According to modern value theory, price is the resultant of the interaction in the market of subjective valuations of commodities and price goods. From beginning to end, it is the product of subjective valuations. Goods are valued by the individuals exchanging them, according to their subjective use-values, and their exchange ratios are determined within that range where both supply and demand are in exact quantitative equilibrium. The law of price stated by Menger and Böhm-Bawerk provides a complete and numerically precise explanation of these exchange ratios; it accounts exhaustively for all the phenomena of direct exchange. Under bilateral competition, market price is determined within a range whose upper limit is set by the valuations of the lowest bidder among the actual buyers and the highest offerer among the excluded would-be sellers, and whose lower limit is set by the valuations of the lowest offerer among the actual sellers and the highest bidder among the excluded would-be buyers.

This law of price is just as valid for indirect as for direct exchange. The price of money, like other prices, is determined in the last resort by the subjective valuations of buyers and sellers. But, as has been said already, the subjective use-value of money, which coincides with its subjective exchange value, is nothing but the anticipated use-value of the things that are to be bought with it. The subjective value of money must be measured by the marginal utility of the goods for which the money can be exchanged.1

It follows that a valuation of money is possible only on the assumption that the money has a certain objective exchange value. Such a point d’appui is necessary before the gap between satisfaction and “useless” money can be bridged. Since there is no direct connection between money as such and any human want, individuals can obtain an idea of its utility and consequently of its value only by assuming a definite purchasing power. But it is easy to see that this supposition cannot be anything but an expression of the exchange ratio ruling at the time in the market between the money and commodities.2

Once an exchange ratio between money and commodities has been established in the market, it continues to exercise an influence beyond the period during which it is maintained; it provides the basis for the further valuation of money. Thus the past objective exchange value of money has a certain significance for its present and future valuation. The money prices of today are linked with those of yesterday and before, and with those of tomorrow and after.

But this alone will not suffice to explain the problem of the element of continuity in the value of money; it only postpones the explanation. To trace back the value that money has today to that which it had yesterday, the value that it had yesterday to that which it had the day before, and so on, is to raise the question of what determined the value of money in the first place. Consideration of the origin of the use of money and of the particular components of its value that depend on its monetary function suggests an obvious answer to this question. The first value of money was clearly the value which the goods used as money possessed (thanks to their suitability for satisfying human wants in other ways) at the moment when they were first used as common media of exchange. When individuals began to acquire objects, not for consumption, but to be used as media of exchange, they valued them according to the objective exchange value with which the market already credited them by reason of their “industrial” usefulness, and only as an additional consideration on account of the possibility of using them as media of exchange. The earliest value of money links up with the commodity value of the monetary material. But the value of money since then has been influenced not merely by the factors dependent on its “industrial” uses, which determine the value of the material of which the commodity money is made, but also by those which result from its use as money. Not only its supply and demand for industrial purposes, but also its supply and demand for use as a medium of exchange, have influenced the value of gold from that point of time onward when it was first used as money.3

• 1See pp. 99. Also Böhm-Bawerk, Kapital und Kapitalzins, Part II, p. 274; Wieser, Der natürliche Wert, p. 46. (Eng. trans. The Theory of Natural Value.)
• 2See Wieser, “Der Geldwert und seine Veränderungen,” Schriften des Vereins für Sozialpolitik. 132:513 ff.
• 3See Knies, Geld und Kredit (Berlin, 1885), vol. 1, p. 324.

If the objective exchange value of money must always be linked with a preexisting market exchange ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange value based on some other use. This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless4  and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

This link with a preexisting exchange value is necessary not only for commodity money, but equally for credit money and fiat money.5  No fiat money could ever come into existence if it did not satisfy this condition. Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money substitutes already in circulation, that is, claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting point for their valuation lay in the objective exchange value that they had at the moment when they were deprived of their character as claims. The other possible case is that in which coins that once circulated as commodity money are transformed into fiat money by cessation of free coinage (either because there was no further minting at all or because minting was continued only on behalf of the Treasury), no obligation of conversion being de jure or de facto assumed by anybody, and nobody having any grounds for hoping that such an obligation ever would be assumed by anybody. Here the starting point for the valuation lies in the objective exchange value of the coins at the time of the cessation of free coinage.

Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange.6

• 4Thus Locke, Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money, 2d ed. (London, 1696), p. 31.
• 5See Subercaseaux, Essai sur la nature du papier monnaie (Paris, 1909), pp. 17 f.
• 6See Simmel, Philosophie des Geldes, 2d ed. (Leipzig, 1907), pp. 115 f.; but, above all, Wieser, “Der Geldwert und seine Veränderungen,” p. 513.

From what has just been said, the important conclusion follows that a historically continuous component is contained in the objective exchange value of money.

The past value of money is taken over by the present and transformed by it; the present value of money passes on into the future and is transformed in its turn. In this there is a contrast between the determination of the exchange value of money and that of the exchange value of other economic goods. All preexisting exchange ratios are quite irrelevant so far as the actual levels of the reciprocal exchange ratios of other economic goods are concerned. It is true that if we look beneath the concealing monetary veil to the real exchange ratios between goods we observe a certain continuity. Alterations in real prices occur slowly as a rule. But this stability of prices has its cause in the stability of the price determinants, not in the law of price determination itself. Prices change slowly because the subjective valuations of human beings change slowly. Human needs, and human opinions as to the suitability of goods for satisfying those needs, are no more liable to frequent and sudden changes than are the stocks of goods available for consumption, or the manner of their social distribution. The fact that today’s market price is seldom very different from yesterday’s is to be explained by the fact that the circumstances that determined yesterday’s price have not greatly changed overnight, so that today’s price is a resultant of nearly identical factors. If rapid and erratic variations in prices were usually encountered in the market, the conception of objective exchange value would not have attained the significance that it is actually accorded both by consumer and producer.

In this sense, reference to an inertia of prices is unobjectionable, although the errors of earlier economists should warn us of the real danger that the use of terms borrowed from mechanics may lead to a “mechanical” system, that is, to one that abstracts erroneously from the subjective valuations of individuals. But any suggestion of a causal relationship between past and present prices must be decisively rejected.

It is not disputed that there are institutional forces in operation which oppose changes in prices that would be necessitated by changes in valuations, and which are responsible when changes in prices that would have been caused by changes in supply and demand are postponed and when small or transitory changes in the relations between supply and demand lead to no corresponding change in prices at all. It is quite permissible to speak of an inertia of prices in this sense. Even the statement that the closing price forms the starting point for the transactions of the next market7  may be accepted if it is understood in the sense suggested above. If the general conditions that determined yesterday’s price have altered but little during the night, today’s price should be but little different from that of yesterday, and in practice it does not seem incorrect to make yesterday’s the starting point. Nevertheless, there is no causal connection between past and present prices as far as the relative exchange ratios of economic goods (not including money) are concerned. The fact that the price of beer was high yesterday cannot be of the smallest significance as far as today’s price is concerned—we need only think of the effect upon the prices of alcoholic drinks that would follow a general triumph of the Prohibition movement. Anybody who devotes attention to market activities is daily aware of alterations in the exchange ratios of goods, and it is quite impossible for anybody who is well acquainted with economic phenomena to accept a theory which seeks to explain price changes by a supposed constancy of prices.

It may incidentally be remarked that to trace the determination of prices back to their supposed inertia, as even Zwiedineck in his pleadings for this assumption is obliged to admit, is to resign at the outset any hope of explaining the ultimate causes of prices and to be content with explanations from secondary causes.8  It must unreservedly be admitted that an explanation of the earliest forms of exchange transaction that can be shown to have existed—a task to the solution of which the economic historian has so far contributed but little would show that the forces that counteract sudden changes in prices were once stronger than they are now. But it must positively be denied that there is any sort of connection between those early prices and those of the present day; that is, if there really is anybody who believes it possible to maintain the assertion that the exchange ratios of economic goods (not the money prices) that prevail today on the German stock exchanges are in any sort of causal connection with those that were valid in the days of Hermann or Barbarossa. If all the exchange ratios of the past were erased from human memory, the process of market-price determination might certainly become more difficult, because everybody would have to construct a new scale of valuations for himself; but it would not become impossible. In fact, people the whole world over are engaged daily and hourly in the operation from which all prices result: the decision as to the relative significance enjoyed by specific quantities of goods as conditions for the satisfaction of wants.

