Mises on Money

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How confident are you that you understand Mises‘s
monetary theory so far? If this were a final exam in a college
class on Mises’s monetary theory, which answer would you select
for the following question: The optimum quantity of money
should be determined by. . . “

  1. The national government
  2. A national government-licensed central bank
  3. A world central bank of central banks
  4. The economics department of the University of Chicago
  5. The unhampered free market

If you selected E, as Walter Williams says, “Go to the
head of the class.”

In Part
, we have already explored some implications of Mises’s
definition of money: the most marketable commodity. If
money is a commodity, then an analytical question arises: “Is
money a consumption good or a production good?” That is, “Is
money a form of capital?”

Part I, Chapter 5 of The
Theory of Money and Credit
discusses this issue: “Money
as an Economic Good.” Mises concluded that money is neither
a consumption good nor a capital good. He argued that production
and consumption are possible without money (p. 82). Money facilitates
both production and consumption, but it is neither a production
good nor a consumption good. Money is therefore a separate
analytical category.

Mises singled out his teacher and co-founder of the Austrian
School of economics, Eugen von Böhm-Bawerk, as having erred
in designating money as a capital good; he viewed it as social
capital (p. 83). Mises disagreed. “It is illegitimate to compare
the part played by money in production with that played by ships
and railways. Money is obviously not a ‘commercial tool’ in
the same sense as account books, exchange lists, the Stock Exchange,
or the credit system” (p. 83).


We now come to another crucial aspect of Mises’s theory of money.
Indeed, it is a uniquely distinguishing feature of his monetary
theory, one that is not shared by other modern schools of economic
thought. Because money is not capital, he concluded that an
increase of the money supply confers no identifiable social
value. If you fail to understand this point, you will not
be able to understand the rest of Mises’s theory of money. On
this assessment of the value of money, his whole theory of money

prevents us nevertheless from reckoning money among these
“distribution goods” and so among production goods (and incidentally
the same objection applies to its inclusion among consumption
goods) is the following consideration. The loss of a consumption
good or production good results in a loss of human satisfaction;
it makes mankind poorer. The gain of such a good results in
an improvement of the human economic position; it makes mankind
richer. The same cannot be said of the loss or gain of money.
Both changes in the available quantity of production goods
or consumption goods and changes in the available quantity
of money involve changes in values; but whereas the changes
in the value of the production goods and consumption goods
do not mitigate the loss or reduce the gain of satisfaction
resulting from the changes in their quantity, the changes
in the value of money are accommodated in such a way to the
demand for it that, despite increases or decreases in its
quantity, the economic position of mankind remains the same.
An increase in the quantity of money can no more increase
the welfare of the members of a community, than a diminution
of it can decrease their welfare. Regarded from this point
of view, those goods that are employed as money are indeed
what Adam Smith called them, “dead stock, which . . . produces
nothing” (p. 85).

went to considerable effort to make his point clear to readers.
How much clearer could he have made his position than this?
“An increase in the quantity of money can no more increase the
welfare of the members of a community, than a diminution of
it can decrease their welfare.” But he sought to make himself
even clearer.

goods derive their value from that of their products. Not
so money; for no increase in the welfare of the members
of a society can result from the availability of an additional
quantity of money. The laws which govern the value of money
are different from those which govern the value of production
goods and from those which govern the value of consumption
goods (p. 84).


theory regarding the impact that changes in the money supply
have on social value is the basis of everything that follows.
Mises offered here a unique assessment of the demand for money.
He implied here that an individual’s demand for production goods
or consumption goods, when met by increased production, confers
an increase in social value or social welfare. Both the consumer
and the producer are made better off by the exchange. Society
is better off because at least two of its members are better
off. What Mises inescapably was saying here is this: while an
individual wants more money, and a producer of gold can make
a profit by selling him more money (gold), society as a whole
is not benefited by this voluntary exchange. This is why
money is a separate analytical category in Mises’s economic

Let us take this conclusion even further. If a producer benefits
society by increasing the production of a non-monetary good,
later finding a buyer, then society is benefitted because there
are at least two winners and no losers. (To say this, the economist
logically must dismiss as socially irrelevant the negative assessments
of envious people who resent anyone else’s success.) Therefore,
if a producer of gold and a buyer of gold both benefit from
an exchange — which they do, or else they would not trade
— yet society receives no social benefit, then the analyst
has to conclude that some other members of society have been
made, or will be made, worse off by the increase in the money
supply. This analysis would also apply to decreases in the money

There are two conceptually related issues here: (1) money as
a separate analytical category, neither a consumption good nor
a production good; (2) changes in the money supply as conveying
neither an increase nor decrease in social value.

