5 replies to this topic

[Murphy]

In The Theory of Money and Credit, how did Mises solve this problem?

[Rune]

Mises agreed that the value of money has an important time component – money is valuable today because it was demanded yesterday. He demonstrated, however, that there is no infinite regress, because the demand for money as an exchange commodity stops when we go sufficiently back in time. More precisely, it stops at the day before the day the commodity started to have exchange value – at the time when it only had value in direct consumption or as a factor of production.

[Murphy]

Right. See the article I linked in the other reply to get more details.

[Joanne]

Murphy, on Sep 4 2005, 02:53 PM, said:

In The Theory of Money and Credit, how did Mises solve this problem?

He thought in terms of individual action and applied Marginal Utility Theory of value to money.  The purchasing power of money can be decided in the same way as supply and demand, in that regard it's like most other goods.  Big difference is, money cannot be eaten, put into various stages of production, converted to another material, but it is only a medium of exchange or it can be saved - but savings is really a deferral of present uses. Moreover, the amount of money transacted for one's needs is considered the optimal amount. Any increase in the supply of money causes dilution and lowering of its value.  So, increase in the paper money supply is pointless - except where the gold standard applies.

Mises Regression Theorum resolved the circular question about money - that its value is predetermined from what it was before and the value of money for the next transaction will be an existing influence on the value of money in the transaction subsequent to that. He went back to the value of money, which would have been expressed in terms of marginal utility, at the exact time goods ceased to be used in barter and exchange.

Mises was no fan of government involvement in the money supply and was equally concerned about fractional reserve banking. He felt that any manipulation of the money supply adversely affects the production calculation.

[Murphy]

Yes this is a good answer. For an elaboration I refer you to the article linked above. The one really tricky step in the argument is that the purchashing power of money today is guided by its expected purchasing power tomorrow, which in turn is influenced by its purchasing power yesterday. It's complicated but makes sense if you take a moment to think it through carefully.