It is so far as the money prices of goods are determined by monetary factors, that a historically continuous component is included in them, without which their actual level could not be explained. This component, too, is derived from exchange ratios which can be entirely explained by reference to the subjective valuations of the individuals taking part in the market, even though these valuations were not originally grounded upon the specifically monetary utility alone of these goods. The valuation of money by the market can only start from a value possessed by the money in the past, and this relationship influences the new level of the objective exchange value of money. The historically transmitted value is transformed by the market without regard to what has become its historical content.9  But it is not merely the starting point for today’s objective exchange value of money; it is an indispensable element in its determination. The individual must take into account the objective exchange value of money, as determined in the market yesterday, before he can form an estimate of the quantity of money that he needs today. The demand for money and the supply of it are thus influenced by the value of money in the past; but they in their turn modify this value until they are brought into equilibrium.

• 7See Schmoller, Grundriss der allgemeinen Volkswirtschaftslehre (Leipzig, 1902), vol. 2, p. 110.
• 8See Zwiedineck, “Kritisches und Positives zur Preislehre,” Zeitschrift für die gesamte Staatswissenschaft, Vol. 65, pp. 200 ff.
• 9See Wieser, “Der Geldwert und seine Veränderungen,” p. 513.

Demonstration of the fact that search for the determinants of the objective exchange value of money always leads us back to a point where the value of money is not determined in any way by its use as a medium of exchange, but solely by its other functions, prepares the way for developing a complete theory of the value of money on the basis of the subjective theory of value and its peculiar doctrine of marginal utility.

Until now the subjective school has not succeeded in doing this. In fact, among the few of its members who have paid any attention at all to the problem there have been some who have actually attempted to demonstrate its insolubility. The subjective theory of value has been helpless in face of the task here confronting it.

There are two theories of money which, whatever else we may think of them, must be acknowledged as having attempted to deal with the whole problem of the value of money.

The objective theories of value succeeded in introducing a formally unexceptionable theory of money into their systems, which deduces the value of money from its cost of production.10  It is true that the abandonment of this monetary theory is not merely to be ascribed to those shortcomings of the objective theory of value in general which led to its supersession by the theory of the modern school. Apart from this fundamental weakness, the cost-of-production theory of the value of money exhibited one feature that was an easy target for criticism. While it certainly provided a theory of commodity money (even if only a formally correct one), it was unable to deal with the problem of credit money and fiat money. Nevertheless, it was a complete theory of money insofar as it did at least attempt to give a full explanation of the value of commodity money.

The other similarly complete theory of the value of money is that version of the quantity theory associated with the name of Davanzati.11  According to this theory, all the things that are able to satisfy human wants are conventionally equated with all the monetary metal. From this, since what is true of the whole is also true of its parts, the exchange ratios between commodity units and units of money can be deduced. Here we are confronted with a hypothesis that is not in any way supported by facts. To demonstrate its untenability once more would nowadays be a waste of time. Nevertheless, it must not be overlooked that Davanzati was the first who attempted to present the problem as a whole and to provide a theory that would explain not merely the variations in an existing exchange ratio between money and other economic goods, but also the origin of this ratio.

