sweeping success. Mill's view was probably

303
00:27:30.700 --> 00:27:38.940
strongly influenced by the crisis that erupted in 1846, despite the Bank Charter Act of 1844,

304
00:27:38.940 --> 00:27:43.820
which sought to put the principles of the currency school into legislation.

305
00:27:43.820 --> 00:27:48.180
In Geldsinn und Güterbeise, Knut Wichser had already delivered a scathing critique of

306
00:27:48.180 --> 00:27:53.900
of the Main Tenants of the Banking School. His book was pointedly ignored at the time,

307
00:27:53.900 --> 00:27:58.720
as was Mises's Theory of Money and Credit, only after the First World War did both books

308
00:27:58.720 --> 00:28:01.500
enjoy a renaissance.

309
00:28:01.500 --> 00:28:07.480
All essential elements of Wies' monetary thought were present in his initial 1903 lecture.

310
00:28:07.480 --> 00:28:11.820
According to his fundamental assumption, there was no such thing as a demand for money per

311
00:28:11.820 --> 00:28:18.780
To the extent that a good was used in indirect exchanges, it was not demanded as such, but

312
00:28:18.780 --> 00:28:25.380
only as an intermediary to obtain a real good. Money did not have value per se, but only

313
00:28:25.380 --> 00:28:30.740
represented the value of those other goods that could be exchanged for it. Weiser did

314
00:28:30.740 --> 00:28:37.020
not deny that historical media of exchange, such as gold and silver, were commodity monies,

315
00:28:37.020 --> 00:28:41.620
but in his view they were commodities only insofar as they were demanded for non-monetary

316
00:28:41.620 --> 00:28:45.460
purposes Modern media of exchange, such as paper money

317
00:28:45.460 --> 00:28:50.460
and money surrogates, legal claims on money that can be used in place of corresponding

318
00:28:50.460 --> 00:28:56.220
amounts of real money, which were used exclusively as exchange intermediaries, were not commodities

319
00:28:56.220 --> 00:29:01.500
at all. There was no demand for the paper notes themselves, only for the commodities

320
00:29:01.500 --> 00:29:07.460
for which they were exchanged. The value of the former was entirely derived from the demand

321
00:29:07.460 --> 00:29:14.160
for the latter. But if modern money is not a commodity, what is it? And how can it be

322
00:29:14.160 --> 00:29:20.600
used in market exchanges if it cannot itself be the object of an exchange? Wieser insisted

323
00:29:20.600 --> 00:29:25.600
that while money does enable the transfer of commodities from one owner to another, it

324
00:29:25.600 --> 00:29:30.840
more importantly measures the value of the commodities it helps to transfer.

325
00:29:30.840 --> 00:29:35.800
This was also Knut Wixels in Geld, Sinns und Güterpeise, where he elaborates on the distinction

326
00:29:35.800 --> 00:29:41.480
between Relative Prices and Money Prices. Vixel's book had virtually no impact on

327
00:29:41.480 --> 00:29:46.440
the German scene at the time it first appeared, but his monetary views seemed to have influenced

328
00:29:46.440 --> 00:29:51.080
his countryman Gustav Kassel, and through Kassel they eventually reached a broad academic

329
00:29:51.080 --> 00:29:55.520
audience after the First World War when Kassel's textbook became the main work of reference

330
00:29:55.520 --> 00:30:01.320
on theoretical economics at German universities. In short, money is essentially a standard

331
00:30:01.320 --> 00:30:07.080
of Value, a measuring rod, or numéraire, and it is used in market exchanges to measure

332
00:30:07.080 --> 00:30:12.560
the value of the commodities against which it is exchanged. For Wiesel, this measuring

333
00:30:12.560 --> 00:30:17.840
process is essentially a ranking of the exchanged commodity against the total array of the other

334
00:30:17.840 --> 00:30:23.380
commodities from which money derives its value. For similar reasons, Wiesel believed that

335
00:30:23.380 --> 00:30:28.600
a cashless payment system or a pure credit economy was possible. It is modern money's

336
00:30:28.600 --> 00:30:34.680
elasticity according to Wieser that makes it such an ideal standard of value.

337
00:30:34.680 --> 00:30:40.000
Praising Thomas Tuck, the great champion of the banking school, Wieser argued that increases

338
00:30:40.000 --> 00:30:45.400
in the quantity of commodities induce a corresponding rise in the quantity of money surrogates and

339
00:30:45.400 --> 00:30:50.480
of the so-called velocity of money. These increases do not exercise an independent influence

340
00:30:50.480 --> 00:30:56.440
on money prices. Rather, their elasticity ensures that monetary equilibrium is automatically

341
00:30:56.440 --> 00:31:00.640
Preserved at the Existing Purchasing Power of Money.

342
00:31:00.640 --> 00:31:05.440
What about Helferich's critique? Is it not circular to assert that money measures the

343
00:31:05.440 --> 00:31:10.040
value of commodities if its own value is entirely derived from commodities?

344
00:31:10.040 --> 00:31:15.760
Wieser, who did not bother to mention Helferich's book, probably thought that he had disposed

345
00:31:15.760 --> 00:31:20.960
of the circularity problem by stressing that money is not a commodity. There is no circularity

346
00:31:20.960 --> 00:31:25.840
because money is a mere placeholder for those other goods that can be bought with its help.

347
00:31:25.840 --> 00:31:30.520
The goods measure themselves, so to speak, through money. Of course, market prices are

348
00:31:30.520 --> 00:31:35.480
not necessarily proportional to values, but as he had already argued in Natural Value

349
00:31:35.480 --> 00:31:40.840
1889, this problem vanishes to the extent that the national economy approaches the ideal

350
00:31:40.840 --> 00:31:44.480
of a perfect communist society.

351
00:31:44.480 --> 00:31:49.080
Wieser also analysed the determination of the value of money from a completely different

352
00:31:49.080 --> 00:31:55.480
angle by introducing the diachronic perspective, how the value of money is based in changes

353
00:31:55.480 --> 00:32:01.780
over time. Again, he did not explicitly mention the Helfrich Kritique, but his diachronic

354
00:32:01.780 --> 00:32:07.480
determination of the value of money implicitly refutes the charge of circular reasoning.

355
00:32:07.480 --> 00:32:12.040
The Helfrich Kritique applies only to attempts at a synchronic determination of the purchasing

356
00:32:12.040 --> 00:32:17.540
power of money. One cannot derive market prices for today's money from today's value of

357
00:32:17.540 --> 00:32:23.540
money, but this criticism does not apply if the value of today's money depends on yesterday's

358
00:32:23.540 --> 00:32:28.380
is Prices, Visa showed that this was in fact the case.

359
00:32:28.380 --> 00:32:34.660
The apparent circularity vanishes, and a pure causal chain appears. Money prices from two

360
00:32:34.660 --> 00:32:41.140
days ago determine the value of money yesterday, which determines money prices today, etc.

361
00:32:41.140 --> 00:32:46.320
Visa argued that the value of money had a historical source in the needs that are satisfied

362
00:32:46.320 --> 00:32:52.580
by those commodities that were first used as money. This original use value of the original

363
00:32:52.580 --> 00:32:57.140
Total Money Commodity was the base from which further changes to the purchasing power of

364
00:32:57.140 --> 00:33:02.780
money occurred. At each point, the past value of money served as a basis to evaluate the

365
00:33:02.780 --> 00:33:08.340
commodities that were now being exchanged. In so far as these exchanges modified already

366
00:33:08.340 --> 00:33:13.780
existing prices, or added new prices to the total array of commodity prices, the value

367
00:33:13.780 --> 00:33:19.300
of money was itself modified, thus changing the basis for future measurements.

368
00:33:19.300 --> 00:33:25.060
Mises stressed that his theory implied that 1. money could come into existence only as

369
00:33:25.060 --> 00:33:31.220
commodity money, but 2. once it had come into existence and a historical basis for future

370
00:33:31.220 --> 00:33:36.740
modifications of its value had been created, it no longer had to remain commodity money.

371
00:33:36.740 --> 00:33:41.160
A pure paper money was therefore possible at some later stage.

372
00:33:41.160 --> 00:33:44.820
Visa placed great emphasis on this point, because it alone seemed to explain recent

373
00:33:44.820 --> 00:33:49.180
events in the development of the Austro-Hungarian monetary system.

