The Theory of Money and Credit

Wieser’s attempt52  to explain an increase in the money prices of goods unaccompanied by any considerable change in their value in terms of other goods, is not entirely satisfactory either. He holds the opinion that most of the changes in the value of money that have actually occurred are to be attributed to changes in the relations between the “natural economy” (Naturalwirtschaft) and the “money economy” (Geldwirtschaft). When the money economy flourishes, the value of money is reduced; when it decays, the value of money rises again. In the early stages of a money economy most wants are still satisfied by the methods of the natural economy. The family is self-supporting; it lives in its own house, and itself produces the greater part of what it needs; the sale of its products constitutes only a supplementary source of income. Consequently, the cost of living of the producer, or, what comes to the same thing, the value of his labor, is not fully allowed for or not allowed for at all in the cost of the products that are sold; all that is included is the cost of the raw materials used and the wear and tear of those tools or other instruments that have had to be specially constructed, which in any case do not amount to much under conditions of extensive production. So it is with the buyer also; the wants that he satisfies by purchase are not among his more important wants and the use-values that he has to estimate are not very great.

Then gradually all this changes. The extension of the sphere of the money economy introduces into cost calculations factors that were not included before but were dealt with on “natural economic” principles. The list of the costs that are reckoned in monetary terms grows longer, and each new element in the cost calculation is estimated by comparison with the factors already expressed in money, and added to them, with the effect of raising prices. Thus a general rise of prices occurs, but this is not interpreted as a consequence of changes in supply conditions, but as a fall in the value of money.

According to Wieser, if it is not possible to explain the increasing rise in the prices of commodities as originating in monetary factors alone (that is, in variations in the relations between the supply of money and the demand for it), then we must seek another reason for these changes in the general level of prices. Now it is impossible to find the reason by reference to such fluctuations in the values of commodities as are caused by factors belonging to the commodity side of the price ratio; for nowadays we are not worse supplied with goods than our forefathers were. But, to Wieser, no other explana tion seems more natural than that which attributes the diminution of the purchasing power of money to the extension of the money economy which was its historical accompaniment. For Wieser, in fact, it is this very inertia of prices which has helped to bring about the change in the value of money during each period of fresh progress; it must have been this that caused the older prices to be raised by the amount of the additional values involved whenever new factors were co-opted into that part of the process of production that was regulated by the money economy. But the higher the money prices of commodities rise, the lower must the value of money fall in comparison. Increasing dearness thus appears as an inevitable symptom of the development of a growing money economy.

It cannot be denied that this argument of Wieser’s reveals important points in connection with the market and the determination of prices, which, if followed up, have important bearings on the determination of the exchange ratios between the various economic goods other than money. Nevertheless, so far as Wieser’s conclusions relate to the determination of money prices, they exhibit serious shortcomings. In any case, before his argument could be accepted as correct, it would have to be proved that, not forces emanating from the money side, but only forces emanating from the commodity side, are here involved. Not the valuation of money, but only that of the commodities, could have experienced the transformation supposed to be manifested in the alteration of the exchange ratio.

But the chain of reasoning as a whole must be rejected. The development of facilities for exchanging means that the new recruits to the economy increase their subjective valuations of those goods which they wish to dispose of. Goods which they previously valued solely as objects of personal use are now valued additionally on account of their exchangeability for other goods. This necessarily involves a rise in their subjective value in the eyes of those who possess them and are offering them for exchange. Goods which are to be disposed of in exchange are now no longer valued in terms of the use-value that they would have had for their owners if consumed by them, but in terms of the use-value of the goods that may be obtained in exchange for them. The latter value is always higher than the former, for exchanges only occur when they are profitable to both of the parties concerned.

But on the other hand—and Wieser does not seem to have thought of this—the subjective value of the goods acquired in exchange sinks. The individuals acquiring them no longer ascribe to them the significance corresponding to their position in a subjective scale of values (Wertskala) or utilities (Nutzenskala), they ascribe to them only the smaller significance that belongs to the other goods that have to be surrendered in order to get them.

