Posted anonymously, 2 years ago

Notes on “Theory of Money and Credit” by Ludwig von Mises

I just finished reading “Theory of Money and Credit” by Ludwig von Mises. I’m reading Mises to better understand economics and Bitcoin.

Here are some of my notes from the book as it pertains to Bitcoin.

“FORTY years have passed since the first German-language edition of this volume was published. In the course
of these four decades the world has gone through many disasters and catastrophes. The policies that brought
about these unfortunate events have also affected the nations’ currency systems. Sound money gave way to
progressively depreciating fiat money. All countries are to-day vexed by inflation and threatened by the gloomy
prospect of a complete break-down of their currencies.”

This is from the introduction. The book is all about money, credit, and interest rates. It was originally published in 1912. What the introduction is referring to is that after this book was published, many governments, particularly Germany (the Weimar Republic), debased their currencies over and over again, leading to economic destruction.

This is still relevant today. Recently, Zimbabwe ruined its currency with hyperinflation, and Venezuela is currently undergoing a period of hyperinflation. The lessons of this book have not been learned by all central banks.

“The great inflations of our age are not acts of God. They are man-made or, to say it bluntly, government-made.
They are the off-shoots of doctrines that ascribe to governments the magic power of creating wealth out of
nothing and of making people happy by raising the ‘national income’.”

Indeed - these are acts of the central banks. This is something Bitcoin can help with. By removing control over the protocol from any one party, it is vastly harder to create inflation. (In theory - we will see whether the promise of Bitcoin works out in practice.)

“Yet in English, at any rate, there has been so little attempt at synthesis of this kind that, when Mr. Keynes came
to write his Treatise on Money, he was compelled to lament the absence, not only of an established tradition of
arrangement, but even of a single example of a systematic treatment of the subject on a scale and of a quality
comparable with that of the standard discussions of the central problems of pure equilibrium theory.”

Apparently works in English about the subject matter that were informed about economic history were rare at the time. This may be the case in Spanish language today, which would explain why Venezuela is having exactly the same problems as many nations of the 20th century.

“Commencing with a rigid analysis of the nature and function of money, it leads by a highly ingenious series of
approximations, from a discussion of the value of money under simple conditions in which there is only one
kind of money and no banking system, through an analysis of the phenomena of parallel currency and foreign
exchanges, to an extensive treatment of the problems of modern banking and the effects of credit creation on the
capital structure and the stability of business. In continental circles it has long been regarded as the standard
textbook on the subject.”

I’m glad the author of the introduction liked the book so much. I think it was worth reading. However, unfortunately, I found large parts of the book difficult to understand, primarily because Mises kept referring to the works of other economists who I know nothing about. I may point this out in more of my notes later on. This makes it hard for me to recommend the book to others, who I know have studied no more economics than I have. One of my takeaways from this book is to not spend any time at all criticizing others who the audience doesn’t know about, because they simply will not understand the criticisms.

“From 1926 to 1929 the attention of the world was chiefly focused upon the question of American prosperity. As
in all previous booms brought about by expansion of credit, it was then believed that the prosperity would last
for ever, and the warnings of the economists were disregarded. The turn of the tide in 1929 and the subsequent
severe economic crisis were not a surprise for economists; they had foreseen them, even if they had not been
able to predict the exact date of their occurrence.”

The bubble leading up to the Great Depression was quite similar in spirit (but bigger in magnitude) to the cryptocurrency bubble leading up to the peak in December 2017.

“Dependence of the value of money on the production of gold does at least mean its independence of the politics
of the hour. The dissociation of the currencies from a definitive and unchangeable gold parity has made the
value of money a plaything of politics.”

Sound money in the form of the gold standard is a recurring theme of the book. Again, Bitcoin can quite possibly help with this, although it is a bit early to say for sure.

“For years past, the economic policy of all countries has been in conflict with the principles on which the
nineteenth century built up the welfare of the nations. International division of labour is now regarded as an evil,
and there is a demand for a return to the autarchy of remote antiquity. Every importation of foreign goods is
heralded as a misfortune, to be averted at all costs.”

It is fascinating to know that the debate between capitalism and socialism was pretty much the same a hundred years ago as it is today. Lessons from history have not been learned. It makes me wonder what other lessons from history have not been learned.

“Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial
stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized,
must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of
attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic
activity by means of additional credit.”

Artificial stimulation of the economy is going on today. The Federal Reserve continues to play an enormous role in the economy by controlling interest rates. Although the period of “quantative easing” is over, the period of Fed manipulation is clearly still ongoing. Banks are holding huge values at the Fed to get the new money interest rates.

“WHEN the first edition of this book was published twelve years ago, the nations and their governments were just
preparing for the tragic enterprise of the Great War. They were preparing, not merely by piling up arms and
munitions in their arsenals, but much more by the proclamation and zealous propagation of the ideology of war.
The most important economic element in this war ideology was inflationism.”

Yes, the historical context is very interesting. This paragraph is referring to World War I. The edition of this book that I read was published after World War I in 1924.

“It is equally hard to understand how the assertion could have been made that the experience of recent years has
necessitated a revision of economics. The tremendous and sudden changes in the value of money that we have
experienced have been nothing new to anybody acquainted with currency history; neither the variations in the
value of money, nor their social consequences, nor the way in which the politicians reacted to either, were new
to economists. It is true that these experiences were new to many etatists, and this is perhaps the best proof that
the profound knowledge of history professed by these gentlemen was not genuine but only a cloak for their
mercantilistic propaganda.”