374
00:33:49.180 --> 00:33:54.420
Before 1892, Austria-Hungary had officially been on a silver standard, but in order to

375
00:33:54.420 --> 00:34:03.940
finance its wars of 1848-1949, 1859-1860 and 1866, the monarchy had issued great quantities

376
00:34:03.940 --> 00:34:09.060
of paper notes. These notes were irredeemable at the time of issue, but there were hopes

377
00:34:09.060 --> 00:34:14.580
of future redeemability and thus they were used as money. Their circulation was further

378
00:34:44.580 --> 00:34:50.780
fell drastically. Or was it? Mises believed that the event was actually a refutation of

379
00:34:50.780 --> 00:34:56.180
what he called the metalistic theory of money. According to this theory, the value of money

380
00:34:56.180 --> 00:35:02.020
did not come from demand, but from the inherent value of the metal that was used as money.

381
00:35:02.020 --> 00:35:06.820
The champions of metalism could therefore easily explain why paper circulated at a discount

382
00:35:06.820 --> 00:35:11.380
– after all, it was not real money – but they were at a loss to explain how the paper

383
00:35:11.380 --> 00:35:21.080
For 13 years the Austro-Hungarian monetary system seemed to be real-world proof of the

384
00:35:21.080 --> 00:35:26.680
possibility of a pure fiat money, and Wieser's diachronic theory of the value of money delivered

385
00:35:26.680 --> 00:35:32.480
the only available explanation of this phenomenon. But this did not exhaust the explanatory power

386
00:35:32.480 --> 00:35:37.420
of Wieser's approach to monetary analysis. Making use of his measuring rod theory of

387
00:35:37.420 --> 00:35:43.340
of Money, Wieser also gave an original account of the secular rise of money prices. He argued

388
00:35:43.340 --> 00:35:47.780
that this phenomenon resulted from a great transformation observable in all developed

389
00:35:47.780 --> 00:35:53.380
nations, namely the abandonment of barter and the adoption of monetary exchanges. In

390
00:35:53.380 --> 00:35:58.420
short, the purchasing power of money decreased because the monetary economy became even more

391
00:35:58.420 --> 00:36:03.140
widespread. He admitted that the increased production of commodity money was another

392
00:36:03.140 --> 00:36:07.700
Another factor explaining the secular decline of the purchasing power of money. Another

393
00:36:07.700 --> 00:36:12.380
factor was government expenditures, which were shifted forward in the form of taxation

394
00:36:12.380 --> 00:36:17.980
and thus added to prices, implying a lower purchasing power of money.

395
00:36:17.980 --> 00:36:23.020
Visa argued as follows, because more and more commodities were exchanged against money,

396
00:36:23.020 --> 00:36:28.260
the marginal value of these additional commodities constantly decreased, the lower marginal value

397
00:36:28.260 --> 00:36:32.940
who led in turn to a corresponding decrease of the marginal value of money, that is, to

398
00:36:32.940 --> 00:36:37.860
a lower purchasing power of money. Six years later he presented important clarifications

399
00:36:37.860 --> 00:36:43.760
of his theory in Der Geld wird und seine Veränderungen, The Value of Money and Its Changes, a lengthy

400
00:36:43.760 --> 00:36:48.780
paper he wrote for the 1909 Vienna meeting of the Verein. In this paper he made his case

401
00:36:48.780 --> 00:36:53.760
for the full integration of monetary theory and general value theory, spelling out how

402
00:36:53.760 --> 00:36:59.640
How This Theory of the Value of Money Related to the Subjectivist Theory of Value

403
00:36:59.640 --> 00:37:03.840
The central argument of what later came to be called the income theory of the value of

404
00:37:03.840 --> 00:37:09.240
money runs as follows. As an individual's income increases, the value of the marginal

405
00:37:09.240 --> 00:37:15.720
money unit decreases. Consider an individual agent who, in a given period, spends his entire

406
00:37:15.720 --> 00:37:21.720
disposable monetary income at given prices on consumer goods. Visa argued that the subjective

407
00:37:21.720 --> 00:37:26.160
Subjective marginal value of money was derived from, equal to, the utility of the least

408
00:37:26.160 --> 00:37:30.640
important consumer's good that he could buy with this income. Equipped with the knowledge

409
00:37:30.640 --> 00:37:35.240
of his subjective marginal value of money, which henceforth serves him as a personal

410
00:37:35.240 --> 00:37:41.560
measuring rod, the agent then sets out to buy and sell goods on the market, always measuring

411
00:37:41.560 --> 00:37:46.480
them in comparison to the utility of the least important consumer's good he can afford to

412
00:37:46.480 --> 00:37:47.480
to Buy.

413
00:37:47.480 --> 00:37:52.800
Wieser stressed that the value of money was determined in monetary exchanges of consumers'

414
00:37:52.800 --> 00:37:58.840
goods only. This precluded taking into consideration, for example, idle cash holdings not used in

415
00:37:58.840 --> 00:38:04.420
market exchanges or monetary exchanges on the market for producers' goods. The values

416
00:38:04.420 --> 00:38:10.600
of producers' goods were in fact merely derived from the values of consumers' goods.

417
00:38:10.600 --> 00:38:16.240
In his 1903 lecture Wieser had emphasised that because the value of money is merely derivative,

418
00:38:16.240 --> 00:38:21.560
It is not really money that is exchanged on the market. Real goods are exchanged against

419
00:38:21.560 --> 00:38:22.840
one another.

420
00:38:22.840 --> 00:38:27.180
Visa here argued that money was an object of exchange only in the case it was bought

421
00:38:27.180 --> 00:38:34.380
and sold as monetary capital. Money subdivides the original exchange into two separate parts.

422
00:38:34.380 --> 00:38:40.560
First commodity A is exchanged for a sum of money. Then this sum is exchanged against

423
00:38:40.560 --> 00:38:46.820
and some other commodity B. In 1909, Wieser further clarified this view, stating that

424
00:38:46.820 --> 00:38:53.160
demand and supply on the market were manifest only in A and B, whereas money was merely

425
00:38:53.160 --> 00:38:59.880
interposed. According to Wieser, this was the only difference between direct and indirect

426
00:38:59.880 --> 00:39:05.720
exchange. The benefit of this interposition is that money makes a great social bookkeeping

427
00:39:05.720 --> 00:39:06.720
Banking.

428
00:39:06.720 --> 00:39:12.320
Visa uses language borrowed from the warehouse business to describe economic processes within

429
00:39:12.320 --> 00:39:14.320
the national economy.

430
00:39:14.320 --> 00:39:20.240
In his metaphor, each quantity of money functions as a deposit receipt that can be easily transferred

431
00:39:20.240 --> 00:39:24.980
from one member of the community to another, thereby giving them both access to a common

432
00:39:24.980 --> 00:39:29.000
pool where each deposits the fruit of his labour.

433
00:39:29.000 --> 00:39:33.540
Between all those who throw commodities into the national economic process in order to

434
00:39:33.540 --> 00:39:55.640
Mises later called this characterization of the nature of money assignment theory, unweisungstheorie,

435
00:39:55.640 --> 00:40:01.100
because its essence is to conceive of money as a token. In the English edition of Mises's

436
00:40:01.100 --> 00:40:13.660
The term claim involves an underlying legalistic interpretation of what the assignment theorists

437
00:40:13.660 --> 00:40:18.900
hold the nature of money to be. But compared to a legal interpretation of money as a claim,

438
00:40:18.900 --> 00:40:24.700
the flaws of the assignment theory look minor. It is obvious that market exchanges are categorically

439
00:40:24.700 --> 00:40:30.540
different from the redemption of claims. But assignment theorists never subscribe to such

440
00:40:30.540 --> 00:40:44.480
The Theory goes back to the 18th century to John Law, the greatest champion of inflation

441
00:40:44.480 --> 00:40:49.260
before Keynes. Blurring the difference between money and credit, Law wrote,

442
00:40:49.260 --> 00:40:55.340
Domestic trade depends on the money. A greater quantity employs more people than a lesser

443
00:40:55.340 --> 00:41:18.620
While Mises rejected this view, he accepted as fundamental the distinction that law had

444
00:41:18.620 --> 00:41:23.620
made between the monetary and non-monetary demand for money.