The same cannot be said of other versions of the quantity theory. These all tacitly assume a certain value of money as given, and absolutely refuse to investigate further into the matter. They overlook the fact that what is required is an explanation of what determines the exchange ratio between money and commodities, and not merely of what causes changes in this ratio. In this respect, the quantity theory resembles various general theories of value (many versions of the doctrine of supply and demand, for example), which have not attempted to explain price as such but have been content to establish a law of price variations.12  These forms of the quantity theory are in fact nothing but the application of the law of supply and demand to the problem of the value of money. They introduce into monetary theory all the strong points of this doctrine; and of course all its weak points as well.13

The revolution in economics since 1870 has not yet been any more successful in leading to an entirely satisfactory solution of this problem. Of course, this does not mean that the progress of the science has left no trace on monetary theory in general and on the theory of the value of money in particular. It is one of the many services of the subjective theory of value to have prepared the way for a deeper understanding of the nature and value of money. The investigations of Menger have placed the theory on a new basis. But till now one thing has been neglected. Neither Menger nor any of the many investigators who have tried to follow him have even so much as attempted to solve the fundamental problem of the value of money. Broadly speaking, they have occupied themselves with checking and developing the traditional views and here and there expounding them more correctly and precisely, but they have not provided an answer to the question: What are the determinants of the objective exchange value of money? Menger and Jevons have not touched upon the problem at all. Carver14  and Kinley15  have contributed nothing of real importance to its solution. Walras16  and 17 Kemmerer assume a given value of money and develop what is merely a theory of variations in the value of money. Kemmerer, it is true, approaches very close to a solution of the problem but passes it by.

Wieser expressly refers to the incomplete nature of the previous treatment. In his criticism of the quantity theory he argues that the law of supply and demand in its older form, the application of which to the problem of money constitutes the quantity theory, has a very inadequate content, since it gives no explanation at all of the way in which value is really determined or of its level at any given time, but confines itself without any further explanation merely to stating the direction in which value will move in consequence of variations in supply or demand; that is, in an opposite direction to changes in the former and in the same direction as changes in the latter. He further argues that it is no longer possible to rest content with a theory of the economic value of money which deals so inadequately with the problem; that since the supersession of the old law of supply and demand as applied to commodities, the case for which it was originally constructed, a more searching law must also be sought to apply to the case of money.18  But Wieser does not deal with the problem whose solution he himself states to be the object of his investigation, for in the further course of his argument he declares that the concepts of supply of money and demand for money as a medium of exchange are useless for his purpose and puts forward a theory which attempts to explain variations in the objective exchange value of money (objektive innere Tauschwert des Geldes)19  by reference to the relationship that exists in an economic community between money income and real income. For while it is true that reference to the ratio between money income and real income may well serve to explain variations in the objective exchange value of money, Wieser nowhere makes the attempt to evolve a complete theory of money—an attempt which, admittedly, the factors of supply and demand being excluded from consideration, would be certain to fail. The very objection that he raises against the old quantity theory, that it affirms nothing concerning the actual determination of value or the level at which it must be established at any time, must also be raised against his own doctrine; and this is all the more striking inasmuch as it was Wieser who, by revealing the historical element in the purchasing power of money, laid the foundation for the further development of the subjective theory of the value of money.

The unsatisfactory results offered by the subjective theory of value might seem to justify the opinion that this doctrine and especially its proposition concerning the significance of marginal utility must necessarily fall short as a means of dealing with the problem of money. Characteristically enough, it was a representative of the new school, Wicksell, who first expressed this opinion. Wicksell considers that the principle which lies at the basis of all modern investigation into the theory of value, namely, the concept of marginal utility, may well be suited to explaining the determination of exchange ratios between one commodity and another, but that it has practically no significance at all, or at most an entirely secondary significance, in explaining the exchange ratios between money and other economic goods. Wicksell, however, does not appear to detect any sort of objection to the marginal-utility theory in this assertion. According to his argument, the objective exchange value of money is not determined at all by the processes of the market in which money and the other economic goods are exchanged. If the money price of a single commodity or group of commodities is wrongly assessed in the market, then the resulting maladjustments of the supply and demand and the production and consumption of this commodity or group of commodities will sooner or later bring about the necessary correction. If, on the other hand, all commodity prices, or the average price level, should for any reason be raised or lowered, there is no factor in the circumstances of the commodity market that could bring about a reaction. Consequently, if there is to be any reaction at all against a price assessment that is either too high or too low it must in some way or other originate outside the commodity market. In the further course of his argument, Wicksell arrives at the conclusion that the regulator of money prices is to be sought in the relations of the commodity market to the money market, in the broadest sense of the term. The cause which influences the demand for raw materials, labor, the use of land, and other means of production, and thus indirectly determines the upward or downward movement of commodity prices, is the ratio between the money rate of interest (Darlehnszins) and the “natural” or equilibrium rate of interest (natürliche Kapitalzins), by which we are to understand that rate of interest which would be determined by supply and demand if real capital was itself lent directly without the intermediation of money.20