This leads us to a major question for all economic analysis:
“What is social value?”


Mises began his economic analysis with the presupposition that
all economic value is subjective. He followed Menger on this
point. But if all economic value is subjective, then it cannot
be measured by any objective standard. He said this specifically:
there is no measure of economic value. This is a major theme
in Chapter 2 of The Theory of Money and Credit, and it
remained a constant throughout his career. (In 1955, Hayek went
so far as to write of Mises that “most peculiarities of his
views which at first strike many readers as strange and unacceptable
are due to the fact that in the consistent development of the
subjectivist approach he has for a long time moved ahead of
his contemporaries.” The Counter-Revolution of Science,
Part One, note 24.)

If there is no objective measure of an individual’s subjective
value, then there is no way to make comparisons of subjective
utility among individuals. There is no way to add or subtract
subjective utility. An individual can compare his own
subjective utilities on his scale of economic values —
first, second, third — but he cannot measure them.
Even less plausible is any assertion that an outside observer
can measure the subjective utilities of others.

The first economist to discuss this in detail was Lionel Robbins,
a disciple of Mises who wrote the Introduction to the 1934 English
edition of Theory of Money and Credit. In Chapter VI
of his book, An
Essay on the Nature and Significance of Economic Science

(1932), Robbins discussed the problem of the epistemological
impossibility of making interpersonal comparisons of subjective

By the time Human
was published, Mises recognized the implications
of Robbins’s argument for any concept of social value. Mises
modified his earlier statement regarding the effects on social
value of changes in the supply of money. Once again, he discussed
cash-induced changes in the purchasing power of money. He arrived
at a different conclusion regarding social value.

these assumptions all that cash-induced changes in purchasing
power bring about are shifts in the disposition of wealth
among different individuals. Some get richer, others poorer;
some are better supplied, others less; what some people gain
is paid for by the loss of others. It would, however, be impermissible
to interpret this fact by saying that total satisfaction remained
unchanged or that, while no changes have occurred in total
supply, the state of total satisfaction or the sum of happiness
has been increased or decreased by changes in the distribution
of wealth. It is impossible to discover a standard for comparing
the different degrees of satisfaction or happiness attained
by various individuals (p. 420).


can be said of aggregate social value, except this: it cannot
be measured. This conclusion is consistent with the assumption
of an exclusively subjective theory of economic value. An economist
who is consistent in his application of subjective value theory
cannot accept even the theoretical possibility of a scientific
rationale for making interpersonal comparisons of subjective
utility. With respect to aggregate social value — “total
satisfaction or total happiness” — the subjectivist can
logically say only this: no one on earth can measure it.


On the very next page of Human Action, Mises discussed
the free market’s use of whatever quantity of money is presently
in presently circulation. “As the operation of the market tends
to determine the final state of money’s purchasing power at
the height at which the supply of and the demand for money coincide,
there can never be an excess or deficiency of money. Each individual
and all individuals together always enjoy fully the advantages
which they can derive from indirect exchange and the use of
money, no matter whether the total quantity of money is great
or small.” The conclusion is obvious, and he makes it: “The
quantity of money available in the whole economy is always sufficient
to secure for everybody all that money does and can do” (p.

I emphasize this because there are economic commentators and
analysts who claim to represent Mises’s position on monetary
theory, but who are proponents of the expansion of money by
the State or by the fractional reserve banking system. They
argue that society can and does benefit from such an expansion
of money. Make no mistake about this: anyone who argues that
a change in the money supply conveys either net social benefits
or net social costs has repudiated Mises’s explicit statement
to the contrary in his earlier writings, and has repudiated
Mises’s denial in his later writings regarding anyone’s ability
to make such a scientific judgment. He who defends, in the
name of Mises, government or central bank policies that deliberately
promote either monetary inflation or monetary deflation has
two obligations: (1) to show why his recommended policy is really
consistent with Mises’s economic theory; (2) to suggest reasons
that led Mises to make such a serious mistake about the implications
of his own theory.