445
00:41:23.620 --> 00:41:29.780
It is reasonable to think silver was bartered as it was valued for its uses as a metal,

446
00:41:29.780 --> 00:41:35.540
and was given as money according to its value in barter. The additional use of money silver

447
00:41:35.540 --> 00:41:41.540
was applied to would add to its value because as money it remedied the disadvantages and

448
00:41:41.540 --> 00:41:48.140
inconveniences of barter, and consequently the demand for silver increasing, it received

449
00:41:48.140 --> 00:41:53.480
an additional value equal to the greater demand its use as money occasioned.

450
00:41:53.480 --> 00:41:57.400
In the mid-19th century, the assignment theory came to be fully developed in the writings

451
00:41:57.400 --> 00:42:01.960
of the champions of the banking school. See in particular Henry D. Macleod's Theory of

452
00:42:01.960 --> 00:42:06.780
Practice of Banking. In the first chapter, the author characterises money as an evidence

453
00:42:06.780 --> 00:42:12.240
of debt being made transferable. Again, although Mises rejected this option, he learned an

454
00:42:12.240 --> 00:42:17.540
important lesson from Macleod, namely that bank deposits are substitutes for money in

455
00:42:17.540 --> 00:42:23.460
essentially the same way as banknotes. However, while Macleod inferred that there was no point

456
00:42:23.460 --> 00:42:33.460
Mises concluded that deposit creation had to be limited, just as note issues had been limited through Peel's Bank Charter Act.

457
00:42:33.460 --> 00:42:44.460
From there, it made its way into the Germanys. Early German proponents of the Anweisungstheorie were Otto Michaelis and Adolf Wagner.

458
00:42:44.460 --> 00:43:01.460
The latter wrote, The idea of money is the one of a transferable IOU for the services that the money owner has provided to civil society. It empowers this money owner to withdraw the value equivalent of his services in terms of goods he desires from any owner of the latter.

459
00:43:01.460 --> 00:43:10.460
In the age of the historical school, which despised economic theorizing, Wagner's writings on money became the primary source of information on these topics.

460
00:43:10.460 --> 00:43:17.460
He converted the next few generations of German language economists to the principles of the

461
00:43:17.460 --> 00:43:19.140
banking school.

462
00:43:19.140 --> 00:43:23.860
In Austria his ideas were developed by Wieser, Schumpeter and Hilferding. The very first

463
00:43:23.860 --> 00:43:29.360
German language economist who contested this new orthodoxy was Mises. He sought to vindicate

464
00:43:29.360 --> 00:43:34.500
the principles of the currency school, which he blended with Menger's analysis of money.

465
00:43:34.500 --> 00:43:38.620
At the heart of his theory is the insight that money is an economic good in its own

466
00:43:38.620 --> 00:43:43.680
and Right, not just a representation of other goods. Nothing precise is known about how

467
00:43:43.680 --> 00:43:49.420
Mises came to hold these views, but Menger's influence was certainly compounded by Boehm-Bawerk's

468
00:43:49.420 --> 00:43:55.020
analogous perspectives on the subject. He had emphasised the crucial points in his university

469
00:43:55.020 --> 00:44:01.420
lectures. Money is by its nature a good like any other good. It is merely in greater demand

470
00:44:01.420 --> 00:44:07.340
and can circulate more widely than all other commodities. Money is no symbol or pledge.

471
00:44:07.340 --> 00:44:14.100
It is not the sign of a good, but bears its value in itself. It is itself really a good.

472
00:44:14.100 --> 00:44:19.180
This from his Innsbruck lectures in the early 1880s. One must assume that Boehm-Bawerk stressed

473
00:44:19.180 --> 00:44:24.040
the same point in his lectures in Vienna. It is not surprising that Boehm-Bawerk and

474
00:44:24.040 --> 00:44:29.700
Mises came to radically different policy conclusions from Wieser and Schumpeter. Whereas Mises

475
00:44:29.700 --> 00:44:34.740
held that the stock of money was ultimately irrelevant, Wieser stressed that money's

476
00:44:34.740 --> 00:44:39.500
Visa's function as a measuring rod must not be interfered with. Its value should be as

477
00:44:39.500 --> 00:44:46.020
stable as possible and all destabilizing influences should be eliminated. Visa suggested that

478
00:44:46.020 --> 00:44:52.040
one could optimize the national currency by abolishing commodity money and putting a pure

479
00:44:52.040 --> 00:44:58.400
paper money in its place. In fact, paper would be more stable because its value is not subject

480
00:44:58.400 --> 00:45:04.400
to the influence of the non-monetary demand for the monetary commodity. Visa also clarified

481
00:45:04.400 --> 00:45:09.240
His theory that the secular increase of money prices was a consequence of the substitution

482
00:45:09.240 --> 00:45:14.320
of monetary exchanges for barter. He argued that the development of the monetary economy

483
00:45:14.320 --> 00:45:20.000
brings ever more factors of production within the network of monetary exchanges. The money

484
00:45:20.000 --> 00:45:24.880
prices that have to be paid for these factors, which before were paid in natura, represent

485
00:45:24.880 --> 00:45:30.480
an increase of the monetary costs of production, and these increased costs have to be added

486
00:45:30.480 --> 00:45:36.280
to the Selling Prices. It is obvious that in this process, aggregate monetary income

487
00:45:36.280 --> 00:45:43.800
increases, while aggregate real income does not change. Thus, the value of money decreases.

488
00:45:43.800 --> 00:45:46.880
Quad erat demonstrandum.

489
00:45:46.880 --> 00:45:49.200
Mises's Theory of the Value of Money

490
00:45:49.200 --> 00:45:55.680
Visa had not gotten everything wrong. Explaining the present value of money by reference to

491
00:45:55.680 --> 00:45:59.920
to its past value was a crucial breakthrough in monetary theory.

492
00:45:59.920 --> 00:46:06.920
Wieser's work inspired two young Vienna economists, Franz X. Weiss and Ludwig von Mises, to refine

493
00:46:06.920 --> 00:46:12.680
the raw idea and hammer out a new doctrine of the value of money.

494
00:46:12.680 --> 00:46:17.960
The regression theorem, as Mises later called it, would become one of the pillars of his

495
00:46:17.960 --> 00:46:23.280
monetary thought, but first let us consider two related problems of Wieser's version.

496
00:46:23.280 --> 00:46:29.000
First, Mises could not integrate the regression with the pricing process of the market. He

497
00:46:29.000 --> 00:46:34.640
had developed a pure value theory of the purchasing power of money. His general assumption was

498
00:46:34.640 --> 00:46:40.040
that the exchange ratios established between the various goods on the market were only

499
00:46:40.040 --> 00:46:46.000
a different expression of their value ratios. Vixel relied on the same assumption, but Mises

500
00:46:46.000 --> 00:46:51.720
thought this assumption entirely untenable. There was no such correspondence between value

501
00:46:51.720 --> 00:46:58.240
and Price, even in a perfect Viserian communism. Menger and Boehm-Bawerk had convincingly

502
00:46:58.240 --> 00:47:05.360
argued that while market prices did result from individual valuations, they were quantitatively

503
00:47:05.360 --> 00:47:11.920
unrelated to the value from which they emerged. The second fundamental flaw in Mises' argument

504
00:47:11.920 --> 00:47:18.280
was that he did not think of money as a good in its own right. Money was but a token of

505
00:47:18.280 --> 00:47:25.560
underlying real goods, avail or assignment, unvisal, and thus, had no independent impact

506
00:47:25.560 --> 00:47:32.400
on the pricing process. This assumption contradicted one of the main tenets of marginal value theory,

507
00:47:32.400 --> 00:47:37.300
while all other market exchanges result from inverse valuations with each trading partner

508
00:47:37.300 --> 00:47:42.160
preferring the commodity that he bought to the price that he paid, market exchanges in

509
00:47:42.160 --> 00:47:49.100
And money were, in Mises' theory, acts that acknowledged equality of value. Again, Vixir's

510
00:47:49.100 --> 00:47:53.520
monetary thought suffered from the same flaw. By paying a certain amount of money to take

511
00:47:53.520 --> 00:47:58.820
some commodity out of the social warehouse, one acknowledged it to be of equal value to

512
00:47:58.820 --> 00:48:04.520
the good one had sold before, deposited in the social warehouse, to obtain that sum of

513
00:48:04.520 --> 00:48:10.040
money. Mises' great achievement in this theory of money and credit was in liberating

514
00:48:10.040 --> 00:48:17.880
Money is a commodity by its very nature, not just by historical accident.

