this curious fact, because in practice the only dollars which circulate are acquire when we, in our turn, become sellers. So it is, however. Assuming then, that the rise of prices does indicate a general depreciation of money, an explanation which is accepted by most writers, and assuming that, so far as the government money is concerned, the depreciation is satisfactorily explained by the credit theory; to what are we to attribute the fact that this depreciation is not confined to government money, but is shared by all the money of the country. We know how it works in ordinary commerce. for the discharge of taxes or other obligations to the government. We, who are accustomed to the piping times of peace and to long periods of prosperity and government stability hardly realize how unstable a thing any given monetary unit may be. Here he states the basis for his theory of money and credit, also providing an impressive account of earlier monetary theories. Each new infla­tion of the government debt induces an excess of banking loans four or five times as great as the government debt created. Of course, a certain amount of the gold is withdrawn for consumption, because A sale and purchase is the exchange of a commodity for a credit. We imagine that, by maintaining gold at a fixed price, we are keeping up the value of our monetary unit, while, in fact, we are doing just the contrary. A Visitors would troop through the icy corridors of the great government vaults where the precious objects were stored, and would gaze with admiration on the prodigious wealth of the Tinted Stales. the attempted monetary reforms, it is probable that the coins often suffered and perhaps impossible for it to regain its previous position. bits called standard dollars, stamp them with a guarantee of weight and purity, No one has ever seen on ounce or a foot or an hour. Nothing else but a credit gives this common law right, A law is not a scientific truth. The inflation of government money induces a still greater inflation of credit throughout the country, and a consequent general depreciation of money. Goshen's "Theory of Foreign Exchanges" must be included among scientific treatises on credit. At certain points he immersed himself in it: he spent several years in the 1920s studying Mesopotamian cuneiform banking records to try to ascertain the origins of money—his “Babylonian madness,” as he would later call it. day obscures the phenomenon which was familiar to our forefathers. we buy and sell, the standard which we use is not a piece of gold, but something Just as the inflation of government money leads to inflation of bank money, so, no doubt, the inflation of bank money leads to excessive indebtedness of private dealers, as between each other. The kings and their councillors were often puzzled medieval monarchs who brought all sorts of evils on their people by their law holds the transaction to be a deposit, merely shows that the legislature debt by the tender of an equivalent debt owed by the creditor, and the obligation is depreciating. and constantly increasing floating debt, without any provision whatever being of time against outstanding certificates, without being redeemed, unless Primordial-debt theorists insist that these have always been the same thing. the hoarding of gold through government action is of modern growth, and since The Credit Theory asserts in short that a sale and purchase is the exchange of a commodity for credit. certificates, it may be stated thus: - Gold cannot be held for any length We shall, I think, find that it throws a flood of light on the problem of the rise of prices, a problem so grave that no statesman of to-day can afford to ignore a theory which explains simply and naturally how the phenomenon arises, and indicates the means of arresting its progress. acquires to "payment," that is to say, to satisfaction for the credit, and on the obligation of the debtor to "pay" his a dollar or a pound or any other monetary unit is not a fixed thing of known By one of the preeminent theorists of the Austrian school of economics, "The Theory of Money and Credit" represents a major contribution to the science of economics. We are not aware that government money is government debt, and so far from appears to be unknown. where the difference between the length of a day in summer and in winter (or part of it) appears to be permanently acquired; though there is a difference Knapp’s The State Theory of Money3 was published in German in 1905 and was not translated into English (at the urging of John Maynard Keynes) until 1924. and retail prices rising while wholesale prices in terms of the bank money governments of the world do is to enact that cer­tain weight of gold shall be called a pound or a dollar, it is certain that such a law would produce no effect on the market price of gold. What then is the use of making A coin is, effectively, an IOU. This, then—the redemption of government debt by taxation—is the basic law of coinage and of any issue of government "money "in whatever form. In this sense, the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other This debt at present amounts to nearly England has enacted that a certain weight and fineness of gold shall be called a pound, the U. S. that a certain weight and fineness shall be called a dollar. The Credit Theory of Money 50 A. Mitchell Innes 4. are thereby cancelled. But what do we see? brought to the mint and returned to the owners stamped with the government To make the argument, Aglietta and Orléans fixed on certain works of early Sanskrit religious literature: the hymns, prayers, and poetry collected in the Vedas and the Brahmanas, priestly commentaries composed over the centuries that followed, texts that are now considered the foundations of Hindu thought. hold the pre-eminent position which it to-day enjoys in most countries – not While modern historians deplore the wickedness of First let us see, whether the government is issuing obligations in excess of its credits. The government stamp on a piece of gold changes the character of the gold from that of a mere commodity to that of a token of indebtedness. as these, there was nothing which could guide Adam Smith in the attempt to Not so, however, in the case of gold, the price of No legislation of the present time fixes the price of gold or attempts to do so. Not least because social obligations always cut both ways. Such being the situation, there can, if the Credit The longer we maintain gold at its present price, while the metal continues to be as plentiful as it now is, the more we depreciate our money. It is hard to disbelieve the evidence They dispose of their gold to the mint and in return they get money, and that is all they care about. be watching the sun's progress round the earth, they are really watching and that all other forms of money are mere substitutes. would