Mises was in favor of free markets. He did not recommend civil
laws against voluntary exchange. Therefore, he did not oppose
gold mining. He did not recommend that the State prohibit miners
from adding to the quantity of money. But he readily acknowledged
that any increase of the money supply from gold mining will
inflict losses on some participants in the economy — participants
who were not parties in the original transaction of selling
new gold into the economy. In this sense, changes in the
money cannot be neutral. There will inevitably be winners
and losers.

Mises stressed the following fact in his theory of money: new
money enters an economy at specific points, i.e., through
specific voluntary exchanges. New money does not appear
magically in equal percentages in all people’s bank accounts
or under their mattresses. Money spreads unevenly, and this
process has varying effects on individuals, depending on whether
they receive early or late access to the new money. This was
one of Mises’s original contributions to monetary theory, one
that is ignored by all other schools of economic analysis.

increase in a community’s stock of money always means an increase
in the amount of money held by a number of economic agents,
whether these are the issuers of fiat or credit money or the
producers of the substance of which commodity money is made.
For these persons, the ratio between the demand for money
and the stock of it is altered; they have a relative superfluity
of money and a relative shortage of other economic goods.
The immediate consequence of both circumstances is that the
marginal utility to them of the monetary unit diminishes.
This necessarily influences their behavior in the market.
They are in a stronger position as buyers. They will now express
in the market their demand for the objects they desire more
intensively than before; they are able to offer more money
for the commodities that they wish to acquire. It will be
the obvious result of this that the prices of the goods concerned
will rise, and that the objective exchange value of money
will fall in comparison. But this rise of prices will by no
means be restricted to the market for those goods that are
desired by those who originally have the new money at their
disposal. In addition, those who have brought these goods
to market will have their incomes and their proportionate
stocks of money increased and, in their turn, will be in a
position to demand more intensively the goods they want, so
that these goods will also rise in price. Thus the increase
of prices continues, having a diminishing effect, until all
commodities, some to a greater and some to a lesser extent,
are reached by it. The increase in the quantity of money does
not mean an increase of income for all individuals. On the
contrary, those sections of the community that are the last
to be reached by the additional quantity of money have their
incomes reduced, as a consequence of the decrease in the value
of money called forth by the increase in its quantity; this
will be referred to later (TM&C, pp. 139-40).

This analysis of the uneven spread of new money applies
to gold as well as to central bank money. It therefore applies
to a legally unrestricted free market.

us, for instance, suppose that a new gold mine is opened in
an isolated state. The supplementary quantity of gold that
streams from it into commerce goes at first to the owners
of the mine and then by turns to those who have dealings with
them. If we schematically divide the whole community into
four groups, the mine owners, the producers of luxury goods,
the remaining producers, and the agriculturalists, the first
two groups will be able to enjoy the benefits resulting from
the reduction in the value of money the former of them to
a greater extent than the latter. But even as soon as we reach
the third group, the situation is altered. The profit obtained
by this group as a result of the increased demands of the
first two will already be offset to some extent by the rise
in the prices of luxury goods which will have experienced
the full effect of the depreciation by the time it begins
to affect other goods. Finally for the fourth group, the whole
process will result in nothing but loss. The farmers will
have to pay dearer for all industrial products before they
are compensated by the increased prices of agricultural products.
It is true that when at last the prices of agricultural products
do rise, the period of economic hardship for the farmers is
over; but it will no longer be possible for them to secure
profits that will compensate them for the losses they have
suffered. That is to say, they will not be able to use their
increased receipts to purchase commodities at prices corresponding
to the old level of the value of money; for the increase of
prices will already have gone through the whole community.
Thus the losses suffered by the farmers at the time when they
still sold their products at the old low prices but had to
pay for the products of others at the new and higher prices
remain uncompensated. It is these losses of the groups that
are the last to be reached by the variation in the value of
money which ultimately constitute the source of the profits
made by the mine owners and the groups most closely connected
with them (pp. 208-9).


The later recipients of the new gold that has entered the economy
face higher prices than would otherwise have prevailed, had
the new gold not been mined and spent into circulation by mine
owners. These late recipients were not parties to the early
transactions, beginning with the mine owners, who sold the gold
either for gold coins or money-certificates, and who then spent
it. Nevertheless, these late recipients suffer losses.

