Study Guide to the Theory of Money and Credit

Chapter Outline

1.   Money Neither a Production Good nor a Consumption Good

Traditionally, economic goods were divided into consumption goods (what Menger called goods of the first order) and production goods (what Menger called goods of higher orders). Consumption goods directly satisfied human desires, whereas production goods only satisfied them indirectly. (For example, an apple might be a consumption good to a hungry man, while an apple seed would be a production good.) If we insist on a two-fold scheme, then money must be a production good, since it is clearly not a consumption good. Yet this is problematic too, because money is very different from other types of production goods.

A solution is to adopt a three-fold system, consisting of consumption goods, production goods, and media of exchange. This makes sense, because money is not a “commercial tool” in the same way that account books are. Although in a certain sense money “facilitates commerce” just as boats and railroads do, they differ in a crucial way: Increasing the supply of money does not make the community richer, whereas having more boats, railroads, and other production goods allows for the greater satisfaction of human desires. This is why money should be classified in a separate category, namely media of exchange.

2.   Money as Part of Private Capital

Private capital can be defined as the aggregate of the products that serve as a means to the acquisition of goods. Money should clearly be included in this category, and in fact historically an interest-bearing sum of money was the starting point of the concept of “capital.”

Over time, theorists realized that money was “barren” and did not directly yield its “fruits” the way physical seeds or human labor could. To explain why people would be willing to pay interest on money loans, we must recognize that money can be exchanged for other, productive goods. This observation reinforces the decision to classify money as a medium of exchange, rather than a production good: the only way to salvage the inclusion of money as a part of private capital, is to distinguish it from other production goods and recognize its special ability to be exchanged for them.

3.   Money Not a Part of Social Capital

Social (or productive) capital can be defined as the aggregate of the products intended for employment in further production. If we deny that money is a production good, then obviously it cannot be a part of social (or productive) capital.

Important Contributions

•   Mises’s summaries of various debates (on whether money is a production good, or whether it is part of social capital) may strike some readers as difficult or even tedious. However, in these passages Mises demonstrates his command of the literature, but also he explains why he favors one view over another. At times Mises differs from Eugen von Böhm-Bawerk, the great pioneer in (what we now call) Austrian economics after Menger. The reader can see that Mises is not simply following in the path laid out by his predecessors in the Austrian tradition, but instead weighs the arguments by various thinkers, and builds the Misesian system with the strongest components of each.

•   As with his classification of money substitutes, credit money, etc., in this chapter Mises exercises great precision in defining his concepts and justifying his decisions. For the issues in this chapter, Mises tells the reader (p. 86) that the groundwork will be important for understanding the discussion of the equilibrium and money rates of interest, which will occur in part III of the book.

New Terminology

Equilibrium rate of interest: The rate of interest corresponding to the true supplies of capital goods and consumer preferences for present versus future consumption. Also known as the natural rate of interest.

Money rate of interest: The rate of interest determined in the marketplace for loans of money. (The money rate can deviate from the equilibrium [or natural] rate of interest, in a process that is explained in part III of the book.)

Private capital: The aggregate of the products that serve as a means to the acquisition of goods.

Social (productive) capital: The aggregate of the products intended for employment in further production.

Study Questions

1.   What are the views of Roscher and Knies with respect to classifying money? (p. 79)

2.   What was Helfferich’s objection to those (like Knies) who wanted to deny that a monetary exchange was an act of production? (pp. 79–80)

3.   Explain: “Money is obviously not a ‘commercial tool’ in the same sense as account books, exchange lists, the Stock Exchange, or the credit system.” (p. 83)

4.   Explain: “[W]hereas the changes in the value of ... production goods and consumption goods do not mitigate the loss or reduce the gain of satisfaction resulting from ... changes in their quantity, ... changes in the value of money are accommodated in such a way to the demand for it that, despites increase or decreases in its quantity, the economic position of mankind remains the same.” (p. 85)

5.   What hindered the development of a scientific understanding of capital and interest? (pp. 88–89)