Let us suppose that the scale of values of the possessor of an apple, a pear, and a glass of lemonade, is as follows:

1. An apple
2. A piece of cake
3. A glass of lemonade
4. A pear

If now this man is given the opportunity of exchanging his pear for a piece of cake, this opportunity will increase the significance that he attaches to the pear. He will now value the pear more highly than the lemonade. If he is given the choice between relinquishing either the pear or the lemonade, he will regard the loss of the lemonade as the lesser evil. But this is balanced by his reduced valuation of the cake. Let us assume that our man possesses a piece of cake, as well as the pear, the apple, and the lemonade. Now if he is asked whether he could better put up with the loss of the cake or of the lemonade, he will in any case prefer to lose the cake, because he can make good this loss by surrendering the pear, which ranks below the lemonade in his scale of values. The possibility of exchange introduces considerations of the objective exchange value of goods into the economic decisions of every individual; the original primary scale of use-values is replaced by the derived secondary scale of exchange values and use-values, in which economic goods are ranked not only with regard to their use-values, but also according to the value of the goods that can be obtained for them in exchange. There has been a transposition of the goods; the order of their significance has been altered. But if one good is placed higher, then—there can be no question of it—some other must be placed lower. This arises simply from the very nature of the scale of values, which constitutes nothing but an arrangement of the subjective valuations in order of the significance of the objects valued.

The extension of the sphere of exchange has the same effects on objective exchange values as on subjective values. Here also every increase of value on the one side must be opposed by a decrease of value on the other side. In fact the alteration of an exchange ratio between two goods in such a way that both become dearer is inconceivable. And this cannot be avoided by the interposition of money. When it is asserted that the objective exchange value of money has experienced an alteration, some special cause for this must be demonstrated, apart from the bare fact of the extension of the sphere of exchange. But nobody has ever provided this demonstration.

Wieser commences by contrasting, after the fashion of economic historians, the natural economy and the money economy. These terms fail to provide that scientific abstraction of concepts that is the indispensable basis of all theoretical investigation. It remains uncertain whether the contrast of an exchangeless state with an order of society based upon exchange is intended, or a contrast between conditions of direct exchange and of indirect exchange based upon the use of money. It seems most likely that Wieser intends to contrast an exchangeless state with one of exchange through money. This is certainly the sense in which the expressions natural economy and money economy are used by economic historians; and this definition corresponds to the actual course of economic history after the full development of the institution of money. Nowadays, when new geographical areas or new spheres of consumption are brought within the scope of exchange, there is a direct transition from the exchangeless state to that of the money economy; but this has not always been so. And in any case the economist must make a clear distinction.

Wieser speaks of the townsman who is in the habit of spending his summer holiday in the country and of always finding cheap prices there. One year, when this townsman goes on holiday he finds that prices have suddenly become higher all round; the village has meanwhile been brought within the scope of the money economy. The farmers now sell their milk and eggs and poultry in the town and demand from their summer visitors the prices that they can hope to get at market. But what Wieser describes here is only half the process. The other half is worked out in the town, where the milk, eggs, and poultry coming on the market from the newly tapped sources of supply in the village exhibit a tendency toward a reduction of price. The inclusion of what has hitherto been a natural economy within the scope of an exchange system involves no one-sided rise of prices, but a leveling of prices. The contrary effect would be evoked by any contraction of the scope of the exchange system; it would have an inherent tendency to increase the differences between prices. Thus we should not use this phenomenon, as Wieser does, to substantiate propositions about variations in the objective exchange value of money.

• 52See Wieser, “Der Geldwert und seine geschichtlichen Veränderungen,” pp. 57 ff.; “Der Geldwert und seine Veränderungen,” pp. 527 ff.; “Theorie der gesellschaftlichen Wirtschaft,” in Grundriss der Sozialökonomik (Tübingen, 1914), Part I pp. 327 ff.