A Pure Cash Balance Approach

Nationalökonomie and Human Action completed the project Mises had started in 1912 with his treatise on money. In certain crucial respects, he decisively improved upon his earlier exposition of monetary theory. The author of Nationalökonomie is a better monetary theorist than the author of the Theory of Money and Credit. In his biographical recollections Mises is somewhat diffident on this point. He merely says that his work from the 1940s had “completed” the great initial project of integrating marginal value theory with the theory of money⁴⁷ Some years later, he used the harsher term “misstatements” to characterize the shortcomings of his early work. To a German correspondent he wrote:

You cannot avoid going astray [Entgleisungen] if you take money out of the total context of market phenomena and deal with it separately. I have experienced this in my own case. The market process is an indivisible whole. One cannot subdivide it into pieces. My theory of money has reached maturity only in Human Action.⁴⁸

The keystone of the mature theory concerned the central importance of the cash balance approach, which alone would explain money prices in terms of human action, rather than in terms of mechanistic metaphors such as the “velocity” of money⁴⁹ Mises now stressed that the demand for money was truly a demand for cash balances. The value of the cash balances was not simply borrowed from the value of the goods against which they could be exchanged.⁵⁰ There was an independent source of value in the services that these cash balances rendered in providing liquid purchasing power.⁵¹

Mises also radicalized his stance on the usefulness of expansions of the money supply. In Theory of Money and Credit he held that monetary expansion might be needed to accommodate greater growth, at least under plausible circumstances. From 1940 onward, he categorically rejected this notion. All benefits that might result from monetary expansion were now presented as being strictly ephemeral. They had no systematic positive impact—quite to the contrary.