Ludwig von Mises, The Theory of Money and Credit

Session 8

Ludwig von Mises, The Theory of Money and Credit

Session 8

Executive Summary of Part One: The Nature of Money

Mises was a major economist and a founding father of modern free-market economic thinking. His “Austrian School” approach emphasizes individual knowledge, choice, and action in its analyses of economic processes. In his classic 1912 treatise on monetary theory, Mises for the first time applied Austrian methods to macroeconomics, in this part, explaining money’s foundations and fundamental uses.

  1. The function of money is to facilitate “the business of the market by acting as a common medium of exchange.” All secondary functions of money—facilitating credit transactions, transmitting value through time and space, being a general medium of payment—can be deduced from this main function.
  2. The existence of a commodity such as money makes sense only in an economic order characterized by a division of labor and private property in both production and consumption goods.
  3. As the amount and complexity of the division of labor in society increases, the direct exchange of goods (barter) becomes increasingly problematic. Therefore, indirect ways of trading arise and prevail.
  4. Market conditions lead to the selection of some marketable commodities as more common means of exchange, thus gradually unifying the economic community’s means of trade.
  5. Economic value is “the significance attributed to individual commodity units by a human being who wishes to consume or otherwise dispose of various commodities to the best advantage” (modern value theory). Therefore, economic value is inherently subjective.
  6. Subjective values are immeasurable; they can be only graded ordinally. Thus, in every economic transaction there is necessarily a comparison of values by each individual involved.
  7. Money as a common medium of exchange acts as a common denominator, which enables one to analyze markets with multiple commodities. Money becomes a price index: it expresses the objective exchange value for all goods and services.  

Read Mises’s full treatise. Summary by Andrei Volkov and Stephen Hicks, 2019.

Facebook logo iconYoutube logo icon
Join Our Newsletter For the Latest Posts
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

We promote open Objectivism: the philosophy of reason, achievement, individualism, and freedom.