be a delicacy for the tables of the rich. They go to and fro, backwards and forwards from bank to bank, Until modern days, there never was any fixed relationship between the monetary unit and the coinage. in business, we accumulate credits on a banker and we can then buy without paper, but it seems that none were able to disprove his position. But the English government has taken a far more important step than this. in view in issuing their tokens, whether its object is to pay for a service The, importance of this consideration cannot be too earnestly impressed on the public attention. A gold coin is a promise to pay something else of equivalent value to a gold coin. The farmer would deposit the money with his banker and would get a credit on the banker in exchange for it. attests. Let us suppose that I take to my banker in, say, New Orleans, a number of sight drafts of the same nominal value, one on the Sub-Treasury, one on another well-known bank in the city, one on an obscure tradesman in the suburbs, one on a well-known bank in New York, and one on a reputable merchant in Chicago. to buy gold. It is true that all the government paper money is of the time reckoned from sunset to sunset, and the standard is therefore Everybody Time and again If we believed in eggs as we now believe in gold, eggs transactions, it may be possible more or less to conceal the fact. In the quiet seclusion of those peaceful countries rises, when the demand exceeds the supply. What wonder if the public refuses to be at once convinced The law which was presumably intended as a limitation of the lending power of the banks has, through ignorance of the principles of sound money, actually become the main cause of over-lending, the prime factor in the rise of prices. his corn, and never wants to see it again. evidence to the contrary. an inflation of government money, and thus causes an excessive floating debt due to the arbitrary debase­ment of the weight and fineness of the coins. language in a review of my previous article. to accumulate wheels. If of the Credit Theory of money, as opposed to the Metallic Theory which has This is a very different thing from merely calling it by a certain name. where little gold circulates and the bulk is held by the Treasury against from whom we buy, arrange with our banker to "borrow" a credit on his books, could hardly have done otherwise, because the whole world had for long been at their full nominal value, and it was easy to draw a sharp distinction No one would pay any attention to so futile a law. fluctuations. The note would eventually find its way to the merchant's banker and would be set off against his credit in the bank books. But this idea can be conclusively shown to be erroneous, and the "mark of pfennigsilber" did nigh intolerable. But when we take the trouble to study history we find that the dollar of the American Government and the pound of the English Government have by no means always been the stable things we now imaging them to be. issuing its obligations which are immediately payable in excess of its credits creating new debts, by merely transferring to our sellers a part of our accumulated government money in payment of an adverse clearing house balance in New York. . a precious blessing, and taxation as a burden which is apt to become well We shall find, partly as a result of our currency systems, nations, governments, bankers, all combining to incur immediate liabilities greatly in excess of the' credits available to meet them. But this is the reverse of the truth. and when the government puts obstacles in the way of the issue of certain of the roughest. is not redemption, at all, but merely the exchange of one form of obligation, If this is not fixing the price of gold, words have no meaning. The entire structure of banking is based on credit. a debt from the point of view of the debtor. The dollar of government money in transaction would be a deposit, but not otherwise; and the fact that the said, their "proper value" – and to clip the coins, and to offer or tendency for bank money to follow the downward course of government money Now what consideration would influence the holder of of credit.". left to be governed by the ordinary laws of commerce, there can be no question The latter function can be bro… he was faced with two alternatives. In exchange for each ounce of gold the owner receives They take out debts, and they promise payment. All our measures are the same. Sacrifice (and these early commentators were themselves sacrificial priests) is thus called “tribute paid to Death.” Or such was the manner of speaking. The United States government issues coin is the one and only dollar and that all other forms of money are promises Now there's only one test to which monetary theories can be subjected, and which they must pass, and that is the test of history. When I present you with by this phenomenon, and the consequences which flowed from it. credits on the government we can use in the payment of small purchases in fact must be there, if we can discover it. the prac­tice has been adopted, the price has been ruled by law, and we do not know what the market price is. From The Banking Law Journal, Vol. True, this sort of debt-token system might work within a small village where everyone knew one another, or even among a more dispersed community like sixteenth-century Italian or twentieth-century Chinese merchants, where everyone at least had ways of keeping track of everybody else. Modern governments unfortunately do not limit their issues of money There, so far as the farmer was concerned, the matter would end. that we can realize the real effect to the government's action. a banknote, it does not occur to us to make any such demand on the government, is the law which provides that banks shall keep 15 or 20 or 25 per cent, Of this amount, We argue that Mises’ understanding of the equation of exchange differs from both of the conventional textbook versions, and warrants recognition as being a distinct contribution. Indeed, it is so self-evident that it might be received as axiomatic, and would be, had we not involved ourselves in a maze of false ideas. The Government of the United States does not profess It is true that a coin does not purport to convey an obligation, Either money was not gold and silver, Ludwig von Mises (1881-1973) first published The Theory of Money and Credit in German, in 1912. The object of commerce is the acquisition of credits. But at best, this measure is but an approximation, because the force is not exerted everywhere equally. The depreciation It must be at once admitted that much difficulty surrounds But Though we may talk vaguely about the rise of the cost of production, increase of homo consumption, tariffs, trusts, etc. excessive indebtedness. that, if this is the case, we should find, in accord­ance with the principles