The Theory of Money and Credit

The theory of money must take account of the fundamental difference between the principles which govern the value of money and those which govern the value of commodities. In the theory of the value of commodities it is not necessary at first to pay any attention to objective exchange value. In this theory, all phenomena of value and price determination can be explained with subjective use-value as the starting point. It is otherwise in the theory of the value of money; for since money, in contrast to other goods, can fulfill its economic function only if it possesses objective exchange value, an investigation into its subjective value demands an investigation first into this objective exchange value. In other words, the theory of the value of money leads us back through subjective exchange value to objective exchange value.

Under the present economic system, which is founded on the division of labor and the free exchange of products, producers as a rule do not work directly on their own behalf but with a view to supplying the market. Consequently their economic calculations are determined not by the subjective use-values of their products, but by their subjective exchange values. Valuations which ignore the subjective exchange value, and consequently the objective exchange value, of a product and take account only of its subjective use-value, are nowadays most exceptional. They are on the whole limited to those cases in which the object has a sentimental value. But if we disregard those things to which certain individuals attach a symbolical significance because they remind them of experiences or persons that they wish to remember, while in the eyes of others for which they have not this personal interest the things possess a very much lower value or even no value at all, it cannot be denied that human valuations of goods are based upon their exchange value. It is not use-value, but exchange value, that appears to govern the modern economic order. Nevertheless, if we trace to its deepest springs, first the subjective and then the objective exchange value of commodities, we find that in the last resort it is still the subjective use-value of things that determines the esteem in which they are held. For, quite apart from the fact that the commodities acquired in exchange for the products are always valued according to their subjective use-value, the only valuations that are of final importance in the determination of prices and objective exchange value are those based on the subjective use-value that the products have for those persons who are the last to acquire them through the channels of commerce and who acquire them for their own consumption.

The case of money is different. Its objective exchange value cannot be referred back to any sort of use-value independent of the existence of this objective exchange value. In the origins of monetary systems, money is still a commodity which eventually ceases to circulate on reaching the hands of a final buyer or consumer.12  In the early stages of the history of money there were even monetary commodities whose natural qualities definitely precluded their employment as money for more than a short time. An ox or a sack of corn cannot remain in circulation for ever; it has sooner or later to be withdrawn for consumption if that part of its value which does not depend on its employment as money is not to be diminished by a deterioration of its substance. In a developed monetary system, on the other hand, we find commodity money, of which large quantifies remain constantly in circulation and are never consumed or used in industry; credit money, whose foundation, the claim to payment, is never made use of; and possibly even fiat money, which has no use at all except as money.

Many of the most eminent economists have taken it for granted that the value of money and of the material of which it is made depends solely on its industrial employment and that the purchasing power of our present-day metallic money, for instance, and consequently the possibility of its continued employment as money, would immediately disappear if the properties of the monetary material as a useful metal were done away with by some accident or other.13  Nowadays this opinion is no longer tenable, not merely because there is a whole series of phenomena which it leaves unaccounted for, but chiefly because it is in any case opposed to the fundamental laws of the theory of economic value. To assert that the value of money is based on the nonmonetary employment of its material is to eliminate the real problem altogether.14  Not only have we to explain the possibility of fiat money, the material of which has a far lower value without the official stamp than with it; we must also answer the question, whether the possibility of a monetary employment of the commodity money material affects its utility and consequently its value, and if so to what extent. The same problem arises in the case of credit money.

Part of the stock of gold at the command of mankind is used for monetary purposes, part for industrial. A change from one kind of use to the other is always possible. Ingots pass from the vaults of the banks to the workshops of the goldsmiths and gilders, who also directly withdraw current coins from circulation and melt them down. On the other hand, things made of gold, even with a high value as works of art, find their way to the mint when unfavorable market conditions render a sale at anything higher than the bullion price impossible. One and the same piece of metal can even fulfill both purposes simultaneously, as will be seen if we think of ornaments that are used as money or of a coin that is worn by its owner as jewelry until he parts with it again.15

Investigations into the foundations of the value of money must eliminate those determinants that arise from the properties of the monetary material as a commodity, since these present no peculiarity that could distinguish the value of money from that of other commodities. The value of commodity money is of importance for monetary theory only insofar as it depends on the peculiar economic position of the money, on its function as a common medium of exchange. Changes in the value of the monetary material that arise from its characteristics as a commodity are consequently to be considered only so far as they seem likely to make it more or less suitable for performing the function of money. Apart from this, monetary theory must take the value of the monetary material that arises from its industrial usefulness as given.

The material of which commodity money is made must have the same value whether it is used as money or otherwise. Whether a change in the value of gold originates in its employment as money or in its employment as a commodity, in either case the value of the whole stock changes uniformly.16

It is otherwise with credit money and fiat money. With these, the substance that bears the impression is essentially insignificant in the determination of the value of the money. In some circumstances it may have a relatively high exchange value comprising a considerable fraction of the total exchange value of the individual coin or note. But this value, which is not based on the monetary properties of the coin or note, only becomes of practical importance at the moment when the value based on the monetary property vanishes, that is, at the moment when the individuals participating in commerce cease to use the coin or note in question as a common medium of exchange. When this is not the case, the coins or notes bearing the monetary impression must have a higher exchange value than other pieces of the same material so long as these are not marked out by any special characteristics.

Again, in the case of credit money the claims used as money have similarly a different exchange value from other claims of the same kind that are not used as money. The hundred-gulden notes which circulated as money in Austria-Hungary before the reform of the currency had a higher exchange value than, say, a government security with a nominal value of a hundred gulden, notwithstanding the fact that the latter bore interest and the former did not.