A theme of this book is that people seem to have not learned lessons from economics, and that politics has continued to distort the truth in disastrous ways. That is certainly still true today in general, and we can see many of the political inanities mirrored in the cryptocurrency world. Politicians mislead people for their own gain.

“But even in an economic order based on division of labour, money would still be unnecessary if the means of
production were socialized, the control of production and the distribution of the finished product were in the
hands of a central body, and individuals were not allowed to exchange the consumption goods allotted to them
for the consumption goods allotted to others.”

One of the many passages making a direct reference to the distinction between socialism and capitalism. Mises makes it very clear he believes socialism is based on misbeliefs about economics.

“The phenomenon of money presupposes an economic order in which production is based on division of labour
and in which private property consists not only in goods of the first order (consumption goods), but also in
goods of higher orders (production goods). In such a society, there is no systematic centralized control of
production, for this is inconceivable without centralized disposal over the means of production. Production is

I’m used to referring to these as “consumption goods” and “capital goods”. Mises prefers “goods of higher orders”. It is interesting that he calls production ‘anarchistic’, as he makes it clear later on in the book that he is in favor of law, and is not an anarchist.

“What is to be produced, and how it is to be produced, is decided in the first place by the owners of the means of
production, who produce however, not only for their own needs, but also for the needs of others, and in their
valuations take into account, not only the use-value that they themselves attach to their products, but also the usevalue
that these possess in the estimation of the other members of the community. The balancing of production
and consumption takes place in the market, where the different producers meet to exchange goods and services
by bargaining together.”

Indeed - production is not centralized (in a capitalist economy or otherwise). As is the case in Bitcoin, very much explicitly, where miners compete to produce blocks. No one entity controls the protocol.

“It was in this way that those goods that were originally the most marketable became common media of
exchange, i.e. goods into which all sellers of other goods first converted their wares and which it paid every
would-be buyer of any other commodity to acquire first. And as soon as those commodities that were relatively
most marketable had become common media of exchange, there was an increase in the difference between their
marketability and that of all other commodities, and this in its turn further strengthened and broadened their
position as media of exchange.”

This is Mises’ basic idea about the origin of money. Money arose first as a commodity that become widely used as a medium of exchange, and then ended up acquiring value in addition to its commodity value purely because it was being used as a medium of exchange.

“It was in this way that those goods that were originally the most marketable became common media of
exchange, i.e. goods into which all sellers of other goods first converted their wares and which it paid every
would-be buyer of any other commodity to acquire first. And as soon as those commodities that were relatively
most marketable had become common media of exchange, there was an increase in the difference between their
marketability and that of all other commodities, and this in its turn further strengthened and broadened their
position as media of exchange.”

Another theme of the book is that multiple different kinds of money can live in parallel, particularly gold and silver. However, Mises does make it clear that he believes that is a strong effect (he doesn’t use the phrase “network effect”, but I believe that is what he means), that encourages the economy to adopt a single form of money rather than multiple.

“The simultaneous use of several kinds of money involves so many disadvantages and so complicates the
technique of exchange that the endeavour to unify the monetary system would certainly have been made in any

This is pretty clear.

“Credit transactions are in fact nothing but the exchange of present goods against future goods.”

Indeed - this is an important way to look at credit.

“The functions of money as a transmitter of value through time and space may also be directly traced back to its
function as medium of exchange. Menger has pointed out that the special suitability of goods for hoarding, and
their consequent widespread employment for this purpose, has been one of the most important causes of their
increased marketability and therefore of their qualification as media of exchange.2 As soon as the practice of
employing a certain economic good as a medium of exchange becomes general, people begin to store up this
good in preference to others.”

I like this definition of money a lot - it is very physical. “Money is a transmitter of value through time and space.”

“ALTHOUGH it is usual to speak of money as a measure of value and prices, the notion is entirely fallacious. So
long as the subjective theory of value is accepted, this question of measurement cannot arise.”

This is an important claim in the book that has made me question how I see money. It seems hard to deny. Money is NOT a measure of value. Value is subjective. Another important concept in the book is that people rank things according to value, but do not measure them. All we can say about human value is what thing we prefer over another, but not how much value it has.

“But subjective valuation, which is the pivot of all economic activity, only arranges commodities in order of their
significance; it does not measure this significance.”

You can’t measure prices across time.

“Such an estimate of relative values in no way involves the idea of measurement. An estimate is a direct
psychological judgement that is not dependent on any kind of intermediate or auxiliary process.”

He makes that very clear here.

“Because the market enables any commodity to be turned into money and money into any commodity, objective
exchange-value is expressed in terms of money. Thus money becomes a price-index, in Menger’s phrase.”

So we can’t measure “value”, but we can measure a “price index”.

“It is a mistake to deal with economic problems according to legal criteria.”

This is another theme of the book - explicitly distinguishing between legal claims and beliefs vs. economic claims and beliefs.

“The decisive characteristic of commodity money is the employment for monetary purposes of a commodity in
the technological sense.”

Bitcoin as a commodity ledger to which you pay to insert an entry.