515
00:48:17.880 --> 00:48:22.720
By realizing this, Mises was in a position to integrate the theory of money into the

516
00:48:22.720 --> 00:48:25.760
general framework of marginal value theory.

517
00:48:25.760 --> 00:48:30.120
His integration would combine the commodity nature of money with Menger's theory of

518
00:48:30.120 --> 00:48:35.540
value and prices, as refined by Boehm-Bawerk and also Mises' insight that the present

519
00:48:35.540 --> 00:48:38.880
value of money required a diachronic explanation.

520
00:48:38.880 --> 00:49:08.880
Mises could even rely on Menger's theory of cash holdings, which already contained, in noose, the insight that money is itself an economic good, and not just representative of other goods, but to combine these elements into one coherent theory, required a radical break with the time-honoured pillars of monetary economics, in particular with the classical tradition of presenting money as a mere veil.

521
00:49:08.880 --> 00:49:14.140
But this was the key to his theory, which is why in an introductory chapter of his book

522
00:49:14.140 --> 00:49:19.440
he engaged in the somewhat tedious exercise of distinguishing various types of money proper

523
00:49:19.440 --> 00:49:25.140
– money in the narrow sense – from money substitutes. It was these substitutes in fact

524
00:49:25.140 --> 00:49:30.340
that were the sort of tokens or placeholders that Mises and the other champions of the

525
00:49:30.340 --> 00:49:35.620
assignment theory tacitly had in mind when they spoke of money. Mises' painstaking

526
00:49:35.620 --> 00:49:41.100
Banking Analysis demonstrated that mainstream theory had unduly generalized the features

527
00:49:41.100 --> 00:49:46.980
of money substitutes to money itself. While it is true that the value of a money substitute

528
00:49:46.980 --> 00:49:53.700
corresponds exactly to the value of the underlying good, for example one ounce of gold, the value

529
00:49:53.700 --> 00:49:59.460
of the gold money itself does not correspond to anything. Rather, it is determined by the

530
00:49:59.460 --> 00:50:06.540
and the same general law of diminishing marginal value that determines the values of all goods.

531
00:50:06.540 --> 00:50:12.380
Mises almost succeeded in dumping the Vale of Money myth. At one place, he still reverted

532
00:50:12.380 --> 00:50:18.260
to this fallacious doctrine. He claimed that the value of a marginal unit of money is equal

533
00:50:18.260 --> 00:50:24.540
to the value of the commodity that the unit is destined to buy. Here is the relevant passage.

534
00:50:24.540 --> 00:50:29.820
The subjective value of money always depends on the subjective value of the other economic

535
00:50:29.820 --> 00:50:36.700
goods that can be obtained in exchange for it. Its subjective value is in fact a derived

536
00:50:36.700 --> 00:50:42.980
concept. If we wish to estimate the significance that a given sum of money has, in view of

537
00:50:42.980 --> 00:50:48.540
the known dependence upon it of a certain satisfaction, we can do this only on the assumption

538
00:50:48.540 --> 00:50:53.820
One that the money possesses a given objective exchange value.

539
00:50:53.820 --> 00:50:59.460
The exchange value of money is the anticipated use value of the things that can be obtained

540
00:50:59.460 --> 00:51:05.560
with it. Whenever money is valued by anybody, it is because he supposes it to have a certain

541
00:51:05.560 --> 00:51:10.540
purchasing power. His error is precisely the anticipated use

542
00:51:10.540 --> 00:51:16.500
value sentence he quotes from Visa. It is irreconcilable with his latest statements

543
00:51:16.500 --> 00:51:21.500
in National Economy and Human Action, where he explains that the subjective value of the

544
00:51:21.500 --> 00:51:27.140
sum of money is the value of holding this quantity in one's cash balance. The same

545
00:51:27.140 --> 00:51:31.980
error seems to be behind his claim that the increase of money substitutes in the previous

546
00:51:31.980 --> 00:51:37.620
20 years or so, up to 1911, had allowed for higher economic growth than would have been

547
00:51:37.620 --> 00:51:43.900
possible with the quantity of gold which grew at a slower pace. Similarly, in his first

548
00:51:43.900 --> 00:51:48.340
Publication on Monetary Problems, he had asserted at the beginning of his exposition

549
00:51:48.340 --> 00:51:53.940
that the media of circulation need to be adjusted to the demand for money, and in the same vein

550
00:51:53.940 --> 00:52:00.180
he talks about conditions for a possible lack of fiduciary media. Such a condition holds

551
00:52:00.180 --> 00:52:04.900
when the quantity of the means of payment lags behind the economic development. This

552
00:52:04.900 --> 00:52:09.980
would certainly lead to credit restrictions and, as a consequence, symptoms of economic

553
00:52:09.980 --> 00:52:15.860
Crises. Discussing a somewhat different issue, Mises later admitted that, at the time he

554
00:52:15.860 --> 00:52:21.400
wrote The Theory of Money and Credit, he was still too much under the influence of Mill.

555
00:52:21.400 --> 00:52:26.200
This prevented him from decisively arguing against Boehm-Bawerk's ideas about money-induced

556
00:52:26.200 --> 00:52:31.500
frictions, but Mill's influence seems to have reached further than that.

557
00:52:31.500 --> 00:52:37.220
By the time he published his treatise, Nationale Economie, 1940, he had removed these errors

558
00:52:37.220 --> 00:52:43.460
But his earlier monograph on the theory of money was still being taken as his final word

559
00:52:43.460 --> 00:52:50.580
on the subject. Don Patinkin, the most influential monetary theorist of the post-1945 era, criticised

560
00:52:50.580 --> 00:52:56.200
Mises by referring precisely to the passage quoted above, in which the old veil-of-money

561
00:52:56.200 --> 00:53:02.180
notion shows through. Patinkin said that these views implied a circular explanation of the

562
00:53:02.180 --> 00:53:17.740
The Value of Money

563
00:53:17.740 --> 00:53:24.980
Money is not neutral. Cantillon effects. The insight that money is a good in its own

564
00:53:24.980 --> 00:53:30.400
right and not just a placeholder for other goods led Mises to place special emphasis

565
00:53:30.400 --> 00:53:35.720
is on the impact of money on the real economy. It was customary to highlight the impact of

566
00:53:35.720 --> 00:53:42.720
inflation and deflation on deferred payments. Inflation would entail higher money prices,

567
00:53:42.720 --> 00:53:47.800
that is, a lower purchasing power of money in the future, which in turn benefited debtors

568
00:53:47.800 --> 00:53:53.520
at the expense of creditors. Inversely, deflation would benefit creditors at the expense of

569
00:53:53.520 --> 00:54:01.200
Debtors. So far so good. Following classical economists such as David Ricardo, Mises stressed

570
00:54:01.200 --> 00:54:06.320
that inflation and deflation of the money supply could not possibly enhance the productive

571
00:54:06.320 --> 00:54:11.480
potential of the nation as a whole, but such changes did have other social consequences,

572
00:54:11.480 --> 00:54:17.360
in particular for the composition of society and the allocation of resources. Although

573
00:54:17.360 --> 00:54:23.120
So inflation and deflation could not make society as a whole better off. They modified

574
00:54:23.120 --> 00:54:29.480
the distribution of resources among the individual members of society, and this necessarily affected

575
00:54:29.480 --> 00:54:34.520
the marginal value of the various uses of these resources. For example, inflation put

576
00:54:34.520 --> 00:54:40.040
more money in the hands of individual A, a debtor, and less money in the hands of individual

577
00:54:40.040 --> 00:54:45.960
B, a creditor, since these two individuals have different subjective values and different

578
00:54:45.960 --> 00:54:50.640
and entrepreneurial visions and talents. They will use the money differently, investing

579
00:54:50.640 --> 00:54:56.320
it at different times and places, paying different wages to different persons at different rates,

580
00:54:56.320 --> 00:55:01.880
etc. These simple considerations illustrate the pervasive impact of changes in the money

581
00:55:01.880 --> 00:55:07.800
supply on the real world, a fact that did not sit well with many of Mises' contemporaries,

582
00:55:07.800 --> 00:55:13.040
imbued as they were with the veil of money doctrine. Boehm-Bawerk, for instance, was

583
00:55:13.040 --> 00:55:17.240
Mises was reluctant to admit the real impact of money because he was used to thinking of

584
00:55:17.240 --> 00:55:23.820
money in aggregate terms, not on the basis of the intra-social distribution and allocation.