Until gold was used as money it was valued merely on account of the possibility of using it for ornamental purposes. If it had never been used as money, or if it had ceased to be so used, its present-day value would be determined solely by the extent to which it was known to be useful in industry. But additional opportunities of using it provided an addition to the original reasons for esteeming it; gold began to be valued partly because it could be used as a common medium of exchange. It is not surprising that its value consequently rose, or that at least a decrease in its value which possibly would have occurred for other reasons was counterbalanced. Nowadays the value of gold, our principal modern monetary material, is based on both possibilities of employment, on that for monetary purposes and on that for industrial purposes.17

It is impossible to say how far the present value of money depends on its monetary employment and how far on its industrial employment. When the institution of money was first established, the industrial basis of the value of the precious metals may have preponderated; but with progress in the monetary organization of economic life the monetary employment has become more and more important. It is certain that nowadays the value of gold is largely supported by its monetary employment, and that its demonetization would affect its price in an overwhelming fashion.18  The sharp decline in the price of silver since 1873 is recognized as largely due to the demonetization of this metal in most countries. And when, between 1914 and 1918, many countries replaced gold by banknotes and Treasury notes so that gold flowed to those countries that had remained on a gold standard, the value of gold fell very considerably.

The value of the materials that are used for the manufacture of fat money and credit money is also influenced by their use as money as well as by all their other uses. The production of token coins is nowadays one of the most important uses of silver, for example. Again, when the minting of coins from nickel was begun over fifty years ago, the price of nickel rose so sharply that the director of the English mint stated in 1873 that if minting from nickel were continued the cost of the metal alone would exceed the face value of the coins.19  If we prefer to regard this sort of use as industrial and not monetary, however, it is because token coins are not money but money substitutes, and consequently the peculiar interactions between changes in the value of money and changes in the value of the monetary material are absent in these cases.

The task of the theory of the value of money is to expound the laws which regulate the determination of the objective exchange value of money. It is not its business to concern itself with the determination of the value of the material from which commodity money is made so far as this value does not depend on the monetary, but on the other, employment of this material. Neither is it its task to concern itself with the determination of the value of those materials that are used for making the concrete embodiments of fiat money. It discusses the objective exchange value of money only insofar as this depends on its monetary function.

The other forms of value present no special problems for the theory of the value of money. There is nothing to be said about the subjective value of money that differs in any way from what economics teaches of the subjective value of other economic goods. And all that it is important to know about the objective use-value of money may be summed up in the one statement—it depends on the objective exchange value of money.

• 12See Wieser, “Der Geldwert und seine geschichtlichen Veränderungen,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 13 (1904): 45.
• 13Thus even as late as Menger, Grundsätze der Volkswirtschaftslehre (Vienna, 1871), p. 259 n; and also Knies, Geld und Kredit (Berlin, 1885), vol. 1, p. 323.
• 14See Simmel, Philosophie des Geldes, 2d ed. (Leipzig, 1907), p. 130.
• 15But, as a general rule, objects of art, jewelry and other things made of precious metal should not be regarded as constituting part of the stock of metal which performs the function of commodity money. They are goods of the first order, in relation to which the bullion or coined metal must be regarded as goods of superior orders.
• 16See Wieser, “Der Geldwert und seine geschichtlichen Veränderungen,” p. 46.
• 17More than two hundred years ago, John Law, far ahead of his time and with an insight amounting to genius, had seized upon this truth: “Il est raisonnable de penser que l’argent s’échangeait sur le pied de ce qu’il était évalué pour les usages, comme métal, et q’on le donnait comme monnaie dans les échanges à raison de sa valeur. Le nouvel usage de la monnaie, auquel l’argent fut appliqué, dut ajouter à sa valeur, parce que, comme monnaie, obviait aux désavantages et aux inconvénients de l’échange; et conséquemment les demandes d’argent venant à s’augmenter, il reçut une valeur additionnelle, égale à l’accroissement de la demande occasionnée par son usage comme monnaie. Et cette valeur additionnelle n’est pas plus imaginaire que la valeur que l’argent avait dans les échanges comme métal, parce que telle ou telle valeur dérivait de son application à tels ou tels usages, et quelle était plus grande ou moindre, suivant les demandes d’argent comme métal, en proportion de sa quantité. Le valeur additionnelle que l’argent reçut de son usage comme monnaie provient de ses qualités, qui le rendaient propre a cet usage; et cette valeur fut en raison de la demande additionnelle occasionnée par son usage comme monnaie. Si l’une et l’autre de ces valeurs sont imaginaires, alors toutes les valeurs le sont; car aucune chose n’a de valeur que par l’usage auquel on l’applique, et à raison des demandes qu’on en fait, proportionellement à sa quantité” (Considerations sur le numéraire et le commerce, ed. Daire, Économistes financiers du XVIIIe siécle, 2nd. ed. [Paris, 1851]), pp. 447 f. See further Walras, Théorie de la monnaie (Lausanne, 1886), p. 40; Knies, op. cit., vol. 1, p. 324. Objective theories of value are unable to comprehend this fundamental principle of the theory of the value of money. This is best shown by the lack of comprehension with which Marx confronts the arguments of Law cited above (see Marx, Das Kapital, 7th ed. (Hamburg, 1914) vol. 1, p. 56, n. 46; trans. E. and C. Paul into English).
• 18See Heyn, Irrtümer auf dem Gebiete des Geldwesens (Berlin, 1900), p. 3; Simmel, op. cit., pp. 116 ff.
• 19Jevons, Money and the Mechanism of Exchange, 13th ed. (London, 1902), pp. 49 f.