“For the present investigation, it is a matter of complete indifference what particular
commodity this is; of State intervention in the monetary sphere is simply to release individuals from the necessity of testing the
weight and fineness of the gold they receive, a task which can only be undertaken by experts and which involves
very elaborate precautionary measures. The narrowness of the limits within which the weight and fineness of the
coins is legally allowed to vary at the time of minting, and the establishment of a further limit to the permissible
loss by wear of those in circulation, is a much better means of securing the integrity of the coinage than the use
of scales and nitric acid on the part of all who have commercial dealings.”

This is one of the great advantages of Bitcoin. Is is radically easier for people to validate a Bitcoin transaction (to a variable level of guarantee) than it is to validate gold.

“Kings and republics have repeatedly refused to recognize this. Diocletian’s edict de pretiis rerum venalium, the
price regulations of the Middle Ages, the maximum prices of the French Revolution, are the most well-known
examples of the failure of authoritative interference with the market.”

So we have market manipulation going back at least as far as the Middle Ages.

“The fact that the law regards money only as a means of cancelling outstanding obligations has important
consequences for the legal definition of money. What the law understands by money is in fact not the common
medium of exchange but the legal medium of payment. It does not come within the scope of the legislator or
jurist to define the economic concept of money.”

Here is an example where he distinguishes the “legal definition” vs. the economic definition.

“First, the impossibility of modifying the monetary system merely by the exercise of authority may be illustrated
by the ill-success of bimetallistic legislation.”

Bimetalism (fixing the price of gold to silver) was bad because it was basically impossible. It’s like trying to regulate the laws of physics.

“All the results followed that are attributed by Gresham’s Law to the legislative equating of coins of unequal

Gresham’s Law comes up many times in this book. When the price of one kind of money is arbitrarily increased by the State, the lower priced form of money ends up being used as the medium of exchange, and all the higher priced money ends up being hoarded.

“The first grave difficulty in the way of any investigation into the relation between money and capital arises from
the difference of opinion that exists about the definition of the concept of capital. The views of scholars on the
definition of capital are more divergent than their views on any other point in economics.”

OK - so how do you define it, Mises? This was one of many examples where Mises spent too much time criticizing economists who I don’t know rather than just explaining his own theory.

“The case of money is different. Its objective exchange-value cannot be referred back to any sort of use-value
independent of the existence of this objective exchange-value.”

Mises defines money differently than other types of capital goods. In fact he places it in its own category separate from capital goods. Money is different because it is valued not for its intrinstic value but specifically for its use as a medium of exchange.

“The earliest value of money links up with the commodity-value of the monetary material.”

Again, relevant to Bitcoin - the use-case for Bitcoin is as a commodity ledger. If it ever transcends that to become a common medium of exchange, then it can become money.

“There are two theories of money which, whatever else we may think of them, must be acknowledged as having
attempted to deal with the whole problem of the value of money. The objective theories of value succeeded in
introducing a formally unexceptionable theory of money into their systems, which deduces the value of money
from its cost of production.”

Mises dismisses this, but it does have an odd parallel to Bitcoin. Miners have to work to create Bitcoin. But the value of it is not really related to the work done by the miners - the value is set by the market. Miners do more work according to the price, the advance of technology, and their own speculation about the future value. See also my notes on the Handicap Principle, which has many lessons for Bitcoin related to costly signals.

“The other similarly complete theory of the value of money is that version of the Quantity Theory associated with
the name of Davanzati.2 According to this theory, all the things that are able to satisfy human wants are
conventionally equated with all the monetary metal. From this, since what is true of the whole is also true of its
parts, the exchange-ratios between commodity-units and units of money can be deduced.”

Mises mentions the Quantity Theory of Money many times in this book. I will have to learn about that.

“If we make use in our discussion of only one fundamental idea contained in the Quantity Theory, the idea that a
connexion exists between variations in the value of money on the one hand and variations in the relations
between the demand for money and the supply of it on the other hand, our reason is not that this is the most
correct expression of the content of the theory from the historical point of view, but that it constitutes that core
of truth in the theory which even the modern investigator can and must recognize as useful.”

I think what he is saying here is that the value of money can vary independently of the supply/demand of it. Value is subjective. Supply/demand concerns the price, which is objective.

“Beyond this proposition, the Quantity Theory can provide us with nothing. Above all, it fails to explain the
mechanism of variations in the value of money.”


“There is an error in the very starting-point of this way of regarding the matter, which was first successfully
attacked by Menger.1 It is inadmissible to begin with the demand for money of the community. The
individualistic economic community as such, which is the only sort of community in which there is a demand for
money, is not an economic agent. It demands money only in so far as its individual members demand money.”

Menger is on my list to read as well.

“An increase in a community’s stock of money always means an increase in the amount of money held by a
number of economic agents, whether these are the issuers of fiat or credit money or the producers of the
substance of which commodity money is made. For these persons, the ratio between the demand for money and
the stock of it is altered; they have a relative superfluity of money and a relative shortage of other economic
goods. The immediate consequence of both circumstances is that the marginal utility to them of the monetary
unit diminishes. This necessarily influences their behaviour in the market. They are in a stronger position as
buyers. They will now express in the market their demand for the objects they desire more intensively than
before; they are able to offer more money for the commodities that they wish to acquire. It will be the obvious
result of this that the prices of the goods concerned will rise, and that the objective exchange-value of money
will fall in comparison.”

