The Theory of Money and Credit

Knapp’s mistakes in the history of theory have unfortunately already been accepted by other writers. This started with the attempt to expound Knapp’s theory in the most kindly manner possible, that is, to judge its weaknesses gently and if possible to credit it with some sort of usefulness. But this was not possible without reading into the state theory things that simply cannot be found in it, things in fact which definitely contradict both its spirit and its letter, or without taking over Knapp’s mistakes in the history of theory.

First, Wieser must be mentioned. Wieser draws a contrast between two monetary theories. “For the metallists, money has an independent value, arising from itself, from its substance; for modern theory, its value is derived from that of the objects of exchange, the commodities.”21  Again, in another place, Wieser says: “The value of the monetary material is a conflux from two different sources. It is constituted from the use value which the monetary material obtains by reason of its various industrial employments—for jewelry, for utensils, for technical uses of all kinds—and from the exchange value which the money obtains by reason of being a means of payment ... The service performed by the coins as a medium of exchange and that performed by the money in its industrial uses, lead in combination to a common estimate of its value ... We may ... assert, that each of the two services is independent enough to be able to go on existing even if the other ceased. Just as the industrial functions of gold would not cease if gold were no longer coined, so its monetary functions would not come to an end if the state decided to forbid its use in industry and requisitioned it all for minting ... The dominant metallistic opinion is different. From this point of view, the metal value of the money means the same thing as the use value of the metal; it has only the one source—industrial employment—and if the exchange value of the money coincides with its metal value, then it is nothing but a reflection of the use value of the metal. According to the prevailing metallistic opinion, money made from valueless material is inconceivable; for, it is said, money could not measure the value of commodities if it was not valuable itself, by virtue of the material from which it is made.”22

Here Wieser contrasts two theories of the value of money: the modern and the metallistic. The theory which he calls the modern is the monetary theory that logically follows from that theory of value which traces value to utility. Now since the utility theory has only recently received scientific exposition (to have contributed to which is one of Wieser’s great merits), and since it undoubtedly may nowadays be regarded as the prevailing doctrine (pace Wieser himself, who calls metallism the prevailing doctrine), it may well be admissible to call that monetary theory which is based upon it the modern theory Greek kat esechun. But in so doing we must not forget that, just as the subjective theory of value can look back over a long history, so also the theory of money corresponding to it is already more than two hundred years old. For example, as early as the year 1705 John Law had expressed it in classical form in his Money and Trade. A comparison of Law’s arguments with those of Wieser will demonstrate the fundamental agreement between their views.23

But this theory, which Wieser calls the modern, is certainly not the doctrine of Knapp; in Knapp, not the slightest suggestion of it can be discovered. All that it has in common with his nominalism, which ignores the problem of the value of money, is the fact that neither is “metallistic.”

Wieser himself sees quite clearly that his theory has nothing to do with that of Knapp. Unfortunately however, he takes over from Knapp the opinion that according to the “prevailing metallistic opinion,” the “metal value of the money means the same as the use value of the metal.” Several serious mistakes in the history of theory are here all mixed up together.

The first thing to observe is that by metallism Wieser means something different from Knapp. Wieser contrasts the “modern” theory of the value of money with the “metallistic,” and describes exactly what he understands by the terms. According to this, the two views are opposed to each other; the one excludes the other. But, for Knapp, the theory that Wieser calls the modern theory is just as metallistic as the others. The truth of this can easily be demonstrated.

In his principal book, Knapp never mentions the names of any writers who themselves have dealt with the problem of money; neither does he quote any work on the subject. He nowhere argues against any of the trains of thought that are usually met with in the abundant literature of money. His quarrel is always only with the metallism that he sets up as the general opinion on money. In his preface, it is true, he refers expressly to two writers as metallists: Hermann and Knies.24  But both Hermann and Knies expounded theories very similar to the “modern” theory expounded by Wieser. This should not appear strange, for both of these writers take their stand on the subjective theory of value,25  from which the “modern” doctrine of the value of money logically follows, so that both regard the foundation of the use-value of the precious metals as lying both in their monetary uses and their “other” uses.26  Between Wieser and Knies there is a difference, it is true, concerning the effect on the monetary function of the possibility of cessation of the “other” functions. Yet Knapp could not have regarded this as the decisive characteristic, or he would have been sure to mention it somewhere, and in fact he has nothing more to say about it than about any other problem of the value of money.

It is, indeed, not among the economists that we must seek the metallists, as they are portrayed by Knapp and his school. Knapp knows very well why he always argues only against this arbitrary caricature of a metallist, and prudently refrains from quoting chapter and verse for the opinions that he puts in the mouth of this metallist. In fact the metallist that Knapp has in mind is none other than Knapp himself; not the Knapp that wrote the State Theory of Money, but the Knapp that, “disregarding all theory” as he himself testifies, used to lecture on the “pragmatic” of the monetary system;27  the Knapp that, as one of the standard-bearers of historicism in political economy, had thought that a substitute for thinking about economic problems could be found in the publication of old documents. If Knapp had not looked down so arrogantly on the work of the much abused “theorists,” if he had not disdained to have anything to do with it, he would have discovered that he had been entertaining an entirely false opinion of its content. The same is true of Knapp’s disciples. Indeed, their leader Bendixen openly admits that he was once a “metallist.”28

It is by no means desirable to follow Wieser’s example in giving the title of prevailing doctrine to the view that the value of the monetary material arises solely from its industrial employment. Surely a view concerning money that has been rejected by Knies cannot be regarded as the prevailing doctrine.29  There can be no question that the whole literature of money, so far as it is based on the conclusions of modern theory is not metallistic in Wieser’s sense; but neither, for that matter, is any other catallactic theory of money.

