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Chapter 8 On Rising Prices and Purchasing Power Policies In the middle of the nineteenth century, prices increased dramatically all over Europe and reached their peak in 1874. At that point, prices began to decline and continued their downward movement until the mid-nineties. Since about 1896 a new upward movement in prices has set in, and its end point is nowhere in sight. This decline in the purchasing power of money has given new impetus to the old demand for a type of money that would not be susceptible to fluctuations in its objective exchange value. Ideally, with this type of money, the exchange relationship between money and all other economic goods would be stable from the money side. Similarly, there could be no general increase or decline in prices. The only disturbance in these stable market relationships would be a decline or rise in individual commodity prices with respect to each other, something that would be acceptable from the standpoint of both economic theory and political reality. Money with an invariant objective exchange value, however, is an unattainable ideal. It was commonly believed that the quantity theory of money provided the means to attain this goal. According to this theory, a change in the relationship between the supply of and the demand for money implied a change in the objective exchange value of money. All other 1. [This essay was originally delivered in German as Ludwig von Mises’s inaugural lecture at the University of Vienna in February 1913, on the basis of which he received the status of Privatdozent [unsalaried lecturer]. It has not been previously published. From 1913 until the spring of 1934, Mises regularly taught a seminar almost every semester (except during the war years of 1914–1918, when he served in the Austrian Army) at the University of Vienna on a wide variety of topics in general economic theory, monetary and business cycle theory, economic policy and comparative economic systems, and methodology of the social sciences.—Ed.] on rising prices and purchasing power policies  157 things equal, an increase in the supply of money had to lead to a decline in the purchasing power of the monetary unit. This is one of the oldest and most firmly established doctrines of monetary theory. Two factors, however, impede the practical application of this insight for stabilizing the value of money. The first is the inability to precisely predict how great will be the effect from a given change in the quantity of money in circulation. For even though it is certain that a decline or a rise in money’s purchasing power will result from an increase or reduction in the quantity of money, the extent of the changes in the objective exchange value of money brought about by specific changes in the quantity of money can never be predicted in advance. Changes in the quantity of money do not directly affect prices. Contrary to the notions of the older mechanistic price theory of supply and demand, changes in the quantity of money affect prices not directly but indirectly , by influencing the subjective valuations made by individuals. Given this insurmountable problem, some proposals were made that accepted the intrinsic impossibility of creating money with a stable exchange value and settled for a more limited goal. For the bulk of transactions , money as we know it today would continue to be used despite all its imperfections. For credit transactions, however—whether by legislation or by voluntary agreement between the parties concerned—the means of exchange would not be money but a uniform composite of the majority of commodities. The debtor would agree to fulfill his obligations by repaying not a nominal sum of money but a sum of money representing the same purchasing power for a fixed number of commodities . The idea was to supplement a currency based on precious metals with a currency based on commodities. These more modest reform proposals limit themselves to keeping the value of money stable only for long-term credit transactions and possibly for salaries of persons with a guaranteed position. But even the implementation of these proposals would not preclude a general rise in prices and the adverse consequences that would result from this in transactions between individuals. Even within this self-imposed limitation, the compensatory commodity currency project has another deficiency. While it has managed to circumvent one of the problems faced by all proposals for stabilizing the value of money, it founders on the second flaw, which makes...

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