585
00:55:23.820 --> 00:55:28.960
He tried to minimise the significance of Mises' findings. He thought that the income effect

586
00:55:28.960 --> 00:55:34.420
creates some occasional frictions, but did not alter the long-term state of the economy

587
00:55:34.420 --> 00:55:40.800
and the society. In his lectures, Boehm-Bawerk had stressed the continual effects, but believed

588
00:55:40.800 --> 00:55:45.220
that they would mainly entail a higher price level, besides they would merely affect the

589
00:55:45.220 --> 00:55:51.100
relationship between debtors and creditors. Mises' analysis of the social consequences

590
00:55:51.100 --> 00:55:56.640
of inflation and deflation was not limited to the consideration of deferred payments.

591
00:55:56.640 --> 00:56:03.560
He also analysed the redistributive impact of inflation and deflation on spot exchanges.

592
00:56:03.560 --> 00:56:08.240
In the case of inflation, for example, he observed that if it affected all members of

593
00:56:08.240 --> 00:56:14.320
of Society at the same time and to the same proportional extent, no redistributive effects

594
00:56:14.320 --> 00:56:20.600
would result, but in the real world this condition never holds true. Inflation first affects

595
00:56:20.600 --> 00:56:25.720
only some members of society, and through their interaction with others, it eventually

596
00:56:25.720 --> 00:56:31.080
affects the rest of society. Let us for instance suppose that a new gold

597
00:56:31.080 --> 00:56:37.700
mine is opened in an isolated state. The supplementary quantity of gold that streams from it into

598
00:56:37.700 --> 00:56:42.500
To commerce goes at first to the owners of the mine, and then by turns to those who have

599
00:56:42.500 --> 00:56:47.500
dealings with them, if we schematically divide the whole community into four groups, the

600
00:56:47.500 --> 00:56:53.340
mine owners, the producers of luxury goods, the remaining producers and the agriculturalists,

601
00:56:53.340 --> 00:56:57.220
the first two groups will be able to enjoy the benefits resulting from the reduction

602
00:56:57.220 --> 00:57:02.420
in the value of money, the former of them to a greater extent than the latter.

603
00:57:02.420 --> 00:57:07.220
But even as soon as we reach the third group, the situation is altered. The profit obtained

604
00:57:07.220 --> 00:57:12.180
and by this group as a result of the increased demands of the first two will already be offset

605
00:57:12.180 --> 00:57:18.260
to some extent by the rise in the prices of luxury goods, which will have experienced

606
00:57:18.260 --> 00:57:24.620
the full effect of the depreciation by the time it begins to affect other goods. Finally,

607
00:57:24.620 --> 00:57:29.940
for the fourth group the whole process will result in nothing but loss. The farmers will

608
00:57:29.940 --> 00:57:34.460
have to pay dearer for all industrial products before they are compensated by the increased

609
00:57:34.460 --> 00:57:39.400
First Prices of Agricultural Products It is true that when at last the prices of

610
00:57:39.400 --> 00:57:44.520
agricultural products do rise, the period of economic hardship for the farmers is over,

611
00:57:44.520 --> 00:57:48.880
but it will no longer be possible for them to secure profits that will compensate them

612
00:57:48.880 --> 00:57:53.120
for the losses they have suffered. That is to say, they will not be able to use their

613
00:57:53.120 --> 00:57:57.960
increased receipts to purchase commodities at prices corresponding to the old level of

614
00:57:57.960 --> 00:58:03.240
the value of money, for the increase of prices will already have gone through the whole community.

615
00:58:03.240 --> 00:58:07.480
Thus, the losses suffered by the farmers at the time when they still sold their products

616
00:58:07.480 --> 00:58:12.740
at the old low prices but had to pay for the products of others at the new and higher prices

617
00:58:12.740 --> 00:58:17.860
remain uncompensated. It is these losses of the groups that are the last to be reached

618
00:58:17.860 --> 00:58:22.880
by the variation in the value of money which ultimately constitute the source of the profits

619
00:58:22.880 --> 00:58:28.780
made by the mine owners and the groups most closely connected with them. Thus, inflation

620
00:58:28.780 --> 00:58:34.220
Inflation and by implication deflation are essentially redistributive phenomena. They

621
00:58:34.220 --> 00:58:39.900
cannot enrich society as a whole, but do affect distribution, allocation and incomes within

622
00:58:39.900 --> 00:58:43.540
society. Mises' analysis of effects of money on the

623
00:58:43.540 --> 00:58:48.900
real economy was based on his study of the great inflations of the past and on his study

624
00:58:48.900 --> 00:58:54.520
of classical economics. His teacher, Grünberg, had analysed the redistributive impact of

625
00:58:54.520 --> 00:59:00.200
of Inflation during the Napoleonic Wars in Grünberg. Mises had dealt with these cases

626
00:59:00.200 --> 00:59:04.760
in the first edition of Theorie des Geldes und der Umlaufsmitte in 1912. He eliminated

627
00:59:04.760 --> 00:59:08.760
these passages from further editions because he believed historical illustrations of the

628
00:59:08.760 --> 00:59:13.800
harmful effects of inflation were no longer necessary in light of recent first-hand experiences

629
00:59:13.800 --> 00:59:20.200
in Germany and Austria. He quotes David Hume and David Ricardo. Among his contemporaries

630
00:59:20.200 --> 00:59:25.180
Mises he merely refers to Rudolf Auspitz and Richard Lieben. Mises quotes them in His Theory

631
00:59:25.180 --> 00:59:30.780
of Money and Credit. Other forerunners, who Mises did not mention, were Mill, Principles

632
00:59:30.780 --> 00:59:36.560
of Political Economy, Hermann Heinrich Gossen, Entwicklung der Gesetze des menschlichen Verkehrs

633
00:59:36.560 --> 00:59:42.520
und der da ausfließenden Regeln für menschliches Handeln, and John Ekans, Essay towards the

634
00:59:42.520 --> 00:59:47.120
Solution of the Gold Question, The Course of the Depreciation, Essays in Political

635
00:59:47.120 --> 00:59:53.000
Financial Economy, Theoretical and Applied. Today, these effects are sometimes called

636
00:59:53.000 --> 00:59:59.080
the Cantillon effects. The expression is Mark Blaugs, named for the early 18th century Irish

637
00:59:59.080 --> 01:00:04.100
French banker and economist Richard Cantillon, who in his essay on the nature of commerce

638
01:00:04.100 --> 01:00:10.960
in general had first described the redistribution and reallocation effects of inflation. Similarly,

639
01:00:10.960 --> 01:00:16.440
Mises also revived the analysis of local price differences, which had been neglected since

640
01:00:16.440 --> 01:00:18.440
Richard Cantillon

641
01:00:18.440 --> 01:00:23.000
The Theory of Money and Credit was one of the last treatises on the subject to highlight

642
01:00:23.000 --> 01:00:28.680
their importance. At the time of Mises's writing, Erwin Fisher, Gustav Kassel and other

643
01:00:28.680 --> 01:00:34.160
economists began to neglect them and concentrate only on the aggregate consequences of changes

644
01:00:34.160 --> 01:00:39.480
in the money supply. Their approach won the day, and thus one of inflation's most pernicious

645
01:00:39.480 --> 01:00:45.680
effects came to fall beneath the purview of the new macroeconomic radar. In contrast,

646
01:00:45.680 --> 01:00:51.120
Mises' analysis might have influenced John Maynard Keynes, who recognised the great importance

647
01:00:51.120 --> 01:00:58.000
of contillon effects and advocated monetary stabilisation as a strategy for social conservation.

648
01:00:58.000 --> 01:01:03.160
Keynes had dismissively reviewed Mises' book in the Economic Journal in fairly vague

649
01:01:03.160 --> 01:01:09.400
and evasive terms. Later he confessed that, in German I can only clearly understand what

650
01:01:09.400 --> 01:01:11.840
I know already.