“But this rise of prices will by no means be restricted to the market for those goods that are desired by those who
originally have the new money at their disposal. In addition, those who have brought these goods to market will
have their incomes and their proportionate stocks of money increased and, in their turn, will be in a position to
demand more intensively the goods they want, so that these goods will also rise in price. Thus the increase of
prices continues, having a diminishing effect, until all commodities, some to a greater and some to a lesser
extent, are reached by it.”

This gives some basic information about the relationship between supply, demand, and “objective exchange-value” of money. Applies to Bitcoin as well, even though it is not “yet” money, because supply/demand apply to everything.

“There is no justification whatever for the widespread belief that variations in the quantity of money must lead to
inversely proportionate variations in the objective exchange-value of money, so that, for example, a doubling of
the quantity of money must lead to a halving of the purchasing power of money.”

True - simply doubling the amount of money does not cause some instant, uniform doubling of prices. It would ripple out in a complicated way. But Mises does not address the scenario of an instant doubling of both quantity and prices, which would be stable (I believe), although that is obviously a purely hypothetical situation that would never and cannot happen in reality.

“Economic history shows us a continual increase in the demand for money. The characteristic feature of the
development of the demand for money is its intensification; the growth of division of labour and consequently of
exchange transactions, which have constantly become more and more indirect and dependent on the use of
money, have helped to bring this about, as well as the increase of population and prosperity.”

Indeed, the increasing demand for money is related to the growth of the economy. Money becomes more useful as production increases.

“But recent times have provided an outstanding example: the almost complete demonetization of silver. Silver,
which previously was widely used as money, has been almost entirely expelled from this position, and there can
be no doubt that at a time not very far off, perhaps even in a few years only, it will have played out its part as
money altogether. The result of the demonetization of silver has been a diminution of its objective exchangevalue.
The price of silver in London fell from 60-9/rod. on an average in 1870 to 23-12/16d. on an average in

  1. Its value was bound to fall, because the sphere of its employment had contracted.”

This is an interesting historical lesson. Moneys can come and go, even physical commodity moneys like silver. There is no sense in which silver is used as money anymore.

“Few visitors to Austria from Germany at the beginning of the twentieth century had any doubts that the value of
money was higher in Germany than in Austria.

We have seen where the fallacy lies in this, and may spare ourselves unnecessary repetition. It is the leaving out
of account of the positional factor in the nature of economic goods, a relic of the crudely materialist conception
of the economic problem, that is to blame for this confusion of ideas.

Alleged Local Differences in the Cost of Living There is a certain connexion between the assertion of local
differences in the purchasing power of money and the widespread belief in local differences in the cost of living.

Thus, the Englishman of the richer classes is able to live more cheaply on the Continent, because he is obliged to
fulfil a series of social duties at home that do not exist for him abroad.

It is no more appropriate to speak of a difference
between the purchasing power of money in Germany and in Austria than it would be justifiable to conclude from
differences between the prices charged by hotels on the peaks and in the valleys of the Alps that the objective
exchange-value of money is different in the two situations and to formulate some such proposition as that the
purchasing power of money varies inversely with the height above sea-level. The purchasing power of money is
the same everywhere; only the commodities offered are not the same. They differ in a quality that is
economically significant – the position in space of the place at which they are ready for consumption.”

What Mises is talking about here is that money does actually have the same value everywhere, but some places are in greater demand than others, and thus cost more, exactly like any other good. It is not the case that the money has different values in different places, but rather those places have different values.

“No individual and no nation need fear at any time to have less money than it needs. Government measures
designed to regulate the international movement of money in order to ensure that the community shall have the
amount it needs, are just as unnecessary and inappropriate as, say, intervention to ensure a sufficiency or corn or
iron or the like. This argument dealt the Mercantilist Theory its death-blow.”

What Mises is talking about here is the idea that you can somehow get something for free by printing money and what a fallacious idea that is. This is very much related to Bitcoin and its constant total supply of Bitcoin of 21 million. Bitcoin embraces the market 100% and is not under the illusion that printing new currency units does anything good for productivity. Instead, allowing the market to determine all prices is best, including the price of money, and, related, the price of transactions (writing to the ledger, or paying miners).

“In law, the objective exchange-value of money is stable. It is sometimes asserted that legal systems adopt the
fiction of the stability of the exchange-value of money; but this is not true. In setting up a fiction, the law
requires us to take an actual situation and imagine it to be different from what it really is, either by thinking of
nonexistent elements as added to it or by thinking of existing elements as removed from it, so as to permit the
application of legal maxims which refer only to the situation as thus transformed.”

This is an interesting distinction between law and economics. In law, one unit of money is always the same. But economically, we can know if the value has decreased (or increased). Note again that value is subjective, but certainly the price in terms of other goods is objective and can go up or down.

“The attitude of the law to money is quite a different matter. The jurist is totally unacquainted with the problem of
the value of money; he knows nothing of fluctuations in its exchange-value.”

Depends on the country - in Argentina they are very aware of the fluctuations in exchange value.