Mises said specifically that the sources of the economic profits
of the gold mine owner are the economic losses sustained by
the late recipients of the new gold. “It is these losses of
the groups that are the last to be reached by the variation
in the value of money which ultimately constitute the source
of the profits made by the mine owners and the groups most closely
connected with them." This indicates a fundamental aspect
of Mises’s monetary theory that is rarely mentioned: the
expansion or contraction of money is a zero-sum game.
Mises did not use this terminology, but he used the zero-sum
concept. Because the free market always maximizes the utility
of the existing money supply, changes in the money supply inescapably
have the characteristic features of a zero-sum game. Some individuals
are made better off by an increase in the money supply; others
are made worse off. The existing money is an example of a “fixed
pie of social value.” Adding to the money supply does not add
to its value.

Economists argue that in a conventional economic exchange, both
parties win. One person does not benefit at the expense of another
unless there has been fraud. The “pie of social value” has grown
because there are two winners. The conceptual problem begins
with a fixed social pie.

Mises argued that the losses of the late-coming losers are the
source of income for the early arrival winners. This inescapably
identifies the monetary system as a zero-sum game. In Human
Action, he included a section denying what he calls the
Montaigne dogma: “the gain of one man is the damage of another;
no man profits but at the loss of other” (p. 664). He then
added: “Now the Montaigne dogma is true with regard to the effects
of cash-induced changes in the purchasing power of money on
deferred payments.” He was being disingenuous here, which is
not characteristic of his argumentation generally. The three
words, “on deferred payments,” appear to restrict the applicability
of the Montaigne dogma in monetary affairs. Yet his entire theory
of money rests on this dogma’s complete applicability in the
matter of increases and decreases in the money supply. The economic
benefits obtained by the early users of new money, even gold,
are made at the expense of those who gain access to it after
it has altered the array of prices. (Although he never described
the reverse scenario, deflation, he would have said that losses
suffered by losers of credit-money that has disappeared through
default must be the source of the economic gains for holders
of coins or currency or credit money that did not perish in
the deflation, who soon will face lower money prices because
of the contraction of the money supply.)

Again, here is his theory, briefly stated. Money is neither
a production good nor a consumption good. Thus, increases or
decreases in the supply of money cannot scientifically be said
to create or destroy wealth in general. These changes distribute

This raises a major epistemological issue. If the economist
cannot logically say anything about net social utility because
he cannot scientifically make interpersonal comparisons of subjective
utilities, then he cannot identify a zero-sum game. Scientifically
speaking, given the individualistic epistemology of subjective
economic value theory, no one can say whether a game’s redistribution
of wealth among its participants has increased or decreased
or failed to change net social value. Perhaps the loser really
does not mind, and the winner is ecstatic, or vice versa. If
we are strict subjectivists, we must refrain from using the
idea of a zero-sum game. It is not that Montaigne was wrong
about capitalism. It is that his dogma cannot apply to any exchange.
We cannot legitimately make interpersonal comparisons of subjective
utilities if we hold to an exclusively subjectivist value theory.

A subjective value theory economist can, however, legitimately
deny another subjective value theory economist’s assertion that
a transaction is or is not part of a zero-sum game. He can also
legitimately deny that someone who suggests a policy of either
inflation or deflation has scientific grounds for justifying
his recommendation in terms of any alleged benefits to society.
In short, the power of exclusively subjective value theory is
very great in undermining all policy recommendations that are
based exclusively on subjective value theory. But, like an acid
that eats everything, including every known container, it is
a risky argument to invoke.


Mises’s commitment to economic freedom led him to the conclusion
that the State should not prohibit gold mining and silver mining,
for these are voluntary activities. But he did argue for market-created
monetary standards that are based on money metals. Why? Because
the cost of mining is high, which will always limit the expansion
of money. In the Preface to the 1934 English edition of Theory
of Money and Credit, he wrote:

the gold standard, the determination of the value of money
is dependent upon the profitability of gold production. To
some, this may appear a disadvantage; and it is certain that
it introduces an incalculable factor into economic activity.
Nevertheless, it does not lay the prices of commodities open
to violent and sudden changes from the monetary side. The
biggest variations in the value of money that we have experienced
during the last century have originated not in the circumstances
of gold production, but in the policies of governments and
banks-of-issue. Dependence of the value of money on the production
of gold does at least mean its independence of the politics
of the hour. The dissociation of the currencies from a definitive
and unchangeable gold parity has made the value of money a
plaything of politics (pp. 17-18).