651
01:01:11.840 --> 01:01:15.920
Exchange Rate Determination – Purchasing Power Theory

652
01:01:15.920 --> 01:01:20.840
Mises also took a position at odds with the mainstream view on another important issue

653
01:01:20.840 --> 01:01:26.880
– the factors determining the exchange rate between two monies. To do so, he revived an

654
01:01:26.880 --> 01:01:31.500
older doctrine that had been displaced by the prevailing veil of money myth. Because

655
01:01:31.500 --> 01:01:36.220
mainstream economists conceived of the value of money as a mere reflection of the value

656
01:01:36.220 --> 01:01:41.320
of underlying real commodities, it was only natural for them to stipulate that exchange

657
01:01:41.320 --> 01:01:46.900
Exchange rates too were merely a reflection of some real state of affairs. Thus, the balance

658
01:01:46.900 --> 01:01:52.260
of payments theory enjoyed a virtual monopoly in higher economic education and guided the

659
01:01:52.260 --> 01:01:58.020
policies of the German and Austro-Hungarian central banks. According to this theory, international

660
01:01:58.020 --> 01:02:03.200
monetary movements and thus the exchange rate between different national currencies tended

661
01:02:03.200 --> 01:02:08.780
to equal whatever rate equilibrated the relative weight of imports and exports of commodities

662
01:02:08.780 --> 01:02:15.100
and Services, and of foreign credit and foreign debts. These real factors were the independent

663
01:02:15.100 --> 01:02:20.380
variables, whereas international monetary payments and the exchange rate were dependent variables.

664
01:02:21.580 --> 01:02:27.180
The political implication was that, when faced with an undesired depreciation in the exchange

665
01:02:27.180 --> 01:02:33.340
rate, governments had to act on those real factors to prevent their expression in monetary flows.

666
01:02:33.340 --> 01:02:40.620
Those. They had to curtail imports through tariffs, import quotas and other measures.

667
01:02:40.620 --> 01:02:45.660
Mises had already rebelled against this orthodoxy in his first publication on monetary policy,

668
01:02:45.660 --> 01:02:50.900
his 1907 article on the motives behind the Austro-Hungarian Bank's regulation of exchange

669
01:02:50.900 --> 01:02:56.700
rates. There he asserted that the theory of the value of money was not yet sufficiently

670
01:02:56.700 --> 01:03:01.660
developed, and the relationship between the quantity of money and the exchange rate was

671
01:03:01.660 --> 01:03:07.140
was unknown. Five years later, the theory of the value of money was sufficiently well

672
01:03:07.140 --> 01:03:13.460
developed in his mind. He demonstrated that the balance of payments theorists had turned

673
01:03:13.460 --> 01:03:19.780
to the real chain of causation on its head. The volume of imports and exports and of foreign

674
01:03:19.780 --> 01:03:25.180
liabilities and credits was not independent of the exchange rate, but entirely dependent

675
01:03:25.180 --> 01:03:30.420
on it. The balance of payments theory forgets that the volume of foreign trade is completely

676
01:03:30.420 --> 01:03:37.380
dependent upon prices, that neither exportation nor importation can occur if there are no

677
01:03:37.380 --> 01:03:43.900
differences in prices to make trade profitable, he went on to explain the root of the error.

678
01:03:43.900 --> 01:03:49.860
It cannot be doubted that if we simply look at the daily or hourly fluctuations on the

679
01:03:49.860 --> 01:03:54.220
exchanges, we shall only be able to discover that the state of the balance of payments

680
01:03:54.220 --> 01:03:59.740
at any moment does determine the supply and the demand in the foreign exchange market,

681
01:03:59.740 --> 01:04:07.000
But this is a mere beginning of a proper investigation into the determinants of the rate of exchange.

682
01:04:07.000 --> 01:04:12.120
The next question is, what determines the state of the balance of payments at any moment?

683
01:04:12.120 --> 01:04:16.940
And there is no other possible answer to this than that it is the price level and the purchases

684
01:04:16.940 --> 01:04:22.980
and sales induced by the price margins that determine the balance of payments. Foreign

685
01:04:22.980 --> 01:04:28.240
commodities can be imported at a time when the rate of exchange is rising only if they

686
01:04:28.240 --> 01:04:37.200
Mises points out that it was Ricardo who had first developed the correct view of exchange

687
01:04:37.200 --> 01:04:43.720
rate determination. The exchange rate between two monies depended exclusively on the relative

688
01:04:43.720 --> 01:04:50.100
purchasing power of each. In a free market, exchange rates would tend to make it irrelevant

689
01:04:50.100 --> 01:04:55.620
which money is used to buy a non-monetary commodity. The different kinds of money are

690
01:04:55.620 --> 01:05:00.900
are exchanged in a ratio corresponding to the exchange ratios existing between each of

691
01:05:00.900 --> 01:05:08.040
them and the other economic goods. If one kilogram of gold is exchanged for the monetary

692
01:05:08.040 --> 01:05:13.540
aggregate kilogram of a particular sort of commodity and one kilogram of silver for the

693
01:05:13.540 --> 01:05:19.620
monetary aggregate of fifteen and a half kilograms of the same sort of commodity, then the exchange

694
01:05:19.620 --> 01:05:25.900
ratio between gold and silver will be established at fifteen and a half. If some disturbance

695
01:05:25.900 --> 01:05:30.540
tends to alter this ratio between the two sorts of money, which we shall call the static

696
01:05:30.540 --> 01:05:37.020
or natural ratio, then automatic forces will be set in motion that will tend to re-establish

697
01:05:37.020 --> 01:05:43.380
it. The political implications of this analysis are diametrically opposed to the ones suggested

698
01:05:43.380 --> 01:05:48.620
by the balance of payments doctrine. There is in fact no need to prevent a depreciation

699
01:05:48.620 --> 01:05:54.220
of the exchange rate through government intervention, because sooner or later the falling exchange

700
01:05:54.220 --> 01:06:00.340
rate would equilibrate the purchasing powers of the two monies, preventing a further fall.

701
01:06:00.340 --> 01:06:05.340
As Mises later acknowledged, this idea was essentially contained already in the classical

702
01:06:05.340 --> 01:06:10.740
quantity theory of money, as well as Gresham's Law and the doctrine of the British Currency

703
01:06:10.740 --> 01:06:16.240
School. His analysis, which was based on the modern theory of subjective value, had refined

704
01:06:16.240 --> 01:06:22.160
these older views and restated them in a more nuanced manner, but the practical conclusion

705
01:06:22.160 --> 01:06:28.660
had remained the same. Mises said in retrospect, governmental interventions that seek to regulate

706
01:06:28.660 --> 01:06:34.240
international monetary flows to provide the necessary quantities of money for the economy

707
01:06:34.240 --> 01:06:40.160
are superfluous. In all cases, the undesired outflow of money can only be the result of

708
01:06:40.160 --> 01:06:45.920
a governmental intervention that endows differently valued monies with the same legal purchasing

709
01:06:45.920 --> 01:06:51.800
Banking Power, all that the government must do not to destroy the monetary order, and

710
01:06:51.800 --> 01:06:58.660
all that it can do, is to avoid any such interventions, that is the nub of the monetary theory of

711
01:06:58.660 --> 01:07:04.480
classical economics, and of its immediate successors, the theoreticians of the currency

712
01:07:04.480 --> 01:07:10.160
school. Here Mises referred to his treatment of these predecessors in the first edition

713
01:07:10.160 --> 01:07:19.000
It was possible to refine and develop this doctrine with the modern subjective theory,

714
01:07:19.000 --> 01:07:24.600
but it was impossible to overhaul it and put something else at its place. His exposition

715
01:07:24.600 --> 01:07:30.180
would eventually have an impact on central bank policy, but at first it was dismissed

716
01:07:30.180 --> 01:07:35.680
and its application prevented. One of the most vituperative dismissals came from a certain

717
01:07:35.680 --> 01:07:41.580
Eugen Kurt Singer, a follower of Knapp, who had attacked Mises for lack of logic. Years

718
01:07:41.580 --> 01:07:45.600
later Mises commented on Singer in a letter to Emil Lederer.

