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Source link: http://archive.mises.org/11093/the-specific-value-of-money/

The Specific Value of Money

November 25, 2009 by

The task of the theory of money consists merely in dealing with that component in the valuation of money which is conditioned by its function as a medium of exchange. FULL ARTICLE by Ludwig von Mises


Mike Sproul December 1, 2009 at 12:37 pm


Let each blip be a claim to 1 oz. of silver. If a blip sold for 1.01 oz in the market, quantity supplied would be infinite, and quantity demanded would be zero. If a blip sold for .99 oz., quantity supplied would be zero, and quantity demanded would be infinite. Both the supply and demand curve are horizontal at 1 oz. They are meaningless. The value of those blips is determined by their backing (assets worth 1 oz.), not by supply and demand.

Commodities have production functions and are produced using scarce resources. Not so with blips. Commodities are consumed by people. Not so with blips. That’s why the theory of value applies to commodities, and not to blips.

Gerry Flaychy December 1, 2009 at 1:30 pm

Does the value of money in the market determined by supply and demand ?

Is there a difference between the ‘value of money’ and the ‘purchasing power of money’ ?

Do we have 2 theories of value or only one ? If 2 is the case, which one is the best ?

That are the questions.

In our present monetary and banking system, $10 of account-money (blips) have the same purchasing power in the market as $10 in Fed notes. If this purchasing power of the money change, it changes for those two forms of money in the same proportion, while $10 of account-money (blips) continue to be change for $10 of Fed notes at the bank, and vice versa.

T. Ralph Kays December 31, 2009 at 12:48 am

At the heart of RBD is the assertion that if credit expansion is backed by adequate collateral for the new loans, then the money, or money substitutes, thus created have real value, and therefore will not cause inflation or lead to the business cycle as described in ABCT. The money, or money substitutes, have value because the collateral used to guarantee the loans has value.
Some of the less sophisticated proponents of RBD assert that when the new money, or money substitutes, are created then an equivalent value assett is also created, namely the loan itself, which can be traded at the push of a button. That loans are traded this way is irrelevant however; the critical point is, was a new assett actually created? When a loan is made, say on a home, the homeowner gives up part of their claim to the property in exchange for present money, the loan represents the claim they surrendered to the bank. Instead of a new assett coming into being, what has actually happened is that an existing assett has been divided between two entities. To argue otherwise would amount to asserting the right of homeowners to take out a loan on their home and still be able to use the equity thus encumbered as they please. They could sell it and pocket the money, they could take out as many loans as they wanted against that same equity, there would be no limit to their claim to the collateral. That is clearly not the case.
RBD proponents are offended when it is claimed that the credit expansion that occurs under their system results in “money being created out of thin air”. People who make this claim point to the fact that after the credit expansion occurs the only new assets (please see previous paragraph) are the new money or money substitutes. RBD hinges on the claim that the value of the collateral creates the value of the money, or money substitutes, that come into existence with the credit expansion.
Their are two basic divisions in the discussion of value, there is the objective theory of value and the subjective theory of value. The objective theory of value asserts that objects have intrinsic value apart from the opinions of humans and that it should be possible to measure objectively this ‘value’. There are many different schools of objective value theory, even though not one of them has ever successfully been able to measure ‘value’. The subjective theory of value, the one at the core of Austrian economics, holds that value is determined differently by every individual and that no object has an intrinsic ‘value’ apart from the opinions of individuals.
RBD proponents must explain their assertion that the value of the money, or money substitutes, created under their system derives from the value of the collateral behind the loans, using one of these two basic philosophies of ‘value’. If they choose the objective theory of value they should be able to define the value of the collateral without reference to money, after all, the value of the money comes from the collateral, it is a derivative of the value of the collateral. They should also be able to explain what constant unit of measure is appropriate to ‘value’.
More often RBD proponents follow somewhat of a subjective theory of value, but there is a serious problem with this approach. They use the term ‘value’ extensively, but, when pressed, they admit that what they really mean is the money price of the collateral behind the credit expansion that creates the new money, or money substitutes. So the ‘value’ that establishes the ‘value’ of the money, or money substitutes, is in fact the money price of the collateral. But the money price of the collateral would depend entirely on the ‘value’ of the money, and the ‘value’ (or money price) of the collateral is what establishes the ‘value’ of the money. It is an endless circular argument.
What one is left with is the Austrian explanation of prices and their function in the free market. The ‘value’ of money, or money substitutes, adjust, along with every other item in the market, in order to clear the market. Clearly the abundance of any item in this world will be reflected in its ‘value’, including money.

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