It is obvious what Mises regarded as the supreme benefit of
a gold standard: a metallic money standard hampers the State.
In his chapter on “Monetary Policy,” he wrote:

significance of adherence to a metallic-money system lies
in the freedom of the value of money from state influence
that such a system guarantees. Beyond doubt, considerable
disadvantages are involved in the fact that not only fluctuations
in the ratio of the supply of money and the demand for it,
but also fluctuations in the conditions of production of the
metal and variations in the industrial demand for it, exert
an influence on the determination of the value of money. It
is true that these effects, in the case of gold (and even
in the case of silver), are not immoderately great, and these
are the only two monetary metals that need be considered in
modern times. But even if the effects were greater, such a
money would still deserve preference over one subject to state
intervention, since the latter sort of money would be subject
to still greater fluctuations (p. 238).


He said it over and over: metallic money is superior to money
issued by the State. Its value will fluctuate less than State-issued
money, but it will fluctuate. A monetary system that cannot
provide stable prices is the price men must pay for economic
liberty, namely, freedom from the control of money by the State.
With the State in control of money, society gets more fluctuations
in value and less freedom.

Mises recognized the costs associated with gold mining. He discussed
this in Part III, Chapter III, “Fiduciary Media and the Demand
for Money.” He said that capital and labor must be applied to
mining. This reduces productivity in other areas of the economy.
Also, precious metals that are used for money cannot be used
to satisfy industrial or ornamental demand for these metals,
further reducing welfare. He even said that, apart from successful
voluntary ways to reduce demand for metallic money, “the welfare
of the community would have been reduced” by the costs of mining
(p. 299). Even the great Mises sometimes could not retain his
commitment to subjective value theory, with its concomitant
denial of community welfare.

Mises favored credit clearing-house systems (p. 297). They lower
the demand for money, i.e., reduce the downward competitive
pressure on money-denominated prices. A clearing house produces
“the reciprocal cancellation of claims to money” (p. 283). For
a fee, a bank clearing house offsets daily liabilities and assets
that are created as a result of commerce. Business A owes business
B ten ounces of gold. Business B owes business C ten ounces
of gold. Business C owes business A ten ounces of gold. So,
at the end of the day, the accounts are cleared, and no gold
changes ownership if the three firms belong to the same clearing
house. There can also be clearing houses for clearing houses.
This arrangement is voluntary and not dependent on the expansion
of money, either metallic or fiduciary. It therefore saves on
capital and labor that would otherwise have been devoted to
mining for the purpose of digging up money metals.

Why did Mises defend a money system based on money metals? First,
because such a system reduces fluctuations in the value of money.
Second, in order to get the State out of the money business.
The State makes things worse.

The State’s policy-makers are unable to foresee the results
of their interventions in the money supply. They are blind.
The free market is preferable to the State in the establishing
of the optimum supply of money.

results of our investigation into the development and significance
of monetary policy should not surprise us. That the state,
after having for a period used the power which it nowadays
has of influencing to some extent the determination of the
objective exchange value of money in order to affect the distribution
of income, should have to abandon its further exercise, will
not appear strange to those who have a proper appreciation
of the economic function of the state in that social order
which rests upon private property in the means of production.
The state does not govern the market; in the market in which
products are exchanged it may quite possibly be a powerful
party, but nevertheless it is only one party of many, nothing
more than that. All its attempts to transform the exchange
ratios between economic goods that are determined in the market
can only be undertaken with the instruments of the market.
It can never foresee exactly what the result of any particular
intervention will be. It cannot bring about a desired result
in the degree that it wishes, because the means that the influencing
of demand and supply place at its disposal only affect the
pricing process through the medium of the subjective valuations
of individuals; but no judgment as to the intensity of the
resulting transformation of these valuations can be made except
when the intervention is a small one, limited to one or a
few groups of commodities of lesser importance, and even in
such a case only approximately. All monetary policies encounter
the difficulty that the effects of any measures taken in order
to influence the fluctuations of the objective exchange value
of money can neither be foreseen in advance, nor their nature
and magnitude be determined even after they have already occurred
(pp. 238-39).