“When jurists and business men assert that the depreciation of money has a very great influence on all kinds of
debt relations, that it makes all kinds of business more difficult, or even impossible, that it invariably leads to
consequences that nobody desires and that everybody feels to be unjust, we naturally agree with them. In a
social order that is entirely founded on the use of money and in which all accounting is done in terms of money,
the destruction of the monetary system means nothing less than the destruction of the basis of all exchange.
Nevertheless, this evil cannot be counteracted by ad hoc laws designed to remove the burden of the depreciation
from single persons, or groups of persons, or classes of the community, and consequently to impose it all the
more heavily on others.”

This is very related to Bitcoin. People will create different contracts when they know that there will only ever be 21 million Bitcoin. Interest rates are likely to be very different and may work differently. Equity may be more widely used.

“But such an imaginary state of affairs is hardly within the bounds of possibility. In the long run, a money which
continually fell in value would have no commercial utility.”

Two problems with this statement. First of all, the US dollar has continually fallen in value for more than a hundred years, and yet is still widely used globally. And secondly, even Mises seems to confuse the idea of ‘value’ quite a lot. If value cannot be measured, how can he keep talking about how it ‘falls’ in value, which implies an order? He should say, according to his own language, that it falls in ‘objective exchange-price’ or something like that, rather than that it falls in ‘value’.

I am pretty sure it’s possible to measure value, even subjectively, somehow. But I’m not sure if anyone has figured out how yet. Note that the positions of particles are subjective. There is nothing wrong with measurements that depend on a frame of reference. That does not mean things cannot be measured.

“The Monetary Theory of Etatism ETATISM,
as a theory, is the doctrine of the omnipotence of the State, and, as a policy, the attempt to regulate all mundane
affairs by authoritative commandment and prohibition.”

Never heard the term “etatism” before this book, but it sounds bad.

“For the etatist, money is a creature of the State, and the esteem in which money is held is the economic
expression of the respect or prestige enjoyed by the State. The more powerful and the richer the State, the better
its money. Thus, during the War, it was asserted that ‘the monetary standard of the victors’ would ultimately be
the best money. Yet victory and defeat on the battlefield can exercise only an indirect influence on the value of

I’ve met many etatists. More than I could count. It is conventional wisdom that “the US government gives value to the US dollar with its guns.” I think that is a really shallow and incorrect view of where the value of the US dollar comes from.

“History likewise shows that sometimes the ‘monetary standard of the victors’ can prove to be very bad. There
have seldom been more brilliant victories than those eventually achieved by the American insurgents under
Washington against the English troops. But the American ‘continental’ dollar did not benefit from them. The
more proudly the star-spangled banner rose on high, the lower did the exchange-rate fall, until, at the very
moment when the victory of the rebels was secured, the dollar became entirely valueless.”

Exactly - you can’t just decide that money has value with guns. This has been tried. It doesn’t work. It’s being tried by Venezuela right now. It’s not working. Guns are not the whole story.

“THE BUSINESS OF BANKING § 1 Types of Banking Activity THE business of banking falls into two distinct
branches: the negotiation of credit through the loan of other people’s money and the granting of credit through
the issue of fiduciary media, i.e. notes and bank balances that are not covered by money.”

Yes - this is a very good way to characterize it. It is a very different manner whether the bank is loaning out its own money or rather it is loaning out its customers’ money.

“Only those who lend the money of others are bankers; those who merely lend their own capital are capitalists,
but not bankers.”


“Notes might be issued by banks in either of two ways. One way is to exchange them for money. According to
accounting principles, the bank here enters into a debit transaction and a credit transaction; but the transaction is
actually a matter of indifference, since the new liability is balanced by an exactly corresponding asset. The bank
cannot make a profit out of such a transaction.

The issue of fully-backed notes can therefore only be carried on in conjunction with the issue of fiduciary media.
This is the second possible way of issuing notes, to issue them as loans to persons in search of credit.”

By “fiduciary media” Mises means notes or something of the sort that are not 100% backed by money.

“We approach a better understanding of the true nature of the whole process if we go instead to the profit-andloss
account. In this account there is recorded a profit whose origin is suggestive – ‘Profit on loans’. When the
bank lends other people’s money as well as its own resources, part of this profit arises from the difference
between the rates of interest that it pays its depositors and the rates that it charges its borrowers.”

Fractional reserve banking in a nutshell. They loan out other people’s money and earn money on it. I would like to know what Mises thinks of Rothbard’s idea that FRB is intrinsically fraudulent. Why is money exceptional when it comes to issuing notes that are not 100% backed? If you do that with normal commodities, it is considered fraud.

“As has already been suggested, it is not the dead letter of the law so much as actual business practice that counts,
so that some things function as fiduciary media, although they cannot be regarded as promises to pay money
from the juristic point of view, because they nevertheless are in fact honoured as such by some body or other.”

Another distinction between legal and economic definitions of money.

“In the domestic trade of most civilized countries, the actual use of money for transacting exchanges made with
the help of money has been very largely superseded by the use of money-substitutes. And among the moneysubstitutes,
fiduciary media play a constantly increasing part.”

This has become pretty much universally the case since this book was written. There is no more use of gold as money, at least not in any real meaningful way, even amongst central banks. Everything is fiduciary media.