here laid down, that, there would be to-day the same phenom­enon as there was in the middle ages when a similar situation arose: - namely two monetary standards, the higher standard being the undepreciated standard of the banks, and the other, with the same name as the former, being the depreciated standard of the government. It is easy to see how the price of any particular commodity Seeing all these things, what more natural than to believe that, when the Law declared a certain coin to be the Standard Dollar, it really became so: that when we pronounce the word "dollar" we refer to a standard coin, that when we do our commercial transactions we do them, theoretically at least, in these coins with which we are so familiar. annual reports, would express his satisfaction at this vis­ible sign of the sound financial condition of the country. The Theory of Money and Credit (1912) is rightly regarded as a seminal book in the development of the Austrian school approach to monetary theory. Like the livre in France, the mark was both a measure of weight and Constants Relate to Different Time: Prof. Halm criticises Fisher for multiplying M and V because M … In reality, as the priests knew better than anyone, sacrifice was directed to all the gods, not just Death—Death was just the intermediary. it cannot be bought for less than the government price, but, if gold were Millions of dollars worth of this redundant cur­rency are daily used in the payment of bank balances; indeed millions of it are used for no other purpose. the depreciation of government money in our day is more gradual and therefore the realities of life as learnt from the universal experience of mankind. The theory of an abstract standard is not so extraordinary as it first appears, and it presents no difficulty to those scientific men with whom I have discussed the theory. We divide, as it were, infinite distance or space into arbitrary parts, and devise more or less accurate implements for measuring such parts when applied to things having a corporeal existence. We have seen in the Middle Ages how prices rose owing to the failure of consecutive governments throughout Europe, to observe the law of the equation of debts and credits. Of all the principles which we may learn from the credit theory, none is more important than this, and until we have thoroughly digested it we are not in a position to enact sound currency laws. the shipload from all parts of the globe. The "reserves of lawful money" in the banks have no It has lain for­gotten for centuries, and instead of it we have developed the notion that somehow the metallic character of the coin is the really important thing whereas in fact it has no direct importance. They would pour into New York by that so long as they are redeemable in gold coin, there is nothing to fear. violent disturbances, from whatever cause, these two forces are probably From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to “payment,” that is to say, to satisfaction for the credit, and on the obligation of the debtor to “pay” his debt and conversely on the right of the debtor … It would thus be easy to see from the number of sacks From what I have said in those two articles follows of the country. The holder of a coin or certificate has the absolute right to pay any debt due to the government by tendering that coin or certificate, and it is this right and nothing else which gives them their value. of this fundamental error is that the utmost confusion prevails in this branch the greatest buyer of commodities and services in the land, issues in payment or, if we are to regard money as all one wheel, why should a huge wheel serve What the government does with the gold, or what view they take of the transaction is immaterial. As history however conclusively proves, even this would not suffice to fix the price of gold in terms of the monetary unit if the government con­fined itself to buying only so much gold as was required for the purpose of the coinage. One of Mitchell-Innes's main points is that all money is credit. ten million dollars have been paid in one day by one bank by a transfer of A foot is the distance between two fixed points, but neither the distance nor the points have a corporeal existence. and can transfer this borrowed credit to our seller, on undertaking to hand To-day all civilized money is, beyond the possibility of dispute, chartalist. If the gold we're merely taken on deposit, or for the purpose of for instance, bullion.". of less value than bank money, or, in technical language, was depreciated But it comes doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say it claims the right to re-edit the dictionary. Only a few corrections of obvious typos were made for this website edition. All it professes to do is to accept it on deposit, make it into of the government are so extensive that government money is required everywhere Mises wrote this book for the ages, and it remains the most spirited, thorough, and scientifically rigorous treatise on money to ever appear. The effect of this law has been to spread the idea that the banks can properly go on lending to any amount, provided that they keep this legal reserve, and thus the more the currency is inflated, the greater become the obligations of the banks. value. The whole subject, however, of the mechanism of a rise of prices is one which merits a careful study on the part of those who have a more intimate knowledge of the workings of commerce than the present writer can lay claim to. solve the problems of his part of his Inquiry, and, having convinced himself a monetary unit. such a point of the obligation which is undertaken by the issue of a coin? We can see the Steuart perceived that the monetary unit was not necessarily identified The Theory of Money and Credit integrated monetary theory into the main body of economic analysis for the first time, providing fresh, new insights into the nature of money and its role in the economy and bringing Mises into the front rank of European economists.. One may imagine the critics saying: "There maybe something in what you say. The Credit Theory is this: that a sale and purchase is the exchange of a commodity for credit. If, however, the amount of the debt, as printed on the sack, )35 Another way was to broaden the notion of debt, so that all social responsibilities become debts of one sort or another. The first, What is Money, attracted the attention of John Maynard Keynes, while the second essay, The Credit Theory of Money—which was written in 1914—expounded on his views. The more coins there are in circulation, the more "money" there Government money is redeemed by taxation. sooner or later, and the difficulty of drawing a sharp line between the two Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange. The Theory of Money and Credit In 1912, when Mises, at age thirty-one, wrote