The Theory of Money and Credit

Foreword

Money_001-100.indd 13 6/17/08 9:07:48 AM FOREWORD By Murray N. Rothbard T udwig von Mises' The Theory of Money and Credit is, quite simply, L one of the outstanding contributions to economic thought in the twentieth century. It came as the culmination and fulfillment of the "Austrian School" of economics, and yet, in so doing, founded a new school of thought of its own. The Austrian School came as a burst of light in the world of economics in the 187os and 188os, serving to overthrow the classical, or Ricardian, system which had arrived at a dead end. This overthrow has often been termed the "marginal revolution ," but this is a highly inadequate label for the new mode of economic thinking. The essence of the new Austrian paradigm was analyzing the individual and his actions and choices as the fundamental building block of the economy. Classical economics thought in terms of broad classes, and hence could not provide satisfactory explanations for value, price, or earnings in the market economy. The Austrians began with the actions of the individual . Economic value, for example, consisted of the valuations made by choosing individuals, and prices resulted from market interactions based on these valuations. The Austrian School was launched by Carl Menger, professor of economics at the University of Vienna, with the publication of his 13 Money_001-100.indd 14 7/1/08 12:04:48 PM 14 Foreword Principles of Economics (Grundsiitze der Volkswirtschaftslehre) in 1871. 1 It was further developed and systematized by Menger's student and successor at Vienna, Eugen von Bohm-Bawerk, in writings from the 188os on, especially in various editions of his multivolume Capital and interest.2 Between them, and building on their fundamental analysis of individual valuation, action, and choice, Menger and Bohm-Bawerk explained all the aspects of what is today called "micro-economics": utility, price, exchange, production, wages, interest , and capital. Ludwig von Mises was a "third-generation" Austrian, a brilliant student in Bohm-Bawerk's famous graduate seminar at the University of Vienna in the first decade of the twentieth century. Mises' great achievement in The Theory of Money and Credit (published in 1912) was to take the Austrian method and apply it to the one glaring and vitallacuna in Austrian theory: the broad "macro" area of money and general prices. For monetary theory was still languishing in the Ricardian mold. Whereas general "micro" theory was founded in analysis of individual action, and constructed market phenomena from these building blocks of individual choice, monetary theory was still "holistic ," dealing in aggregates far removed from real choice. Hence, the total separation of the micro and macro spheres. While all other economic phenomena were explained as emerging from individual action, the supply of money was taken as a given external to the market, and supply was thought to impinge mechanistically on an abstraction called "the price level." Gone was the analysis of individual choice that illuminated the "micro" area. The two spheres were analyzed totally separately, and on very different foundations. This book performed the mighty feat of integrating monetary with micro theory, of building monetary theory upon the individualistic foundations of general economic analysis. Eugen von Bohm-Bawerk died soon after the publication of The Theory of Money and Credit, and the orthodox Bohm-Bawerkians, 1 The English translation ofMenger's Grundsiitzeonly first appeared in 1950. See Carl Menger, Principles of Economics (New York: New York University Press, 1981). 2 The first complete English translation of the third/fourth German edition, by George D. Hunke and Hans F. Sennholz, was published by Libertarian Press, South Holland, Ill., in 1959; it includes: Volume I, History and Critique of Interest Theories; Volume II, Positive Theory of Capital; and Volume III, Further Essays on Capital and Interest. Money_001-100.indd 15 6/17/08 9:07:48 AM Foreword 15 locked in their old paradigm, refused to accept Mises' new breakthrough in the theory of money and business cycles. Mises therefore had to set about the arduous task of founding his own neo-Austrian, or Misesian, school of thought. He was handicapped by the fact that his post at the University of Vienna was not salaried; yet, all during the 1920s, many brilliant students flocked to his Privatseminar . In the English-speaking world, acceptance of Misesian ideas was gravely hampered by the simple but significant fact that few economists read any...