“The fact that money continued to be in actual circulation at all in a series of States, like Germany and England,
and was not entirely superseded by fiduciary media and money-certificates, was due solely to legislative
intervention. For reasons which were connected with certain views on the nature of notes, it was thought that the
circulation of notes of small denominations ought to be opposed.1 The battle against the one-pound note in
England ended with the complete victory of the sovereign, and this victory had a significance outside England,
too, for the disfavour in which small bank-notes were held for decades on the Continent of Europe was based
upon English opinion. It is certain that in those States which have a sound administration of justice and a
developed banking system, the employment of actual money in commerce could be replaced without difficulty
by the issue of a corresponding quantity of small notes.”

It is fascinating to know that states used to be opposed to universal fiduciary media, and now that is what they all want and have.

“The only thing calculated to create international money-substitutes and subsequently international fiduciary
media would be the establishment of an international giro bank or bank-of-issue. When it became possible to use
the notes issued by the world bank and the accounts opened by it for the settlement of money claims of all kinds,
there would no longer be any need to settle the national balances of payments by transportation of money. The
actual transference of money could be superseded by the transference of the notes issued by the world bank or of
cheques giving disposal over the issuer’s account with the world bank, or even by simple entries in the books of
the world bank.”

Mises mentions the idea of some kind of international bank several times. A very good way to do that without centralizing the entire world financial system into the hands of a single organization is Bitcoin. Bitcoin allows a global system of money to function without centralization.

“A similar effect results from the custom of not paying wages and salaries daily, but weekly, monthly, or
quarterly. Rents, interest, and repayment instalments, are as a rule paid on particular days. The accounts of the
tailor, the shoemaker, the butcher, the baker, the bookseller, the doctor, and so forth, are often settled not daily
but periodically. The tendency in all these arrangements is enormously strengthened by the mercantile practice
of establishing certain days as days of settlement, or pay-days.”

This is partially because of the cost of transactions. But with the exceptionally low cost of transacting in Bitcoin, it will be possible to transact more frequently.

“Thus a falling value of money goes hand in hand with a rising rate of interest, and a rising value of money with a
falling rate of interest. This lasts as long as the movement of the objective exchange-value of money continues.
When this ceases, then the rate of interest is re-established at the level dictated by the general economic situation.”

This is an interesting claim. This does seem to mirror periods of inflation most of the time, where interest rates become higher. They are not perfectly correlated though. In response to the 2008 financial crisis, the Fed did “quantitative easing” which radically increased the amount of money. And it lowered interest rates. So in that case, lower interest rates when hand in hand with radical (supply) inflation. That’s the opposite correlation that Mises is suggesting, so clearly this is not a universal rule.

“The real obstacle in the way of an unlimited extension of the issue of fiduciary media is not constituted by
legislative restriction of the note-issue, which, after all, only affects a certain kind of fiduciary medium, but the
lack of a centralized world bank or of uniform procedure on the part of all credit-issuing banks. So long as the
banks do not come to an agreement among themselves concerning the extension of credit, the circulation of
fiduciary media can indeed be increased slowly, but it cannot be increased in a sweeping fashion. Each
individual bank can only make a small step forward and must then wait until the others have followed its
example. Every bank is obliged to regulate its interest policy in accordance with that of the others.”

This was true during the gold standard era when changing the price of gold in one country would lead to incoming or outgoing gold - in order to maintain gold balances, all countries had to (roughly speaking) inflate together at the same rate.

“A Return to a Gold Currency A return to the actual use of gold would be certain to have effects that would
scarcely be welcomed.”

Returning to gold seems extremely unlikely. I wonder what he would think about Bitcoin.

“There is no need to criticize Fisher’s scheme again with reference to the considerable dubiety attaching to the
scientific correctness of index numbers and to the possibility of turning them to practical account in eliminating
those unintended modifications of long-term contracts that arise from variations in the value of money.2 In
Fisher’s scheme, the function of the index number is to serve as an indicator of variations in the purchasing
power of the monetary unit from month to month. We may suppose that for determining changes in the value of
money over very short periods – and in the present connexion the month may certainly be regarded as a very
short period – index numbers could be employed with at least sufficient exactitude for practical purposes. Yet
even if we assume this, we shall still be forced to conclude that the execution of Fisher’s scheme could not in
any way ameliorate the social consequences of variations in the value of money.”

Index numbers can be created any which way with whatever form of money you want. If the market prefers index numbers, they can use them.

“Since then we have experienced the collapse, sudden enough, of the monetary systems in a whole series of
European States. The inflation of the War and post-War periods, exceeding everything that could have been
foreseen, has created an unexampled chaos.”

And it kept happening over and over and over again to the present day. Bitcoin may be a way to help - clearly nation states are not going to just get their act together and act responsibly without some different circumstances (such as new technology) forcing them to do so.

“The Classical Idea of Sound Money THE principle of sound money
that guided nineteenth-century monetary doctrines and policies was a product of Classical Political Economy. It
was an essential part of the liberal programme as developed by eighteenth-century social philosophy and
propagated in the following century by the most influential political parties of Europe and America.”

It is very interesting to know that “sound money” was a popular principle in the past. It is not especially popular today (as best I can tell, qualitatively).