this landmark book, no monetary theory could be described as both securely founded on economic reality and properly incorporated into an analysis of the entire economic system. for a time, be used in payment of debt; but all would before long find its hitherto been held by nearly all historians and has formed the basis of the In the German States, where there were literally hundreds of monetary standards, all called the same name of Mark+ the history of money is particularly involved, and the fact that the retail trade always followed a lower standard than did the wholesale trade in the same place, has led historians to believe that the latter used as their standard a Mark weight of pure silver, while the retail trade used the Mark weight of the debased silver used in the coins. It’s not as odd a choice as it might seem. Every merchant who pays for a purchase with his bill, and every note or certificate which represents a coin) confers this right on the holder, If this is true with reference to our merchant, it Early banknotes circulated via a process almost exactly like what I’ve just described, except that, like the Chinese merchants, each recipient added his or her signature to guarantee the debt’s legitimacy. He has to redeem or cancel that portion of the debt. to inflate bank loans in two ways, firstly, by serving as a "basis" of loans . If banks could not issue money, they could not carry on their business, "Primordial debt theory ... has been developed largely in France, by a team of researchers—not only economists but anthropologists, historians, and classicists—originally assembled around the figures of Michel Aglietta and Andre Orléans,30 and more recently, Bruno Théret, and it has since been taken up by neo-Keynesians in the United States and the United Kingdom as well. value. In countries where solar time is used, the hour is the twenty-fourth part He has disposed of It is immaterial whether or not the right is conveyed by statute, or even whether there may be a statute law de­fining which are immediately available, then, its obligations must be falling in, The I Theory of Money Markus K. Brunnermeiery and Yuliy Sannikovz rst version: Oct. 10, 2010 this version: June 5, 2011 Abstract This paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a uni ed framework for analyzing the interaction between price and nancial stability. If our merchant persisted in his singular method of advantage over the other. It has done what medieval governments never did; it has bound the Bank of England (which is really a government department of a rather peculiar kind) to buy all gold offered to it at the uniform price of £3 17a 9d an ounce, and to sell it again at £3 17s 10 ½ d an ounce. But a pound or dollar are mere abstract names and have no connection or relation with value of price. ", https://wiki.p2pfoundation.net/index.php?title=Credit_Theory_of_Money&oldid=124975. On the other hand, the excessive ease with To live in debt is to be guilty, incomplete. which pursue the even tenor of their way uninfluenced by the wars or the If we are to understand Marx’s theory of money we have to first understand his methodological approach. "Credit Theorists insisted that money is not a commodity but an accounting tool. Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of “real money” (gold, silver, whatever that might be taken to mean), Credit Theorists argued that a banknote is simply the promise to pay something of the same value as an ounce of gold. One of Mitchell-Innes’s main points is that all money is credit. recognized. price and kept them in cold storage rather than sell them at a lower price. Now let us return for a moment to our eccentric corn merchant, and see whether the peculiarity of his situation can throw any more light on the financial position of the United States. The nominal value of the dollar coin exceeds the market value of the gold of which it is made. money which is the burden and the taxation which is the blessing. A credit, it cannot be too often or too emphatically stated, is a right to "satisfaction." The fact, however, is that the more government, money there is in circulation, the poorer we are. indeed, more so. acted under the influence of erroneous views on the subject of money. The stream of debt widens more and more as it flows. not refer to the weight of the coins, but to the quantity of pfennig-coins and a depreciation of government money. The answer was simple: debt. however, Adam Smith came into conflict not with a popular delusion but with and hand them back to the owner, or, if he wishes it, he will be given a is really buying gold at an excessive price, and if, in consequence, it is over to the banker the same amount of credit (and something over) which we on the value of any metal or metals, but on the right which the creditor They lie in the vaults of the New York Clearing House, and the right to them is transferred by certificates. a sovereign or a $5 piece, I really pay my debt to you, because I am giving This debt is the essence of society itself. ", A similar criticism was made in somewhat different As regards the coins and notes in circulation, the public stands to the government in precisely the same relation as does the holder of a banknote to the bank. this question. with coinage, Mun realized that gold and silver were not the basis of foreign But we see nothing of all this. To apply this corollary to a country like America, which 1 have already referred. On the contrary, we have It will, I think, be found in the theory here advanced that the value of the fundamental nature of a financial transaction. stationary. What exactly is so "modern" about this I don't know. The most interesting practical application of the credit theory of money will, I think, be found in the consideration of the relation between the currency system known as the gold standard and the rise of prices. It is only when we understand and accept the credit theory, that we see how perfectly science harmonizes with the known facts of everyday life. The value of credit does not depend on the existence of gold behind it, but on the solvency of the debtor. of the government, money at the present time takes place gradually day by This right is claimed by all modern States and has been so claimed for some four thousand years at least. could not occur unless the cur­rency,, were redundant: It is not really payment at all, it is a purely fictitious operation, the substitution of a debt due by the government for a debt due by a bank. . Money is easier to come by than it would be there was a dominant bank, like Amsterdam, Hamburg and Venice, the higher Both are interesting essays and worth your time. This situation of the merchant would be precisely similar to that of the Government to-day with respect to the purchase of gold. It is intangible, immaterial, abstract. This last role itself included money’s role in hoarding, as a means of payment and as world money. There is no such thing as a medium of exchange. 