The Theory of Money and Credit

Appendix A. On the Classification of Monetary Theories

Money_501-544.indd 3 6/17/08 9:30:04 AM APPENDIX A On the Classification of Monetary Theories (This Appendix was first published as a journal article in 1917-1918, it was later used as a chapter in the 2nd German edition of 1924, but was then relegated to the Appendix in the Batson translation of 1934.) 1 Catallactic and Acatallactic Monetary Doctrine r-y"'he phenomenon of money occupies so prominent a position .l among the other phenomena of economic life, that it has been speculated upon even by persons who have devoted no further attention to the problems of economic theory, and even at a time when thorough investigation into the processes of exchange was still unknown. The results of such speculations were various. The merchants and, following them, the jurists who were closely connected with mercantile affairs, ascribed the use of money to the properties of the precious metals, and said that the value of money depended on the value of the precious metals. Canonist jurisprudence , ignorant of the ways of the world, saw the origin of the employment of money in the command of the state; it taught that the value of money was a valor impositus. Others, again, sought to explain the problem by means of analogy. From a biological point of view, they compared money with the blood; as the circulation of the blood animates the body, so the circulation of money animates the economic organism. Or they compared it with speech, which likewise had the function of facilitating human Verkehr (interchange, 503 Money_501-544.indd 4 6/17/08 9:30:05 AM 504 Appendices trade). Or they made use of juristic terminology and defined money as a draft by everybody on everybody else. All these points of view have this in common: they cannot be built into any system that deals realistically with the processes of economic activity. It is utterly impossible to employ them as foundations for a theory of exchange. And the attempt has hardly been made; for it is clear that any endeavor to bring, say, the doctrine of money as a draft into harmony with any explanation of prices must lead to disappointing results. If it is desired to have a general name for these attempts to solve the problem of money, they may be called acatallactic, because no place can be found for them in catallactics. The catallactic theories of money, on the other hand, do fit into a theory of exchange ratios. They look for what is essential in money in the negotiation of exchanges; they explain its value by the laws of exchange. It should be possible for every general theory of value to provide a theory of the value of money also, and for every theory of the value of money to be included in a general theory of value. The fact that a general theory of value or a theory of the value of money fulfills these conditions is by no means a proof of its correctness . But no theory can prove satisfactory if it does not fulfill these conditions. It may seem strange that acatallactic views on money were not completely suppressed by the growth of the catallactic doctrine. There were many reasons for this. It is not possible to master the problems of theoretical economics unless questions of the determination of prices (commodity prices, wages, rent, interest, etc.) are at first dealt with under the supposition of direct exchange, indirect exchange being temporarily left out of account. This necessity gives rise to a division of the theory of catallactics into two parts-the doctrine of direct, and that of indirect, exchange. Now so abundant and difficult are the problems of pure theory, that the opportunity of putting part of them on one side, at least for the time being, has been very welcome. So it has come about that most recent investigators have devoted either no attention at all or very little to the theory of indirect exchange; any way, it has been the most neglected section of our science. The consequences of this omission have been most unfortunate. They Money_501-544.indd 5 6/17/08 9:30:05 AM On the Classification of Monetary Theories 505 have been expressed not only in the sphere of the theory of indirect exchange, the theory of money and banking, but also in the sphere of the theory of direct...