Wicksell imagines that this argument of his provides a theory of the determination of the objective exchange value of money. In fact, however, all that he attempts to prove is that forces operate from the loan market on the commodity market which prevent the objective exchange value of money from rising too high or falling too low. He never asserts that the rate of interest on loans determines the actual level of this value in any way; in fact, to assert this would be absurd. But if we are to speak of a level of money prices that is “too high” or “too low,” we must first state how the ideal level with which the actual level is compared has been established. It is in no way sufficient to show that the position of equilibrium is returned to after any disturbance, if the existence of this position of equilibrium is not first explained. Indubitably, this is the primary problem, and its solution leads directly to that of the other; without it, further inquiry must remain unfruitful, for the state of equilibrium can only be maintained by those forces which first established it and continue to reestablish it. If the circumstances of the loan market can provide no explanation of the genesis of the exchange ratio subsisting between money and other economic goods, then neither can they help to explain why this ratio does not alter. The objective exchange value of money is determined in the market where money is exchanged for commodities and commodities for money. To explain its determination is the task of the theory of the value of money. But Wicksell is of the opinion that “the laws of the exchange of commodities contain in themselves nothing that could determine the absolute level of money prices.”21  This amounts to a denial of all possibility of scientific investigation in this sphere.

Helfferich also is of the opinion that there is an insurmountable obstacle in the way of applying the marginal-utility theory to the problem of money; for while the marginal-utility theory attempts to base the exchange value of goods on the degree of their utility to the individual, the degree of utility of money to the individual quite obviously depends on its exchange value, since money can have utility only if it has exchange value, and the degree of the utility is determined by the level of the exchange value. Money is valued subjectively according to the amount of consumable goods that can be obtained in exchange for it, or according to what other goods have to be given in order to obtain the money needed for making payments. The marginal utility of money to any individual, that is, the marginal utility derivable from the goods that can be obtained with the given quantity of money or that must be surrendered for the required money, presupposes a certain exchange value of the money; so the latter cannot be derived from the former.22

Those who have realized the significance of historically transmitted values in the determination of the objective exchange value of money will not find great difficulty in escaping from this apparently circular argument. It is true that valuation of the monetary unit by the individual is possible only on the assumption that an exchange ratio already exists in the market between the money and other economic goods. Nevertheless, it is erroneous to deduce from this that a complete and satisfactory explanation of the determination of the objective exchange value of money cannot be provided by the marginal-utility theory. The fact that this theory is unable to explain the objective exchange value of money entirely by reference to its monetary utility; that to complete its explanation, as we were able to show, it is obliged to go back to that original exchange value which was based not on a monetary function at all but on other uses of the object that was to be used as money—this must not in any way be reckoned to the discredit of the theory, for it corresponds exactly to the nature and origin of the particular objective exchange value under discussion. To demand of a theory of the value of money that it should explain the exchange ratio between money and commodities solely with reference to the monetary function, and without the assistance of the element of historical continuity in the value of money, is to make demands of it that run quite contrary to its nature and its proper task.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity. At this point the theory must hand over all further investigation to the general theory of value, which will then find no further difficulty in the solution of the problem. It is true that the subjective valuation of money presupposes an existing objective exchange value; but the value that has to be presupposed is not the same as the value that has to be explained; what has to be presupposed is yesterday’s exchange value, and it is quite legitimate to use it in an explanation of that of today. The objective exchange value of money which rules in the market today is derived from day’s under the influence of the subjective valuations of the individuals frequenting the market, just as yesterday’s in its turn was derived under the influence of subjective valuations from the objective exchange value possessed by the money the day before yesterday.