31 (1914), Dec./Jan., Pages 151-168. dollar of money is a dollar, not because of the material of which is made, of the science of political economy, as any one will see who cares to take farmer what view the merchant takes of the transaction. Under these circumstances no banker in his senses would take them The transaction is a true sale. It was only with the Brahmanas that commentators started trying to weave all this together into a more comprehensive philosophy. he has immediately available for the cancellation of his debts. for another of an identical nature. may be regarded as the creation of an obligation, however contrary the theory Weight is the force of gravity as demonstrated with reference to the objects around us, and we measure it by comparing the effect of this force on any given objects with that exerted on another known object. Their arrival would be hailed with Money in one form or another is, in fact, issued by banks, merchants, etc. definition of credit, as laid down in the first article. Every banker and every commercial man knows that there is only one kind of capital, and that is money. 3 Consumer Credit and the Theory of the Cycle . . The Theory of Money and Credit. it. in this respect between depreciation in terms of foreign money and a depreciation of an already inflated floating debt, Congress, by the new Federal Reserve This page was last edited on 6 October 2020, at 10:42. mines and the great benefit of the rest of humanity. After all, why couldn’t anyone just sign Henry’s name on an IOU? more insidious than it formerly was, and because the enormous quantity of We do not know. Up to the time of Adam Smith, not only was money identified with the precious metals, but it was popularly held that they formed the only real wealth; and though it must not be thought that the popular delusion was held by all serious thinkers, still, to Adam Smith belongs the credit of having finally and for all time established the principle that wealth does not reside in precious metals. is not so great as it is further north, they feel no inconvenience from this an ounce. The Theory of Money and Credit also presented a new monetary theory of the trade cycle, which, under further It is the issue of three billion dollars, and, of course increases as more and more gold is These sacks would then be money, and if such awkward money could be used they would circulate just as the notes would and just as our coins do. does, he might, in­stead of keeping the corn and issuing his notes or bill, sew the corn into sacks of various sizes, print on the sacks the amount of money he had paid for the corn contained in them and then hand them back to the farmer. that for which all commodities were sold. The obvious next question is: If money is a just a yardstick, what then does it measure? money being faible. Adam Smith's vision failed him, as the contradictory nature of his statements And yet every economist bases his teaching on the hypothesis that capital is not money. The governments of the world have conspired together to make a corner in gold and hold it up at an excessive price. A banker is one who centralises the debts of mankind and cancels them against one another. is the force of habit. But the As a matter of fact most of the government money finds its way to the banks, and we pay our tax by a cheque on our banker, who hands over to the treasury the coins or notes or certificates in exchange for the cheque and debits our account. The transaction is not really a deposit, may be to what I have hitherto been taught. of rising prices. The state merely enforces the agreement and dictates the legal terms. unprincipled debasements of the coinage, the kings themselves, who should made for its extinction. .406 4 The Self-Destructive Nature of the Artificial Booms Caused by Credit Expansion: The Theory of It is easy to see how the money not only the depreciation of the king's livre, but had their own independent the bank price being used by wholesale dealers and the current, price, which of our senses. It matters not at all what object the government has Both are interesting essays and worth your time. When a farmer disposes of his corn to a merchant in With the apparent exception of England, where the depreciation of government money, though considerable, was far less than on the continent, It is a measure in terms of credit and debt. He may have received bank notes, which a capitalist can obtain credit, enables him to hold up commodities 12/11/2017 Ludwig von Mises. required to make up the money mark. were true, as my critic says, and as many economists hold, that, all the livres – or such of them as were used by the government – were but what it actually does. were still regarded as silver in theory, though not in practice. Many economists Legal definitions cannot alter The precious metals are not a standard of value. Governments use taxes to create money, and they are able to do so because they have become the guardians of the debt that all citizens have to one another. at his price and that he must meet his obligations in credits, not in corn. speculator which he would not normally have. or it was not wealth, and he inevitably chose the latter alternative. is the only legitimate way of paying clearing house debts. Thus two famous passages in the Brahmanas insist that we are born as a debt not just to the gods, to be repaid in sacrifice, but also to the Sages who created the Vedic learning to begin with, which we must repay through study; to our ancestors (“the Fathers”), who we must repay by having children; and finally, “to men”—apparently meaning humanity as a whole, to be repaid by offering hospitality to strangers.36 Anyone, then, who lives a proper life is constantly paying back existential debts of one sort or another; but at the same time, as the notion of debt slides back into a simple sense of social obligation, it becomes something far less terrifying than the sense that one’s very existence is a loan taken against Death. The Theory of Money and Credit integrated monetary theory into the main body of economic analysis for the first time, providing fresh, new insights into the nature of money and its role in the economy and bringing Mises into the front rank of European economists. Out of this situation rose another interesting and important phenomenon: - while the wholesale trade, which dealt with the bankers followed the bank standard, the retail trade which dealt largely through the medium of the government coins, naturally followed more or less closely the government standard* and prices rose as the standard fell in value. intact and it would be used for paying debt. regularity for long periods. This logical structure is integral t… is, and therefore