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Centenary of Mises's Theory of Money and Credit

This is the centenary year of Ludwig von Mises’s Theory of Money and Credit. The book was originally published in German, and not translated into English until 1934. That the translation continues to be in print from not one but two publishers is in my view more a testimony to the continuing significance of Mises generally rather than to the book specifically. Important books on money at around the same time by other economists have now been forgotten. (Only a few people interested in the history of monetary thought now know, for instance, of Frederick Lavington’s The English Capital Market.) Mises’s lesser works bask in the reflected glory of his two dazzling achievements, Socialism and Human Action.

My remarks are from a re-skimming of the book and a consultation of my old notes, not from a rereading of it. They accordingly touch on a few key themes rather than offering the lengthier treatment best left to someplace other than a blog.

At the time the book appeared, it made some steps forward in monetary economics. One was its stress on the subjective character of money, monetary exchange, and monetary prices. This is the lesson that has still not been fully enough absorbed into monetary theory; it is acknowledged intellectually but is not “in the bones” of  most monetary economists. Another step forward was the book’s emphasis on injection effects, known to some previous economists but not to enough of Mises’s contemporaries. Yet another was Mises’s understanding that what people often think of as differences in the purchasing power of a currency are really differences in the goods offered in different locations; in truth, the purchasing power of money tends to equalize across locations. Mises’s treatment of interest, though brief, linked Austrian and Wicksellian themes.

I am not as impressed as other Austrians are with Mises’s “regression theorem” to explain the value of money. It answers a puzzle, but one that could have remained unsolved without affecting the progress of other aspects of monetary theory. It also seems to me too backward looking, which was the basis of the criticism of it that according to the Austrians, fiat money was the “ghost of gold.”

Mises’s terminology is confusing. He should have called “fiduciary media” and “money substitutes” by the simpler term “credit.” They are IOUs having varying degrees of perceived trustworthiness and general acceptance. Unlike, say, gold in a gold standard system, they do not constitute final payment in transaction; that is, they are not used to settle clearing balances among financial institutions. They are a form of credit, backed (or not) by assets having various degrees of liquidity. The idea that “money substitutes” are money rather than credit seems to be at the origin of the misconceptions about the nature of banking that Austrian advocates of 100% reserve banking have.

It is highly misleading to say that any quantity of money can satisfy human needs as well as any other. Here Mises succumbs to what Schumpeter called the Ricardian Vice of  excessive abstraction. Once a particular quantity of money is in existence, it matters a great deal whether the quantity changes and how it changes.

Even granted that it is a theoretical work, The Theory of Money and Credit has too little to say about how different kinds of monetary institutions might influence monetary equilibrium. To the extent that Mises discusses institutions, it is those that were familiar a German-speaking reader of his time. He does not attempt a broader view across time or even across space. At the time he wrote, monetary systems ranged from “primitive money” in remote parts of Africa and the Pacific to the highly sophisticated arrangements of the major financial centers, and from free banking to currency boards to treasury issue of currency to central banking. There are only fleeting references to free banking (for instance, near the end of chapter 17, section 4).

And brother, is it long-winded. There have been many writers more lumbering than Mises, but the book is squarely in the German-language tradition of the big fat academic book. Mises, and we, are lucky that after he came to America he had Henry Hazlitt as an informal editor. Hazlitt was as pointed as Mises was ponderous.

If it seems that I judge The Theory of Money and Credit harshly, it is only because Mises did some work that was truly great, and The Theory of Money and Credit was merely good. "Good" is a status still sufficiently rare that the number of books on monetary theory that are its equal in terms of their contribution to the subject would not fill a bookcase.