719
01:07:45.600 --> 01:07:51.360
I myself regretted very much today that history has proved me right rather than the champions

720
01:07:51.360 --> 01:07:57.920
of inflation. My income would be substantially higher if Knapp and his disciples had turned

721
01:07:57.920 --> 01:08:03.160
out to be right. Mises felt it was necessary to return to the subject of exchange rate

722
01:08:03.160 --> 01:08:08.300
Determination after the First World War, because the continued prevalence of the balance-of-payment

723
01:08:08.300 --> 01:08:15.680
doctrine had Austria well on its way to hyperinflation. In the feverish days of 1919 he wrote a paper

724
01:08:15.680 --> 01:08:21.600
on Saarungsbilanz und Wechselkurse, balance of payments and exchange rates, which proved

725
01:08:21.600 --> 01:08:26.680
to be influential in turning Austrian monetary policy away from the path of hyperinflation

726
01:08:26.680 --> 01:08:31.460
before it was too late. Some years after Mises' book had come out,

727
01:08:31.460 --> 01:08:35.820
The Swedish economist Gustav Kassel, who would play an important role in interwar economic

728
01:08:35.820 --> 01:08:40.860
science in Germany, developed a variant of the same theory without referring to his contemporary

729
01:08:40.860 --> 01:08:46.820
Austrian predecessor. Kassel's exposition had a great deal more success, which was probably

730
01:08:46.820 --> 01:08:52.600
due to the fact that he had coined the popular new phrase, purchasing power parity, to describe

731
01:08:52.600 --> 01:08:57.560
the equilibrium exchange rate, and also because he was less vitriolic than Mises, who had

732
01:08:57.560 --> 01:09:19.240
fractional reserve banking and business cycles

733
01:09:19.240 --> 01:09:24.240
Mises's careful distinction between money proper and money substitutes naturally led

734
01:09:24.240 --> 01:09:27.480
to the question of the role of money substitutes.

735
01:09:27.480 --> 01:09:32.380
In the second part of his book, Mises showed that bank-issued money substitutes could not

736
01:09:32.380 --> 01:09:37.280
affect the value and purchasing power of money, as well as the distribution and allocation

737
01:09:37.280 --> 01:09:43.400
of resources, as long as they were true representatives of a corresponding amount of money deposited

738
01:09:43.400 --> 01:09:50.520
with the bank, that is, in Mises' terminology, as long as they were money certificates. Only

739
01:09:50.520 --> 01:09:56.700
if they were issued without being backed 100% by a money deposit could they have an influence

740
01:09:56.700 --> 01:10:02.840
on Prices, Distribution and Allocation. These issuances of uncovered or partially covered

741
01:10:02.840 --> 01:10:08.320
money substitutes, fiduciary media, added to the quantity of money in the larger sense,

742
01:10:08.320 --> 01:10:13.440
increasing money prices and redistributing resources in favour of their first recipients,

743
01:10:13.440 --> 01:10:18.400
and at the expense of their last recipients. It was therefore necessary to single them

744
01:10:18.400 --> 01:10:23.540
out for separate analysis, inquiring after the particular consequences of an expansion

745
01:10:23.540 --> 01:10:36.540
First Mises showed why fiduciary media had an impact on money prices. Although they are

746
01:10:36.540 --> 01:10:42.620
only legal documents, they are dealt with, bought and sold, as if they were real money,

747
01:10:42.620 --> 01:10:47.440
whether or not they are backed by real money. As a consequence, an increase in the quantity

748
01:10:47.440 --> 01:10:52.820
of fiduciary media leads to an increase of the price level in the same way and for the

749
01:10:52.820 --> 01:10:57.940
are the same reasons that an increase of real money has this effect. Moreover, there is

750
01:10:57.940 --> 01:11:03.580
a tendency in a fractional reserve banking system steadily to increase the issuance of

751
01:11:03.580 --> 01:11:10.420
fiduciary media. No bank can afford drastically to exaggerate its note issues because it would

752
01:11:10.420 --> 01:11:16.620
have faced too many redemption claims at once. But if its increases of fiduciary media are

753
01:11:16.620 --> 01:11:23.260
are small enough allowing other banks to follow suit, it can steadily increase the issuances.

754
01:11:23.260 --> 01:11:28.940
This analysis led Mises to one of the central contributions of his book, an entirely new

755
01:11:28.940 --> 01:11:35.060
business cycle theory. Here Mises created a synthesis of Boehm-Bawerk's capital theory

756
01:11:35.060 --> 01:11:40.000
and the business cycle theory of the currency school. At about the same time, two other

757
01:11:40.000 --> 01:11:45.220
members of Boehm-Bawerk's seminar presented original business cycle theories in elaboration

758
01:11:45.220 --> 01:11:50.900
of the Principles of the Banking School. Mises argued that the issuance of uncovered

759
01:11:50.900 --> 01:11:56.820
money substitutes could depress the interest rate below its equilibrium level, thus inciting

760
01:11:56.820 --> 01:12:02.460
entrepreneurs to launch investment projects that consume too many resources. Production

761
01:12:02.460 --> 01:12:07.780
takes time and thus requires the support of the human beings engaged in production during

762
01:12:07.780 --> 01:12:13.780
the entire production period. For a new project to be successful, one needs a sufficient provision

763
01:12:13.780 --> 01:12:17.860
Production of all the goods that the consumers consider to be more important than the goods

764
01:12:17.860 --> 01:12:23.840
that will result from this project. Consequently, the realization of additional production projects

765
01:12:23.840 --> 01:12:29.900
requires that additional consumer's goods be put at the disposal of the entrepreneurs.

766
01:12:29.900 --> 01:12:35.780
These additional consumer's goods can only come from net savings. Without sufficient

767
01:12:35.780 --> 01:12:41.860
savings, therefore, no extension of the structure of production is possible. It follows that

768
01:12:41.860 --> 01:12:46.460
And if new projects are started not because of net savings, but only because fractional

769
01:12:46.460 --> 01:12:51.460
reserve banks have depressed the interest rate below its equilibrium level, then the

770
01:12:51.460 --> 01:12:58.500
resulting structure of production is unsustainable. It is now physically impossible for all production

771
01:12:58.500 --> 01:13:03.420
processes to be carried to completion. There are simply not enough savings to sustain the

772
01:13:03.420 --> 01:13:08.580
more extensive structure of production. The existence of such an unsustainable situation

773
01:13:08.580 --> 01:13:13.720
is not immediately evident because the additional investments are made in higher production

774
01:13:13.720 --> 01:13:18.720
stages which are removed in time from their final products, the consumer's goods. But

775
01:13:18.720 --> 01:13:24.620
as time goes on, it becomes increasingly evident that something has gone deeply wrong in the

776
01:13:24.620 --> 01:13:32.660
entire economy. The day of reckoning is reached in what is commonly called an economic crisis.

777
01:13:32.660 --> 01:13:36.700
Entrepreneurs then discover that not all projects can be carried out as planned for lack of

778
01:13:36.700 --> 01:13:42.600
of Originary Capital. Some projects can only be continued in a reduced form, and others

779
01:13:42.600 --> 01:13:47.900
have to be stopped altogether. Hence, the material resources and human energies invested

780
01:13:47.900 --> 01:13:54.200
in these projects are now seen to have been wasted. Society is impoverished, individuals

781
01:13:54.200 --> 01:14:00.840
are out of work, firms go bankrupt, etc. How can fiduciary media bring about a situation

782
01:14:00.840 --> 01:14:06.180
of malinvestment in the first place? Mises argued that this happens when they are brought

783
01:14:06.180 --> 01:14:11.180
into circulation through the credit market. In this case, the additional supply of credit

784
01:14:11.180 --> 01:14:17.860
reduces the rate of interest, thus pushing it below its equilibrium or natural level.

785
01:14:17.860 --> 01:14:22.040
Entrepreneurs are able to obtain more credit on better terms and invest these additional

786
01:14:22.040 --> 01:14:27.860
funds in new projects in the stages of production most removed from final consumers' goods.

787
01:14:27.860 --> 01:14:33.740
Deluded by the increased activities and apparent blossoming of new opportunities, everyone

788
01:14:33.740 --> 01:14:38.380
One believes at first that the economy is growing faster than before. This is the so-called

789
01:14:38.380 --> 01:14:44.340
boom. But sooner or later the market participants will become conscious of the fact that this

790
01:14:44.340 --> 01:14:52.020
boom is unsustainable, at which point the economy goes bust. An economic crisis.

791
01:14:52.020 --> 01:14:57.780
In developing his theory, Mises could rely on two important discoveries of previous thinkers.

