Summary: ‘The Theory of Money and Credit’ by Ludwig von Mises

In “The Theory of Money and Credit,” Mises argues that economics is not just the study of wealth, but also the study of human action. He asserts that money is not just a medium of exchange, but rather the most marketable good in an economy. Mises suggests that money has a unique ability to facilitate trade and coordinate production, making it a crucial element in the functioning of a market economy.

Mises argues that money arises naturally as a market commodity that is valued for its use as a medium of exchange. He distinguishes between commodity money, such as gold or silver, and fiat money, which is created by government decree. Mises argues that the value of money is not determined by the quantity of money but rather by the subjective valuations of individuals in the market. Mises contends that the value of money is strongly influenced by its purchasing power in the market, and that government interventions in the monetary system, such as inflation and central banking, lead to distortions and malinvestments in the economy. He also contends that credit expansion leads to inflation and economic instability.

Mises also examines the role of banking in the monetary system, arguing that the practice of fractional reserve banking, in which banks lend out more money than they actually have on hand, creates artificial credit expansion and artificially low interest rates, leading to economic instability and financial crises. He advocates for a return to a gold standard and a monetary system based on market principles.

Chapter Summaries

Part I: The Nature of Money

Chapter 1: The Subject Matter of the Problem

Mises begins by outlining the nature of the problem he seeks to address in the book, which is the nature of money and credit.

Chapter 2: The Emergence of Money

Mises explains how money emerged in the marketplace as a result of barter, and how it evolved from being a mere commodity to becoming a widely accepted medium of exchange.

Chapter 3: The Various Kinds of Money

Mises discusses the different forms that money can take, such as commodity money, credit money, and fiat money.

Chapter 4: The Functions of Money

Mises explains the functions of money, which include serving as a medium of exchange, a unit of account, and a store of value.

Chapter 5: The Value of Money

Mises analyzes the concept of the value of money, arguing that its value is determined by the subjective valuations of individuals in the marketplace.

Chapter 6: Money and the State

Mises explores the role of the state in the monetary system, arguing that government intervention in the money supply can cause economic instability and distortions.

Part II: The Value of Money

Chapter 7: The Determination of the Purchasing Power of Money

Mises examines the factors that influence the purchasing power of money, such as changes in the money supply and changes in the demand for money.

Chapter 8: Changes in the Value of Money

Mises discusses how changes in the value of money can have important consequences for economic activity, such as altering the distribution of wealth and affecting the profitability of different industries.

Chapter 9: The Course of Monetary Events

Mises explains how monetary events can affect the broader economy, such as causing changes in employment and production.

Part III: Money and Credit in the Market Economy

Chapter 10: The Place of Money in the Market Economy

Mises argues that money plays a crucial role in the market economy, serving as a medium of exchange, a unit of account, and a store of value.

Chapter 11: Money in the Crises of the Market

Mises discusses the role of money in market crises, arguing that the contraction of the money supply can cause economic downturns and depressions.

Chapter 12: The Non-Neutrality of Money

Mises argues that changes in the money supply can have real effects on the economy, such as altering the distribution of wealth and affecting the structure of production.

Chapter 13: The Place of Credit in the Market Economy

Mises explores the role of credit in the market economy, arguing that it is crucial for facilitating long-term investments and allowing for greater specialization and division of labor.

Chapter 14: The Business Cycle

Mises discusses the phenomenon of the business cycle, arguing that it is caused by government intervention in the monetary system and the distortion of market signals.

Historical Context

At the time of its publication in 1912, “The Theory of Money and Credit” was a groundbreaking work, challenging prevailing economic theories and advocating for a radical change in the monetary system. It was written in the wake of the Panic of 1907, a financial crisis that had exposed the weaknesses of the US banking system and raised questions about the stability of the global financial system.

Main Themes

The main themes of “The Theory of Money and Credit” are the nature of money, the role of government in the monetary system, and the consequences of monetary interventions. Mises argues that money is a commodity that emerges from the market, and that government interventions in the monetary system lead to distortions and malinvestments in the economy.

Contributions to Academia and Society

“The Theory of Money and Credit” has been influential in shaping economic theory and policy. It is considered a seminal work in the Austrian School of Economics and has been praised for its insights into the nature of money and the consequences of government interventions in the monetary system. Mises’ arguments against government intervention in the monetary system have influenced many economists and policymakers.

Criticisms

Critics of “The Theory of Money and Credit” have pointed out that Mises’ arguments are based on assumptions about human behavior that may not hold up in practice. They have also criticized his advocacy for a gold standard and a return to a system of commodity money as unrealistic in the modern global economy.

Mises’ argument against government intervention in the market for money and credit has been criticized by some economists who argue that government intervention is necessary to stabilize the economy. Mises’ argument that the business cycle is caused by credit expansion has also been criticized by some economists who argue that the business cycle is a natural phenomenon.

However, the book’s strongest points lie in its analysis of the nature of money and the role of government in the monetary system. Mises’ arguments have influenced generations of economists and policymakers, and continue to be debated and discussed to this day.

Famous People that have Cited the Book:

1. F.A. Hayek, Nobel Prize-winning economist: “Mises’s ‘The Theory of Money and Credit’ (1912) was one of the first books to carry me away.”
2. Murray Rothbard, economist and historian: “Mises’s ‘The Theory of Money and Credit’ is a masterpiece of economic analysis and theory.”

Famous Quotes from the Book:

1. “The theory of money is the outcome of an age-long evolution.”
2. “Money is a medium of exchange, and its value is not intrinsic but arises from its purchasing power.”
3. “Credit expansion cannot increase the supply of real goods.”

Concepts Used in the Book:

1. Money: The medium of exchange used in a market economy.
2. Value: The subjective worth of an economic good or service.
3. Purchasing Power: The ability of money to purchase goods and services.
4. Credit: The lending of money to borrowers.
5. Interest Rates: The price of credit.
6. Time Preference: The degree to which individuals value present consumption over future consumption.
7. Inflation: The increase in the general price level of goods and services.
8. Deflation: The decrease in the general price level of goods and services.
9. Elasticity: The degree to which demand or supply responds to changes in price.
10. Currency: The physical medium of exchange used in a market economy.
11. Monetary Policy: The actions of a central bank to manage the money supply and interest rates.
12. Business Cycle: The fluctuation of economic activity over time.
13. Savings: Income not consumed.
14. Investment: The purchase of capital goods.
15. Capital Goods: Goods used in the production of other goods and services.