“As a system of peaceful co-operation under the division of labour, the market economy could not work without
an institution warranting to its members protection against domestic gangsters and external foes. Violent
aggression can be thwarted only by armed resistance and repression. Society needs an apparatus of defence, a
state, a government, a police power. Its undisturbed functioning must be safeguarded by continuous
preparedness to repel aggressors. But then a new danger springs up. How keep under control the men entrusted
with the handling of the government apparatus lest they turn their weapons against those whom they were
expected to serve? The main political problem is how to prevent the rulers from becoming despots and enslaving
the citizenry. Defence of the individual’s liberty against the encroachments of tyrannical governments is the
essential theme of the history of Western civilization. The characteristic feature of the Occident is its peoples’
pursuit of liberty, a concern unknown to Orientals. All the marvellous achievements of Western civilization are
fruits grown on the tree of liberty.”

Here Mises makes it clear he thinks a State is necessary to protect private property. Mises is not an anarchist.

“Thus the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a
commonly-used medium of exchange. It is negative in obstructing the government’s propensity to meddle with
the currency system.”

Sounds good to me. Applies to Bitcoin, if the market chooses it.

“The sound-money principle was not so much derived from the Classical economists’ analysis of the market
phenomena as from their interpretation of historical experience. It was an experience that could be perceived by
a much larger public than the narrow circles of those conversant with economic theory. Hence the sound-money
idea became one of the most popular points of the liberal programme. Friends and foes of liberalism considered
it one of the essential postulates of a liberal policy.”

Very interesting. Can’t wait to learn more about this history.

“So far there was unanimity among the supporters of sound money. But then the battle of the standards arose. The
defeat of those favouring silver and the unfeasibility of bimetallism eventually made the sound-money principle
mean the gold standard. At the end of the nineteenth century there was all over the world unanimity among
business-men and statesmen with regard to the indispensability of the gold standard. Countries which were
under a fiat-money system or under the silver standard considered adoption of the gold standard the foremost
goal of their economic policy. Those who disputed the eminence of the gold standard were dismissed as cranks
by the representatives of the official doctrine – professors, bankers, statesmen, editors of the great newspapers
and magazines.”

“Battle of the standards” - absolutely fascinating, and relevant to Bitcoin. They couldn’t decide on a protocol. Haha! Exactly what is happening today in the Bitcoin world. And the dismissal of people who disagree as cranks is also exactly what is occuring in Bitcoin.

“It was a serious blunder of the supporters of sound money to adopt such tactics. There is no use in dealing in a
summary way with any ideology however foolish and contradictory it may appear. Even a manifestly erroneous
doctrine should be refuted by careful analysis and the unmasking of the fallacies implied. A sound doctrine can
win only by exploding the delusions of its adversaries.”

What Mises is saying is that when people became irrational, misleading proponents of gold, they did gold no favors. This is precisely what is happening in the Bitcoin world. People who try to market Bitcoin by doing so in a misleading way are not helping at all - they are hurting. They need to stop with their nonsense for their own good. No more false advertising. Truth and substance only.

“It is easy to comprehend how under such circumstances even the least tenable objections raised by the advocates
of inflationism remained unanswered. The gold standard lost popularity because for a very long time no serious
attempts were made to demonstrate its merits and to explode the tenets of its adversaries.”

Hopefully Bitcoin has a chance if we give serious arguments for it.

“This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptist Say. In our day
it has been revived by Lord Keynes and under the name of full-employment policy is one of the basic policies of
all governments which are not entirely subject to the Soviets. Yet Keynes was at a loss to advance a tenable
argument against Say’s law. Nor have his disciples or the hosts of economists, pseudo and otherwise, in the
offices of the various governments, the United Nations, and divers other national or inter- national bureaus done
any better. The fallacies implied in the Keynesian full-employment doctrine are, in a new attire, essentially the
same errors which Smith and Say long since demolished.”

Yep, people latch on to economically nonsense ideas because they can profit from promulgating nonsense. It seems this is a common theme throughout history, and often involves politics. Economists profit by spewing nonsense that can be used by shady politicians.

“The most characteristic feature of the full-employment doctrine is that it does not provide information about the
way in which wage rates are determined on the market. To discuss the height of wage rates is taboo for the
‘progressives’. When they deal with unemployment, they do not refer to wage rates. As they see it, the height of
wage rates has nothing to do with unemployment and must never be mentioned in connection with it. If there are
unemployed, says the progressive doctrine, the government must increase the amount of money in circulation
until full employment is reached. It is, they say, a serious mistake to call inflation an increase in the quantity of
money in circulation effected under these conditions. It is just ‘full-employment policy’.”

Exactly the same discussions happen today. People have not learned. Ideas like “full employment” or “equality” are fantasies that when the government tries to implement them it does more harm than good. Time and time again.

“If the government practises restraint in the issuance of additional amounts of its credit or fiat money and if
public opinion assumes that the inflationary policy will be stopped altogether in a not-too-distant future, an
inflationary currency system can prevail for a series of years. The country experiences all the effects resulting
from a currency the unit of which vacillates in exchange-value as against the international gold standard. With
regard to these effects the freely-vacillating currency may be called a bad currency. But it can last and is not
inevitably headed for a break-down.”

This is what’s happening with the US dollar right now. Although the USD is inflationary, it can last so long as it is not completely destroyed by the Fed.