If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money. But this point is not merely an instrumental concept of theory; it is an actual phenomenon of economic history, making its appearance at the moment when indirect exchange begins.

Before it was usual to acquire goods in the market, not for personal consumption, but simply in order to exchange them again for the goods that were really wanted, each individual commodity was only accredited with that value given by the subjective valuations based on its direct utility. It was not until it became customary to acquire certain goods merely in order to use them as media of exchange that people began to esteem them more highly than before, on account of this possibility of using them in indirect exchange. The individual valued them in the first place because they were useful in the ordinary sense, and then additionally because they could be used as media of exchange. Both sorts of valuation are subject to the law of marginal utility. Just as the original starting point of the value of money was nothing but the result of subjective valuations, so also is the present-day value of money.

But Helfferich manages to bring forward yet another argument for the inapplicability of the marginal-utility theory to money. Looking at the economic system as a whole, it is clear that the notion of marginal utility rests on the fact that, given a certain quantity of goods, only certain wants can be satisfied and only a certain set of utilities provided. With given wants and a given set of means, the marginal degree of utility is determined also. According to the marginal-utility theory, this fixes the value of the goods in relation to the other goods that are offered as an equivalent in exchange, and fixes it in such a manner that that part of the demand that cannot be satisfied with the given supply is excluded by the fact that it is not able to offer an equivalent corresponding to the marginal utility of the good demanded. Now Helfferich objects that while the existence of a limited supply of any goods except money is in itself sufficient to imply the limitation of their utility also, this is not true of money. The utility of a given quantity of money depends directly upon the exchange value of the money, not only from the point of view of the individual, but also for society as a whole. The higher the value of the unit in relation to other goods, the greater will be the quantity of these other goods that can be paid for by means of the same sum of money. The value of goods in general results from the limitation of the possible utilities that can be obtained from a given supply of them, and while it is usually higher according to the degree of utility which is excluded by the limitation of supply, the total utility of the supply itself cannot be increased by an increase in its value; but in the case of money, the utility of a given supply can be increased at will by an increase in the value of the unit.23

The error in this argument is to be found in its regarding the utility of money from the point of view of the community instead of from that of the individual. Every valuation must emanate from somebody who is in a position to dispose in exchange of the object valued. Only those who have a choice between two economic goods are able to form a judgment as to value, and they do this by preferring the one to the other. If we start with valuations from the point of view of society as a whole, we tacitly assume the existence of a socialized economic organization in which there is no exchange and in which the only valuations are those of the responsible official body. Opportunities for valuation in such a society would arise in the control of production and consumption, as, for example, in deciding how certain production goods were to be used when there were alternative ways of using them. But in such a society there would be no room at all for money. Under such conditions, a common medium of exchange would have no utility and consequently no value either. It is therefore illegitimate to adopt the point of view of the community as a whole when dealing with the value of money. All consideration of the value of money must obviously presuppose a state of society in which exchange takes place and must take as its starting point individuals acting as independent economic agents within such a society,24  that is to say, individuals engaged in valuing things.

