Monetary Problems

From Ludwig von Mises :

"...Monetary problems are economic problems and have to be dealt with in the same way as all other economic problems. The monetary economist does not have to deal with universal entities like volume of trade meaning total volume of trade, or quantity of money meaning all the money current in the whole economic system. Still less can he make use of the nebulous metaphor "velocity of circulation."

He has to realize that the demand for money arises from the preferences of individuals within a market society. Because everybody wishes to have a certain amount of cash, sometimes more, sometimes less, there is a demand for money.

Money is never simply in the economic system, money is never simply circulating. All the money available is always in the cash-holdings of somebody. Every piece of money may one day — sometimes more often, sometimes more seldom — pass from one man's cash-holding to another man's. But at every moment it is owned by somebody and is a part of somebody's cash-holdings.

The decisions of individuals regarding the magnitude of their cash-holding, their choices between the disutility of holding more cash and its advantages constitute the ultimate factor in the formation of purchasing power.

Changes in the supply of money or in the demand for it can never occur for all individuals at the same time and to the same extent and they, therefore, never affect their judgments of value and their behavior as buyers and sellers to the same degree. Therefore the changes in prices do not affect all commodities at the same time and to the same degree. The over-simple formula both of the primitive quantity theory and of contemporary mathematical economists according to which prices, that is, all prices, rise or fall in the proportion of the increase or decrease in the quantity of money, is absolutely wrong.

We have to study monetary changes as changes which occur first for some groups of individuals only and slowly spread over the whole economic system to the extent that the additional demand of those first benefited reaches other classes of individuals. Only in this way can we obtain a realistic insight into the social consequences of monetary changes."

[reformated for readability]

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