792
01:14:57.780 --> 01:15:02.460
The first was the business cycle theory of the British currency school. According to

793
01:15:02.460 --> 01:15:06.700
According to this school of thought, fractional reserve banking led to a constant increase

794
01:15:06.700 --> 01:15:13.180
of fiduciary media until the banks, in particular the central bank, proved to be unable to satisfy

795
01:15:13.180 --> 01:15:19.160
redemption demands. Then the monetary circulation collapsed because the fiduciary media immediately

796
01:15:19.160 --> 01:15:25.260
lost all their value, and this in turn ushered in a crisis. A group of French economists

797
01:15:25.260 --> 01:15:31.780
had developed similar ideas in the mid-1800s. Victor Bonnet argued that excessive investments

798
01:15:31.780 --> 01:15:37.940
in Fixed Capital. Excessive meaning disproportionate in comparison to the investments in circulating

799
01:15:37.940 --> 01:15:44.300
capital were responsible for economic crises, and Charles Coquelin had anticipated Knut Vixer

800
01:15:44.300 --> 01:15:50.220
in elaborating the hypothesis that business cycles were caused by credit expansions. The

801
01:15:50.220 --> 01:15:55.300
second was Knut Vixer's discovery that monetary expansion could result from discrepancies

802
01:15:55.300 --> 01:16:00.420
between the money rate of interest and the equilibrium rate of interest. Yet none of

803
01:16:00.420 --> 01:16:04.980
One of these predecessors had developed the main theme of Mises' business cycle theory,

804
01:16:04.980 --> 01:16:11.880
namely the causation and propagation of economy-wide error, as well as the notion that the error-ridden

805
01:16:11.880 --> 01:16:18.300
process necessarily has to come to an end because it involves an inter-temporal misallocation

806
01:16:18.300 --> 01:16:24.720
of resources. In 1903, Werner Sombart had presented a disproportionality theory of the

807
01:16:24.720 --> 01:16:31.480
At a meeting of the Verein für Sozialpolitik in Hamburg, Zombard argued that increased

808
01:16:31.480 --> 01:16:36.120
gold production had provoked a reallocation of resources that was unsustainable after

809
01:16:36.120 --> 01:16:42.520
the gold production ceased. The ensuing crisis, which hit Germany in 1900-1902, was therefore

810
01:16:42.520 --> 01:16:48.200
a structural crisis that reflected the unsuitable use that had been made of the capital goods.

811
01:16:48.200 --> 01:16:53.880
Zombard's theory does not take into account the problem of intertemporal misallocation.

812
01:16:53.880 --> 01:17:00.060
In Wichsel's famous book Geldsinns und Güterpreise, Money Interest and Commodity Prices, he elaborated

813
01:17:00.060 --> 01:17:06.100
on David Ricardo's observation that an inflationary monetary policy could reduce the rate of interest

814
01:17:06.100 --> 01:17:12.340
only temporarily, because sooner or later commodity prices catch up. It followed that

815
01:17:12.340 --> 01:17:16.960
any attempt to reduce the interest rate on a permanent basis required constant increases

816
01:17:16.960 --> 01:17:23.420
of the money supply. Now, the question was whether any such policy of permanent inflation

817
01:17:23.420 --> 01:17:28.800
could be sustainable. Vixel answered this question by first pointing out that the notion

818
01:17:28.800 --> 01:17:34.140
of reduced interest rate did not concern any absolute level of the interest rate, but rather

819
01:17:34.140 --> 01:17:38.860
a relative comparison of the market rate of money interest to what he called the natural

820
01:17:38.860 --> 01:17:45.060
rate of interest. In Viserion fashion, Vixel defined the natural rate of interest as the

821
01:17:45.060 --> 01:17:51.880
rate that would come into existence under the sole influence of real, non-monetary factors.

822
01:17:51.880 --> 01:17:58.000
He also defined it as the rate at which the price level would remain constant. Both distinctions

823
01:17:58.000 --> 01:18:03.680
led to great confusion among later theorists, but Mises's business cycle theory seemed

824
01:18:03.680 --> 01:18:08.420
to show that it was useful to make some such distinction.

825
01:18:08.420 --> 01:18:12.080
In Human Action, he would eventually show that the relevant distinction is between the

826
01:18:12.080 --> 01:18:17.120
equilibrium rate of interest and the market rate. Both rates are monetary rates and can

827
01:18:17.120 --> 01:18:21.960
can therefore coincide. He then claimed that indefinite deviations of the money rate from

828
01:18:21.960 --> 01:18:27.000
the natural rate were not possible, because the constant influx of new money would sooner

829
01:18:27.000 --> 01:18:32.280
or later entail an over-proportional increase of commodity prices, which would induce the

830
01:18:32.280 --> 01:18:35.920
banks to adjust the money rate to the natural rate.

831
01:18:35.920 --> 01:18:41.320
Wixel noticed that Frederic Bastiat had made a similar point in his polemic against Proudhon,

832
01:18:41.320 --> 01:18:45.600
only Bastiat had not insisted that a concomitant price increase would be over-proportional.

833
01:18:45.600 --> 01:18:51.420
are proportional. But, as Mises pointed out, Vixel did not substantiate this claim by showing

834
01:18:51.420 --> 01:18:56.720
which mechanism forced the banks to perform such an adjustment. Strictly speaking, Vixel

835
01:18:56.720 --> 01:19:01.420
had no explanation of the business cycle at all, and, despite his fundamental distinction

836
01:19:01.420 --> 01:19:06.640
between the natural and the money rates of interest, he did not see that deviations between

837
01:19:06.640 --> 01:19:13.000
these two rates entail an inter-temporal misallocation of resources. Vixel comes closest to Mises's

838
01:19:13.000 --> 01:19:17.740
Mises' discovery when he points out that a low money rate relative to the natural rate

839
01:19:17.740 --> 01:19:22.600
will incite businessmen to launch additional investment projects, and even observes that

840
01:19:22.600 --> 01:19:27.720
the low money rate disrupts general equilibrium, but he does not see the implication that the

841
01:19:27.720 --> 01:19:33.080
structure of production is set on a path that is physically impossible to complete.

842
01:19:33.080 --> 01:19:38.680
Mises would later develop and refine the business cycle theory he had presented in his Habilitation

843
01:19:38.680 --> 01:19:39.680
work.

844
01:19:39.680 --> 01:19:44.960
As far as the exposition of Mises's business cycle theory is concerned, there are no differences

845
01:19:44.960 --> 01:19:51.240
between the first edition and later editions. But for a few exceptions, the text is exactly

846
01:19:51.240 --> 01:19:58.360
the same. The same is true for the entire chapter 5, except for paragraph 5. Thus, from

847
01:19:58.360 --> 01:20:02.840
the first edition, Mises's business cycle theory contains the same discussion of forced

848
01:20:02.840 --> 01:20:09.240
savings, the reverse movement of prices, the natural rate of interest and deviations from

849
01:20:09.240 --> 01:20:19.200
The difference between the first and the second

850
01:20:19.200 --> 01:20:24.840
edition relates to the concluding paragraph 5 of chapter 5, where Mises discusses the

851
01:20:24.840 --> 01:20:30.840
significance of his own contribution to business cycle theory. In 1912 he thought he had found

852
01:20:30.840 --> 01:20:36.280
merely one out of a number of conceivably complementary explanations of the business

853
01:20:36.280 --> 01:20:41.440
Business Cycle. Thus, he qualified his findings right in the opening sentence of the concluding

854
01:20:41.440 --> 01:20:48.440
paragraph 5. It is not the task of this work to develop a theory of economic crises. We

855
01:20:48.440 --> 01:20:54.480
take account of crisis phenomena only insofar as they can spring from the mechanism of money

856
01:20:54.480 --> 01:21:00.200
and fiduciary media. He goes on in a somewhat lengthy manner to assert that there might

857
01:21:00.200 --> 01:21:06.200
be other sources for business cycles, and in particular that they might also exist in

858
01:21:06.200 --> 01:21:11.200
In a barter economy, it could well be that these qualifications of the significance of

859
01:21:11.200 --> 01:21:16.680
his discoveries were meant to shield him against criticism from his elders. After all, the

860
01:21:16.680 --> 01:21:23.200
book was the basis on which he sought to be granted his habilitación. Be this as it may,

861
01:21:23.200 --> 01:21:28.040
Mises eventually made up his mind and came to adopt more definite views on behalf of

862
01:21:28.040 --> 01:21:30.720
business cycle research.

863
01:21:30.720 --> 01:21:34.600
Starting from the second edition of Theory of Money and Credit, the qualifications in

864
01:21:34.600 --> 01:21:40.880
in paragraph 5 are left out, and the first sentence now reads, Our theory of banking

865
01:21:40.880 --> 01:21:45.040
leads ultimately to a theory of business cycles.