“The outstanding instance of a freely-vacillating currency to-day is the United States dollar, the New Deal dollar.
It is not redeemable in gold or any foreign exchange. The Administration is committed to an inflationary policy,
increasing more and more the amount of notes in circulation and of bank deposits subject to cheque. If the
Treasury had been permitted to act according to the designs of its advisers, the dollar would have long since
gone the way of the German mark of 1923. But lively protests on the part of a few economists alarmed the
nation and enjoined restraint on the Treasury. The speed of the inflation was slowed down. Yet the future of the
dollar is precarious, dependent on the vicissitudes of the continuing struggle between a small minority of
economists on the one hand and hosts of ignorant demagogues and their ‘unorthodox’ allies on the other hand.”

Yup. Bad news Mises - it has been going on for almost another 50 years since you died.

“Money is the commonly-used medium of exchange. It is a market phenomenon. Its sphere is that of business
transacted by individuals or groups of individuals within a society based on private ownership of the means of
production and the division of labour. This mode of economic organization – the market economy or capitalism
– is at present unanimously condemned by governments and political parties. Educational institutions, from
universities down to kindergartens, the press, the radio, the legitimate theatre as well as the screen, and
publishing firms are almost completely dominated by people in whose opinion capitalism appears as the most
ghastly of all evils. The goal of their policies is to substitute ‘planning’ for the alleged planlessness of the market
economy. The term ‘planning’ as they use it means, of course, central planning by the authorities, enforced by
the police power. It implies the nullification of each citizen’s right to plan his own life. It converts the individual
citizens into mere pawns in the schemes of the planning board, whether it is called Politburo,
Reichswirtschaftsministerium or some other name. Planning does not differ from the social system that Marx
advocated under the name of socialism and communism. It transfers control of all production activities to the
government and thus eliminates the market altogether. Where there is no market, there is no money either.”

Mises is a capitalist.

“In this great conflict the advocates of public control cannot do without inflation. They need it in order to finance
their policy of reckless spending and of lavishly subsidizing and bribing the voters. The undesirable but
inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext to establish price
control and thus step by step to realize their scheme of all-round planning. The illusory profits which the
inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in
taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In
spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda
of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two
decades has offered has been really amazing. Governments without any hesitation have embarked upon vast
inflation and government economists have proclaimed deficit spending and ‘expansionist’ monetary and credit
management as the surest way towards prosperity, steady progress, and economic improvement. But the same
governments and their henchmen have indicted business for the inevitable consequences of inflation. While
advocating high prices and wage rates as a panacea and praising the Administration for having raised the
‘national income’ (of course, expressed in terms of a depreciating currency) to an unprecedented height, they
blamed private enterprise for charging outrageous prices and profiteering. While deliberately restricting the
output of agricultural products in order to raise prices, statesmen have had the audacity to contend that
capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of
everything. And millions of voters have swallowed all this.”

Same thing is going on today, although fortunately most of the world has seen spectacular economic growth since Mises died. People are still having the same dumb arguments, but capitalism has actually won by and large for most people most of the time.

“CONCLUDING REMARKS THE present unsatisfactory state of monetary affairs is an outcome of the social
ideology to which our contemporaries are committed and of the economic policies which this ideology begets.
People lament over inflation, but they enthusiastically support policies that could not go on without inflation.
While they grumble about the inevitable consequences of inflation, they stubbornly oppose any attempt to stop
or to restrict deficit spending. The suggested reform of the currency system and the return to sound monetary
conditions presuppose a radical change in economic philosophies. There cannot be any question of the gold
standard as long as waste, capital decumulation, and corruption are the foremost characteristics of the conduct of
public affairs. Cynics dispose of the advocacy of a restitution of the gold standard by calling it Utopian. Yet we
have only the choice between two Utopias: the Utopia of a market economy, not paralysed by government
sabotage, on the one hand, and the Utopia of totalitarian all-round planning on the other hand. The choice of the
first alternative implies the decision in favour of the gold standard.”

The gold standard is probably not going to happen, but if Bitcoin is able to survive and grow, it provides a realistic possibility for the foundation of the world financial system in the future.

Principle takeaways:

  • Mises is a capitalist. And he does make it explicit that he prefers government and law and order, just not heavy handed socialism. Mises is not an anarchist.
  • Money arises as a commodity first and becomes money after being valued in addition as a medium of exchange.
  • People are encouraged to use a single form of money, not multiple.
  • “Credit transactions are in fact nothing but the exchange of present goods against future goods.”
  • Money is not a measure of value, because value is subjective. Money is money.
  • People rank preferences but do not measure them. There is no “measure” of value.
  • You can’t measure prices across time because your subjective rankings may be different can’t cannot be compared that way.
  • A great advantage of Bitcoin vs. physical commodities is the ease with which someone can validate it.
  • Gresham’s Law: When govt fixes the price of currencies, the “worse” currency becomes used as a medium of exchange, and the “better” currency is hoarded.
  • Learn about the Quantity Theory of Money.
  • Value is subjective and cannot be quantitified. Supply/demand are quantifiable and objective because they result in the price that anyone can see.
  • Read Menger.
  • Bankers loan out other people’s money. Capitalists loan out their own money.
  • “Thus a falling value of money goes hand in hand with a rising rate of interest, and a rising value of money with a falling rate of interest.”

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Ryan X. Charles

Founder & CEO of Money Button