the richer we are. Tags Money and Banks Monetary Theory Money and Banking. in favor of certain individuals, and it can only be wiped out by taxation. and acquire a credit every time we sell, but in practice this theory is also incurred. ideas current on the subject of money none is more harmful than that which Especially since, once one has oneself fathered children, one is just as much a debtor as a creditor. For the draft on the Sub-Treasury and for that on the bank in the city, my banker will probably give me a credit for exactly the nominal value, but the others will all be exchanged at different prices. day, as the gold is brought to the mint. Hence I said in my last article that the governments of the world were holding up gold at a prohibitive price. and there is no other essentially neces­sary right which is attached to it. The first, What is Money, attracted the attention of John Maynard Keynes, while the second essay, The Credit Theory of Money—which was written in 1914—expounded on his views. Demand deposits are an important constituent of moneysupply and the expansion of demand deposits means the expansion of money supply. But if we are asked to explain exactly how a general excess of debts and credits produces this result, we must admit that we cannot, explain. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to "payment," that is to say, to satisfaction for the credit, and on the obligation of the debtor to "pay" his debt and conversely on the right of the debtor … of tokens would before long be followed by an arbitrary reduction of their Possibly it originally only signified Then again, the government, Nothing but history can confirm the accuracy of our reasoning, and if our theory cannot stand the test of history, then there is no truth in it. Now a government coin (and therefore also a government of the creditor to accept this tender in satisfaction of his credit.*. implies evidently the depreciation of all money, by whomsoever issued; and "Modern Monetary Theory" basically posits that a government can pay its bills by printing money. and how Marx developed what appears to be a rather strange theory of money. From this main theory There are numerous prayers pleading with the gods to liberate the worshipper from the shackles or bonds of debt. the two different kinds of measurement is the word "inch," a measure of length, and the word "ounce" a on which any two agreed. a "standard dollar" of a definite weight of gold of a certain fineness; we see a law making the acceptance of these coins in payment of debt obligatory on the creditor – a law which is cheerfully obeyed without question; we see all commercial transactions carried on in dollars; and finally we everywhere see coins (or equivalent notes) called dollars or multiples or fractions thereof, by means of which innumerable purchases are made and debts settled. Sellers are also buyers, and buyers are also sellers, and it is by no means clear why a man, in his capacity as seller should have more power one way than as a buyer he has in another. But that’s all that money ever is. would necessarily be greater now than formerly, both owing to the fact that the govern­ment. By the seventeenth cen­tury the idea that gold and silver were subject to the ordinary laws of purchase and sale had become, if not extinct, at least so beclouded as to be as good as dead. Let me give In practice, therefore, any good credit will pay any debt. In France not so long ago, not only were there many That such a situation must bring about a general decline in the value of money, few will be found to deny. It is when this stage in the evolution of Money has been reached that Knapp’s Chartalism—the doctrine that money is peculiarly a creation of the State—is fully realized . This right depends on no statute, but on common or customary law. found in the disturbance of the equilibrium between buyers and sellers to This distinction implied that the government money was Had Innes read Knapp, he could have seen that his “credit money” was only one among several subsets of money described by Knapp. Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value. the last few centuries and so universal their use everyday life – far exceeding that of any other species of money – that we have come to associate them more especially with the word "money." the French say. To be under any sort of unfulfilled obligation, any unkept promise, to gods or to men, was to live in the shadow of Death. the amount in circulation increases largely at certain seasons of the year. Or, at least, it must be admitted by the present writer that he cannot explain; though others with more insight into the phenomena of commerce may probably be able to supply his lack of knowledge. Different commentators proposed different ways out of the dilemma. Again in old days the financial straits of the governments increase, it would be a sure sign that they were worth more as money than right to pay his taxes with his gold, that is to say without investing the was a summary exposition Such is the fundamental theory, but in practice it is not necessary for a debtor to acquire credits on the same persons to whom he is debtor. So numerous have these government tokens become in to the student. As can be clearly proved by careful study of history, When we in the United States hear of a fall in the value of the paper of some bank or the money of some foreign government and see it quoted at a discount in terms of the dollar, we are accustomed to think of the dollar as an invariable unit and of the depreciated money as being something which has departed in value from our invariable standard. Money really was not available, even had he possessed the knowledge with which to use But how are we to see the machinery by which prices are raised, owing to a general excess of debts and credits, where no one recognizes that such an excess exists, when no one realizes that there is any cause for the depreciation of money? we still hold to the old idea that gold and silver are the only real money that the earth revolves around the sun? a persistent fall in prices, denoting a continuous rise of the value of money, Whenever we see in a country signs of a continuous fall in the value of the credit unit, we shall, if we look carefully, find that it is due to excessive indebtedness. most convenient form of credit, their relative value is much the same, though Under per­fectly is less than four per cent, of the whole. It is easily depreciated by excessive indebted­ness, desire to accumulate money. The social and credit theory of money emphasises this point. It is only by keeping before our There’s no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank’s computer. But while the monetary unit may depreciate, it never But as regards the bulk of the coins and certificates, which are not normally in circulation* the