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Source link: http://archive.mises.org/10910/the-determination-of-the-purchasing-power-of-money/

The Determination of the Purchasing Power of Money

October 26, 2009 by

The demand for a medium of exchange is the composite of two partial demands: the intention to use it in consumption and production and the intention to use it as a medium of exchange. FULL ARTICLE

{ 5 comments }

Michael A. Clem October 26, 2009 at 3:04 pm

Here’s another one, straight from Human Action. Mises could be remarkably concise when he wanted to be, without beating around the bush. This contains some very fundamental concepts about money, but also some very key things that distinguish Austrian Economics from other schools. Includes his Regression Theorem and the “flaw” in the quantity theory of money.

George October 26, 2009 at 3:29 pm

Michael A. Clem,

Just wondering what that flaw is? I’ve seen this mentioned elsewhere as well and I’m curious.

Michael A. Clem October 26, 2009 at 3:41 pm

It’s towards the end of the article: “The main fault of the old quantity theory as well as the mathematical economists’ equation of exchange is that they have ignored this fundamental issue. Changes in the supply of money must bring about changes in other data too.”
You can read the article for the full context, but in essence, and one of the distinguishing marks of Austrian economics, is that changes in the money supply affect different commodities and industries in different and uneven ways, depending upon where the change in the money supply is introduced. The quantity theory is right, but only in narrowly specific, limited cases, and not as a general theory. Mises here covers the broader and more general application of changes in the money supply.
As I’ve said, before, all other things being equal, an increase in the money supply will cause an increase in prices–but all other things will rarely be equal.

Gil October 26, 2009 at 9:43 pm

Isn’t one of the main features that should define ‘money’ is that whatever form the money is cannot be created on a whim?

Deefburger October 27, 2009 at 8:14 am

Mises understood that money is really two things, Wealth and Currency. He also understood that Wealth is objective only to the individual who is comparing it to his circumstance. He understood that the currency “count” of money supply, carries with it a subjective value of Wealth, but that the Currency count has no direct correlation to the Wealth it carries. What this means is that the money can be counted, but the wealth that it represents is still unknown.

What he is doing in this article is tracing the cause and effect back to the industrial use of the commodity, and showing the source of original intrinsic value. This study assumes that the “money” is gold, silver, or at least paper backed by gold or silver or some other intrinsic value commodity.

Today’s money is currency ONLY. Any Wealth value it may convey in an exchange is there as a in-the-now comparison of one persons value vs. an other. Without a tie to an intrinsic value, (Bretton-Woods), it has nothing of it’s own to measure.

This is an interesting case, our modern money. It has none of the loose ties of value, so it has none of the problems associated with creation-on-demand. In Mises’ theory, the intrinsic value of the money itself is traced back to the utilitarian source of value in the industrial use. But this requires an intrinsic value to act as the source. With no intrinsic source value in the money, there is no trace of it’s creation, other than the press itself used to print the bills.

If the money is not a supply of Wealth, but is only a supply of currency, then how can we assign a value to the money supply that has meaning beyond it’s count? The answer is that you can only GUESS. And the only Wealth you can compare lies completely within your self and your situation, and within the “other person” of the market itself, and their situation. You must look only at what they are and who they are comapred to yourself. In a sense, we are back to barter, and with a useless measure for frangible exchange to “solve” the problems ascociated with barter exchange. So we are forced to solve the barter problem with tokens that store no value. Saving is impossible. Only risk bearing “investments” prevail in the market, because no other option can exist.

But the tie back to intrinsic value is persistent in the market. The market, which is you, me and everybody else we exchange with seeks value store, value consistency, value commodity to store Wealth. Mises is right, in that even in this situation, the reduction back through the regression of events in exchage, are bound to intrinsic value commodities.

Even in the credit age, our homes became our savings. That is how we looked at them, and that is how we treated them. Money was whatever the equity on the house was. That is the store of our own sweat that we “Saved”. That was our Wealth.

Equity replaced frangible commodity when money lost it’s tie to Wealth.

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