In fact Wieser’s opinion of the monetary theories of his precursors has been distorted by his acceptance of the expression metallism. He himself did not fail to notice this; for he supplements the remarks quoted above with the following words: “The dominant doctrine does not remain true to itself, for it ... develops a special theory to explain the exchange value of money. If the value of money was always limited by the use value of the metal, what influence would remain to be exerted by the demand for money the velocity of circulation, or the amount of credit substitutes?” The solution of this apparent contradiction must be sought in the fact that what Wieser calls the prevailing metallistic doctrine is in the very sharpest contrast to those catallactic theories which “develop a special theory to explain the exchange value of money.”

Like Wieser, Philippovich also draws a contrast between two theories of the value of money; the nominalistic (represented by Adam Müller, Knapp, and others; Philippovich also includes Adolf Wagner in this group); and those which reject the nominalistic attitude. As representing this second group, he names only my Theorie des Geldes und der Umlaufsmittel.30  He adds the remark that, in discussing the value of money, I had been forced to admit that the value of commodity money only bears upon the theory of the value of money insofar as it depends upon its function as a common medium of exchange.31  In this, through following the historical views of Knapp, Philippovich falls into the same errors as Wieser.

While Wieser rejects the chartal and nominal theory of money, Philippovich confesses his allegiance to it, but at the same time interprets it in a way that entirely effaces the difference between the catallactic and the nominalistic conception. On the one hand, he declares that “the essential thing about the monetary unit is its nominal Geltung or validity as a unit of value.” And on the other hand, he says that “the monetary unit is not really this technically defined quantity of precious metal, but its power of purchase or payment.”32  These are two theses that cannot be reconciled. We have already met the former, as Knapp’s definition; the latter is the starting point of all catallactic theories of money. A sharper contrast could hardly be imagined.

That the identification of the monetary unit with purchasing power, so far from expressing Knapp’s views, completely contradicts them, may be clearly deduced from several passages in his writings.33  The very thing that characterizes nominalism—like all acatallactic theory in general—is the fact that it does not speak of the value, the purchasing power, of money. It is easy to show how irreconcilable are the two theses that Philippovich propounds. Within the limits of his own theory, Knapp is formally correct when he defines the mark as “the third part of the preceding unit of value, the thaler.”34  However uninformative this definition may be, it contains nothing contradictory in itself. It is otherwise when Philippovich declares that “the silver mark, as the third part of the thaler, was previously the unit of money for reckoning purposes, which, in the experience of economic agents, represented a certain purchasing power. This purchasing power had to be retained in the unit of coinage of the new metal; that is, the mark as a gold coin had to represent the same quantity of value as had previously been represented by the silver mark. The technical determination of the unit of coinage therefore has the aim of maintaining the value of the monetary unit.”35  These sentences, in connection with those previously quoted, can apparently only mean that the reform of the German monetary system had aimed to establish the purchasing power of the thaler at its transmitted level. But this can hardly be Philippovich’s real opinion.

There is yet another historical error that has been taken over by Philippovich from Knapp, namely, the belief that the catallactic doctrine of money disregards actual experience, “which provides examples enough of the forced circulation of state paper money.”36  Any catallactic writing, including the first edition of the present book, which is the only work referred to by Philippovich in this connection, would prove the contrary. It is possible to assert that the catallactists have not solved the problem of such paper money in a satisfactory manner—that is still an open question; but it will not do to assert that they have disregarded its existence. This is a particularly important point, because many of Knapp’s disciples think that catallactic theories of money have been confuted by the paper-money economics of the war period; as if this was not a problem that has been dealt with by all monetary theories since Ricardo.

When Knapp’s mistakes about the views on monetary theory of earlier and contemporary economists have been accepted by two such eminent experts in the history and literature of political economy as Wieser and Philippovich, it should not surprise us if the majority of those now at work in Germany on monetary problems base their history of theory entirely on Knapp.

• 21Wieser, Über die Messung der Veränderungen des Geldwerts, p. 542.
• 22Wieser, “Theorie der gesellschaftlichen Wirtschaft,” Grundriss der Sozialökonomik (Tübingen, 1924), p. 316.
• 23See the passages quoted on pp. 106 f.
• 24See Knapp, Staatliche Theorie, 1st ed., pp. 5, 7.
• 25See Zuckerkandl, Zur Theorie des Preises mit besonderer Berücksichtigung der geschichtlichen Entwicklung der Lehre (Leipzig, 1899), pp. 98, 115 f.
• 26See Hermann, Staatswirtschaftliche Untersuchungen, 2d ed. (Munich, 1870), p. 444; Knies, Das Geld, 2d ed. (Berlin, 1885), p. 324.
• 27Knapp, Staatliche Theorie, p. 5.
• 28Bendixen, op. cit., p. 134.
• 29See Wieser, “Theorie der gesellschaftlichen Wirtschaft,” p. 317.
• 30[Of which the present work is a translation. H.E.B.]
• 31Philippovich, Grundriss (Tübingen, 1916), p. 275.
• 32Ibid.
• 33See esp. Knapp, Schriften des Vereins für Sozialpolitik, vol. 132, pp. 560 ff.
• 34Knapp, Geldtheorie, staatliche in H. d. S., 3d ed.
• 35Philippovich, op. cit.
• 36Ibid., pp. 272 ff.