• 10See Senior, Three Lectures on the Value of Money (London, 1840; 1931), pp. 1 ff.; Three Lectures on the Cost of Obtaining Money (London, 1830; 1931), pp. 1 ff.
• 11See Davanzati, Lezioni delle monete, 1588 (in Scrittori classici italiani di economia politica, Parte Antica (Milan, 1804), vol. 2, p. 32. Locke and, above all, Montesquieu (De l’Ësprit des lois, edition Touquet [Paris, 1821], vol. 2, pp. 458 f.) share this view. See Willis, “The History and Present Application of the Quantity Theory,” Journal of Political Economy 4 (1896): 419 ff.
• 1231. See Zuckerkandl, Zur Theorie des Preises (Leipzig, 1889), p. 124.
• 13See Wieser, “Der Geldwert und seine Veränderungen,” p. 514.
• 14See Carver, “The Value of the Money Unit,” Quarterly Journal of Economics 11 (1897): 429 f.
• 15See Kinley, Money (New York, 1909), pp. 123 ff.
• 16See Walras, Théorie de la Monnaie (Lausanne, 1886), pp. 25 ff.
• 17See Kemmerer, Money and Credit Instruments in Their Relation to General Prices (New York, 1907), pp. 11 ff.
• 18See Wieser, “Der Geldwert und seine Veränderungen,” pp. 514 ff.
• 19[See p. 124 n. H.E.B.]
• 20See Wicksell, Geldzins und Güterpreise (Jena, 1898), pp. iv ff, 16 ff.
• 21Ibid., p. 35.
• 22See Helfferich, Das Geld, 6th ed. (Leipzig, 1923), p. 577.
• 23Ibid., p. 578.
• 24Dr. B. M. Anderson, pp. 100-110 of his excellent work The Value of Money (New York, 1917), has objected to the theory set forth above that instead of a logical analysis it provides merely a temporal regressus. Nevertheless, all the acute objections that he manages to bring forward are directed only against the argument that finds a historical component in the exchange ratios subsisting between commodities, an argument with which I also [see pp. 133 ff. above] am in definite disagreement. But Dr. Anderson recognizes the logical foundation of my theory when he declares, “I shall maintain that value from some source other than the monetary employment is an essential precondition of the monetary employment” (p. 126).

Now, the first part of the problem of the value of money having been solved, it is at last possible for us to evolve a plan of further procedure. We no longer are concerned to explain the origin of the objective exchange value of money; this task has already been performed in the course of the preceding investigation. We now have to establish the laws which govern variations in existing exchange ratios between money and the other economic goods. This part of the problem of the value of money has occupied economists from the earliest times, although it is the other that ought logically to have been dealt with first. For this reason, as well as for many others, what has been done toward its elucidation does not amount to very much. Of course, this part of the problem is also much more complicated than the first part.

In investigations into the nature of changes in the value of money it is usual to distinguish between two sorts of determinants of the exchange ratio that connects money and other economic goods; those that exercise their effect on the money side of the ratio and those that exercise their effect on the commodity side. This distinction is extremely useful; without it, in fact, all attempts at a solution would have to be dismissed beforehand as hopeless. Nevertheless its true meaning must not be forgotten.

The exchange ratios between commodities—and the same is naturally true of the exchange ratios between commodities and money—result from determinants which affect both terms of the exchange ratio. But existing exchange ratios between goods may be modified by a change in determinants connected only with one of the two sets of exchanged objects. Although all the factors that determine the valuation of a good remain the same, its exchange ratio with another good may alter if the factors that determine the valuation of this second good alter. If of two persons I prefer A to B, this preference may be reversed, even though my feeling for A remains unchanged, if I contract a closer friendship with B. Similarly with the relationships between goods and human beings. He who today prefers the consumption of a cup of tea to that of a dose of quinine may make a contrary valuation tomorrow, even though his liking for tea has not diminished, if he has, say, caught a fever overnight. Whereas the factors that determine prices always affect both sets of the goods that are to be exchanged, those of them which merely modify existing prices may sometimes be restricted to one set of goods only.25

• 25See Menger, Grundsätze der Volkswirtschaftslehre (Vienna, 1923), pp. 304 ff. [In the German edition of this book, the above paragraph was followed by an explanation that German writers, following Menger, usually refer to “the question of the nature and extent of the influence upon the exchange ratios between money and commodities exerted by variations in those determinants of prices that lie on the monetary side” as the problem of the innere objektive Tauschwert of money, and to “those concerned with variations in the objective exchange value of money throughout time and space in general” as the problem of its äussere objektive Tauschwert. Since this distinction has not been usual in English terminology, it has been omitted from the present version; and, in what follows, wherever “the objective exchange value of money” is referred to, it is the innere exchange value that is meant unless the contrary is explicitly stated. H.E.B.]