First, Mises was convinced that the free market always maximizes
the use of the existing money supply. No additional money is
needed, even though each participant would like more money for
himself. Second, he was convinced that mining costs establish
limits to the expansion of money. This is an advantage, for
all monetary inflation has unforeseeable effects on the distribution
of wealth: winners and losers. If mine owners make a profit
by producing metals, some of which will be used for money, then
others in the economy suffer losses as a result of this increase
in the money supply. A metallic money standard minimizes these
losses. Conclusion: a metallic money standard is therefore preferable
to any State-run system in which the State has the power to
increase or decrease the money supply or set exchange rates
for money. As he wrote in a chapter of his 1951 appendix, “The
Principle of Sound Money,”

excellence of the gold standard is to be seen in the fact
that it renders the determination of the monetary unit’s purchasing
power independent of the policies of governments and political
parties. Furthermore, it prevents rulers from eluding the
financial and budgetary prerogatives of the representative
assemblies. Parliamentary control of finances works only if
the government is not in a position to provide for unauthorized
expenditures by increasing the circulating amount of fiat
money. Viewed in this light, the gold standard appears as
an indispensable implement of the body of constitutional guarantees
that make the system of representative government function
(p. 416).


Mises recognized the implications of a State-induced redistribution
of wealth. The following comment came in his discussion of State-issued
money. In Human Action, he wrote:

the government-made cash-induced changes in the purchasing
power of money resulted only in shifts of wealth from some
people to other people, it would not be permissible to condemn
them from the point of view of catallactics’ [economic theory’s]
scientific neutrality. It is obviously fraudulent to justify
them under the pretext of the commonweal or public welfare.
But one could still consider them as political measures suitable
to promote the interests of some groups of people at the expense
of others without further detriment (p. 431).


always defended his economic analysis as value-free. Here, he
acknowledged that monetary inflation by the State does redistribute
wealth. It would be fraudulent, he says, for politicians to
justify the issue of additional fiat money on the basis of the
supposed increases in the public welfare. Why fraudulent? Because,
for Mises (and for any fully consistent subjective value theorist),
there is no such thing as measurable public welfare.
It is impossible to add up benefits and losses in estimating
total welfare because there is no objective measure of subjective
utility. So, any State policy that rests on a claim of an increase
in the public welfare is scientifically bogus and therefore

This is a radical epistemological position to defend. It means
at least two things: (1) a subjective economist cannot scientifically
recommend any policy on the basis of increased aggregate social
welfare; (2) any appeal to a supposed increase in aggregate
public welfare must rest on some version of a theory of objective
economic value.

Mises nevertheless concluded, “But one could still consider
them [cash-induced redistributions of wealth] as political measures
suitable to promote the interests of some groups of people at
the expense of others without further detriment.” Here is a
major point of contention between Rothbard and Mises. Rothbard
regarded the State as morally evil because its effects always
redistribute wealth by coercion. He had a moral objection to
the State that Mises never voiced. Therefore, his objection
to the State’s fiat currency had a moral element. But he would
have agreed with Mises on this point: it is fraudulent for politicians
to justify an expansion of State-issued money on the basis of
any supposed increase of public welfare.


Mises believed in free market-generated money. He believed
that the civil government should not have any monetary policy,
other than an absolutely fixed money supply. A civil government
that is powerful enough to have a flexible, “scientific” monetary
policy is too powerful, in Mises’s opinion. As he wrote in his
1951 appendix essay, “The Return to Sound Money,”

The first step must be a radical
and unconditional abandonment of any further inflation. The total
amount of dollar bills, whatever their name or legal characteristic
may be, must not be increased by further issuance. No bank must
be permitted to expand the total amount of its deposits subject
to check or the balance of such deposits of any individual customer,
be he a private citizen or the U.S. Treasury, otherwise than by
receiving cash deposits in legal-tender banknotes from the public
or by receiving a check payable by another domestic bank subject
to the same limitations. This means a rigid 100 percent reserve
for all future deposits; that is, all deposits not already in
existence on the first day of the reform (p. 448).


Human Action, Mises said that the government’s task is
to enforce contracts. Among these contracts are contracts for
redeeming money-certificates for money metals on demand. He
defined a money-certificate a receipt for a money metal that
has 100% of the promised metal in reserve. He said that banks
should not be favored by the government. They should not be
allowed the right to break contracts, which is what a refusal
to redeem money-certificates on demand is. “What is needed to
prevent any further credit expansion is to place the banking
business under the general rules of commercial and civil laws
compelling every individual to fulfill all obligations in full
compliance with the terms of the contract” (p. 443).