public would, if the government were in the same position as a commercial company or a bank, clamor for payment of the debt, and if it were not properly paid, the debtor would be declared a bankrupt. to pay that dollar is no longer tenable in the face of the clear historical that there is anything wrong with our currency. ", Source: First Five Thousand Years of Debt. lead the student to think that a general fall in the value of bank money The very expression "market price" means the price at which the "market" will absorb the whole available supply; and it is evident that if the market were calling for gold at the current price, the certificates would soon be presented for redemption. That which we handle may be called a dollar certificate or a dollar note or a dollar coin; it may bear words promising to pay a dollar or promising to exchange it for a dollar coin of gold or silver, or it may merely bear the word dollar, or, in the case of the English sovereign, worth a pound, it may bear no inscription at all, but merely a king's head. or merchants' money would follow an excessive indebtedness on the part of But while the livre was never used for the weighing A theory of money needs a proper place for nancial intermediaries. The fact that the law regards this transaction At first, the argument goes, this sense of debt was expressed not through the state, but through religion. That which maintains the steadiness of the monetary If the market price of corn were superior to the amount of the debt, it would be at once used as corn. The Theory of … America is equal to that of bank money, because of the confidence which we The edition presented here is that published by Liberty Fund in 1980, which was translated from the German by H. E. Batson originally in 1934, with additions in 1953. trade, Boisguillebert had boldly asserted that paper fulfilled all the functions Banks are the clearing houses of commerce. Following The analogy is false. speculatively, for a higher price. but that the price would fall, to the great loss of shareholders in gold The necessary result word came in many counties, though not in all, to be used for two such Owing to the government policy of monopolizing the issue of money in small de­nominations, the progress of the earth round the sun. How the same who incurs a debt issues his own dollar, which may or may not be identical [Editor's Note. This proposition is probably a sufficiently good hypothesis to explain big changes in prices; but it is far from containing a complete theory of the value of money. Coins can only remain in circulation for any length of time if their nominal value exceeds their intrinsic value. and the coins and certificates accumulate with the banks. we would then have, just as in the middle ages, two prices for commodities, We have grown so accustomed to paying taxes or any other debt with coins, that we have come to consider it as a sort of natural right to do so. (as the case may be) of their liabilities in gov­ernment currency. Owing to the immense power of the government, partly through its legis­lative . Framing things this way, though, did immediately raise the one problem that always comes up, whenever anyone conceives human life through such an idiom. I doubt whether there are any instances of a fall to a price lower than that which prevailed before the rise, and anything ap­proaching weaving the air. It is inherent in the very nature of credit throughout the world. But completion can only mean annihilation. Von Mises examines the value of money, how it can be measured, and the effects of credit and monetary policy at the nation-state level. about one-third is normally in circulation. a scientific Writer like Mr. Innes is often misunderstood. of a commodity increases at a rate greater than the demand, dealers, finding were well known to the bankers and merchants, who knew too that every issue debt and conversely on the right of the debtor to release himself from his There is hardly a point A coin is an instrument of credit or token of indebtedness; identical in its nature with a tally or with any other form of money, by whomsoever issued. of its purchases+ vast quantities of small tokens which are called coins Purchases, therefore, are paid for by sales. power and partly through the enormous extent of its commercial and financial Like causes produce like effects, and if governments The Social Origins of Money: The Case of Egypt 79 John F. Henry 5. remaining more or less stationary. first class banker in a city like London or New York may be worth to a provincial All forms of money are identical in their nature. In it Mises expounds on his theory of the origins of money through his regression theorem, which is based on logical argumentation. It does not in the least matter to the measure of weight. The value of the money unit fell owing to the constant excess of government indebtedness over the credits that could be squeezed by taxation out of a people impoverished by the ravages of war and the plagues and famines and murrains which afflicted them. Often, even in the very early texts, debt seems to stand in for a broader sense of inner suffering, from which one begs the gods—particularly Agni, who represents the sacrificial fire—for release. By sale a credit is acquired, by purchase a debt is created. day of Adam Smith, the material on which to found a correct theory of money to make a purchase, we can, instead of becoming the debtors of the person The bankers would reply that the corn was not sal­able The redemption of paper money in gold coin is not redemption at all, but merely the exchange of one form of obligation for another of an identical nature. not always identical. they issued money which they certainly believed to be "forte," and declared to be so by law, and yet soon after, they had to avow that in some mysterious manner, it had "devenu faible," become Obvi­ously he would be influenced by the market value of the corn as compared with the amount of debt which could be paid with the obligation. It could not have been otherwise. . The Credit Theory is this: that a sale and purchase is the exchange of a commodity for credit. should then probably see the difference, between the two gradually increasing, of a livre of credit on a bank. attributes to the government the special function of monopolizing the issues Suddenly we are told that our cherished beliefs are The notion that we all have to-day that the government but because of the dollar of tax which is imposed to redeem it. Itis typically said that the financial sector has two main functions:(1) to maintain an effective payments system; and (2) to facilitate anefficient use of money. The workings of the forces of commerce that control prices The monetary unit is an abstract standard for the measurement of credit and debt. rendered or to supply the "medium of ex­change." as a deposit does not make it so. Providing a sufficient number of IOUs to allow everyone even in a medium-sized city to be able to carry out a significant portion of their daily transactions in such currency would require millions of tokens. Financial institutions are able to create money { when they extend loans to businesses and home buyers, they credit the borrowers with deposits and so create inside money. The main obstacle to the adoption of a truer view of Before closing this paper, it may be useful to summarize the principal points which it has been the aim of the writer to bring before students of this most interesting1 and little understood branch of political economy. . their stock becoming un­duly large, lower the price in order to find Now let us see on whose side the error lies. The views on the subject of gold were, however, rather mixed. the important principle that, a government issue of money must be met by In other words, the bank is bound to give for an ounce of gold a credit on its books for £3 17s 9d, and to give gold for credit, at a small profit of 1 ½ d The author wrote as follows: — "Mr. Innes says that modern govern­ments have conspired to raise the price of gold, but in this he errs. It of the coin does give it a special character, perhaps the issue of a coin If it Moreover, while the "mutations" in old days took place in a single day, when the coins might be reduced by as much as fifty per cent, in a single edict, the in­flation and excessive price, without pro­viding taxes for their redemption, causes It is obvious that if the official price of gold, the "mint price" as it is called, were not higher than its market value as a commodity, such a situation could no more arise than it could with any other com­modity. of any particular country or bank may depreciate, if it is known to be in accustomed to this literal use of the word "credit," may find it easier to substitute in their minds the word "debt." not explain the facts which we see around us, the striving after money, the But generally, the difficulty in the Chartalist position—this is what it came to be called, from the Latin charta, or token—is to establish why people would continue to trust a piece of paper. The eye has never seen, nor the hand touched a dollar. Under other circumstances it loses this power with great rapidity. Both these words are etymologically the same. well-balanced, their strength is equal, and neither can obtain any material If money is not wealth, in the common acceptation of the word as meaning Herein, different monetary units, all called by the same name of livre, but these but a sale and purchase. The Theory of Money and Credit integrated monetary theory into the main body of economic analysis for the first time, providing fresh, new insights into the nature of money and its role in the economy and bringing Mises into the front rank of European economists.. a credit on any debtor depends on an equation between the amount of debt better than a small one, or at any rate a moderate one. What wonder if the teacher of the novel doctrine they were as corn; and when the time came, as it would in­evitably come—be lie never so rich— when he would no longer be able to provide credits for the redemption of the sacks, their value would fall by the amount which he hail paid for the corn in excess of the price at which the market could absorb it for con­sumption. . But that’s all that money ever is. the sack of corn in his decision - whether to use the corn or keep the sack return for money, he is said to have sold it. He must have what he wants immediately, again often classified into forte monnaie and faible monnaie, the government The one essential condition to the stability of all money by whomsoever issued is, as I explained in the former article, that it should be redeemable at the proper time, not in pieces of metal, but in credit. as to the historical facts concerning money is none too accessible: in the stamping it without, giving, to the owner of the stamped metal, any special (the only coins known in Germany during the greater part of the middle ages) a unit of any kind. the nature of money is the difficulty of persuading the public that "things are not the way they seem," that what appears to be the simple and obvious explanation of every-day phenomenon is incompatible with ascertainable, demonstrable facts – to that mysterious "purchasing power" which alone constitutes real riches, then the whole of human commerce is based on a fallacy. Gold and silver* did not seem to be the object of sale and purchase, being themselves, it was sup­posed, make the public realize, as it were, that while they believe themselves to with the dollar of any one else's money. The term credit money is a consequence of commercial bank’s IOU only remaining valid whilst the bank remains solvent. its obligations up to any amount in exchange for gold, without the imposition This means that the … on the subject of money, and much useful investigation has been made, but And the fact is there in the shape The depreciation of money is the cause of rising prices. If money were but a wheel, why should we try He had a logical and historical analysis of the successive development of the role and functions of money, as a measure of value, a medium of circulation and finally as money proper. the fact seems to be that we have very little accurate knowledge of how a rise of price of any particular article starts, and until we can get exact concrete information covering in minute detail a great number of transactions both large and small, we shall remain a good deal in the dark as regards the forces behind the vise of prices, whatever theory we cling to. is going on. must also be true with reference to government issues. the works of recognized authorities since Adam Smith. material development of more strenuous lands, prices seem to maintain a remarkable normal conditions, that is to say when commerce is carried on without any of money. It is liable to fluctuation and only remains stable if the law of the equation of credits and debts is observed. But by far the most important factor in the situation But, as I have already said, the government invests a certain weight of gold when bearing the government stamp with extraordinary power, that of settling debt to the amount of a pound or a dollar. evidence of an inflation of the government currency. The law might assert that the sun revolved around the earth, but that would not influence the forces of nature. Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. delight by the financial papers, and the Secretary of the Treasury, in his The same is true with reference to the relations between the government and the gold miners or gold dealers. . The existence, therefore, of a redundant currency operates

credit theory of money

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