A traditional gold standard is where the government issues pieces
of paper that promise to the bearer full redemption in gold
coins. Mises did not defend the traditional gold standard. His
theory of money and credit denies the legitimacy of such a gold
standard. Mises did not believe that civil governments should
be in any way involved in the creation of money or the destruction
of money. He defended free banking because he did not trust
the government with sufficient authority to enforce 100% reserve

He believed that a non-governmental national gold standard is
no different in principle or operation from the international
gold standard. There was no one-world government that enforced
the international gold standard when he wrote Human Action
or in the nineteenth century, when it was a major factor in
world trade. In fact, the attempt by modern governments to regulate
in any way an international gold standard is always a political
ruse to undermine its anti-inflationary bias. “The international
gold standard works without any action on the part of governments.
It is effective real cooperation of all members of the world-embracing
market community. . . . What governments call international
monetary cooperation is concerted action for the sake of credit
expansion” (p. 476). Conclusion: there is no need for a national
government to enforce a national gold standard.

Economic logic does not end or begin at a political border.
There are no economic laws linking individuals within borders
that do not also apply to individuals across borders. To argue
that there are different economic laws for different groups
is utterly spurious. Mises called this dualism polylogism.
He devoted an entire section of Human
Action to its refutation (pp. 75-91). (I believe that the
only term that was more contemptible than “polylogist” in Mises’s
vocabulary was “empiricist.” But I could be wrong. Maybe “polylogist”
was at the top.)

To argue that Mises recommended any monetary policy for governments
is to argue that he simultaneously believed that (1) the international
gold standard needs no joint government intervention; (2) nevertheless,
for some unstated reason, domestic governments must develop
and enforce specific monetary policies relating to gold, banks,
and the issue of government claims to money. But Mises did not
hold such a polylogist position. Mises left no wiggle room on
this point: “Now, the gold standard is not a game, but a social
institution. Its working does not depend on the preparedness
of any people to observe arbitrary rules. It is controlled by
the operation of inexorable economic law” (p. 462).

I remind you once again of the representative “conservative”
policy recommendation that I mentioned in Part

is nothing more important that the government can provide
individual producers than a reliable standard of value,
a unit of account that retains its constancy as a measuring

idea is a conservative’s well-intentioned but totally anti-Misesian
version of a comment by John Maynard Keynes, in his book, Essays
in Persuasion

Individualistic Capitalism of today, precisely because it
entrusts saving to the individual investor and production
to the individual employer, presumes a stable measuring-rod
of value, and cannot be efficient — perhaps cannot survive
— without one.

these grave causes we must free ourselves from the deep
distrust which exists against allowing the regulation of
the standard of value to be the subject of deliberate
decision. We can no longer afford to leave it in the
category which the distinguishing characteristics are possessed
in different degrees by the weather, the birth-rate, and
the Constitution, — matters which are settled by natural
causes, or are the resultant of the separate action of many
individuals acting independently, or required a Revolution
to change them.

recommended no “scientific” government monetary policy whatsoever.
He recommended private ownership, the State’s enforcement of
all contracts, and legal sanctions against private violence.
As he wrote in his 1927 book, Liberalismus,
“This is the function that the liberal doctrine assigns to the
state: the protection of property, liberty, and peace” (Liberalism
in the Classical Tradition [1985], p. 37). Providing money
of stable purchasing power was not on the list. He took this
extremely limited set of government policies and applied them
to all of economics, including monetary theory.


Money is neither a production good nor a consumption good. Therefore,
an increase or decrease of the money supply cannot be said to
add to the social value of the economy. There is no way to measure
social value.

Mises said that profits from mining are paid for by those participants
in the economy who gain access to the newly mined money metal
late in the process of exchange, after prices have risen. Those
who gain early access are the beneficiaries.

He defended the metallic money standard because it reduces fluctuations
in the value of money compared to State-issued money. The costs
of mining are greater than the cost of printing money. This
reduces the increase of money. For this reason, a precious metal-based
monetary system is an advantage over a State-issued currency.
He recommended private ownership and the State’s enforcement
of contracts. He did not offer any recommended monetary
policy for the State, other than a freeze on its existing money

Then what of the goal of stable prices? What of the goal of
a truly neutral money, in which changes in the money supply
hurt no one? These are the subjects of Part III.


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2002 LewRockwell.com

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