Integration of Value Theory and the Theory of Money

Although the new marginalist approach to the theory of value and prices had thoroughly transformed economic science, the theory of money had been left virtually untouched. Here Menger, Jevons, and Walras championed the same view as the classical economists, stressing that money is merely instrumental in acquiring “real” goods—goods which have some beneficial impact on human life—without itself being such a good. From an individual perspective, they argued, the ultimate purpose of market exchanges is never to exchange “real goods” against money, but to exchange real goods against other real goods. And taking the perspective of the national economy, they emphasized that the quantity of money did not affect the overall available quantity of goods.

From these insights they concluded that money was irrelevant to the wealth of the nation, and that political economy (which dealt with the economic interests of the whole nation) could afford to ignore money when analyzing the nation's welfare.²⁰ The most famous metaphor for this view was the “veil of money”—the notion that money is merely an intermediate layer between the human person and the real economy. John Stuart Mill had given clear expression to this perspective:

Things which by barter would exchange for one another, will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. The relations of commodities to one another remain unaltered by money: the only new relation introduced is their relation to money itself; how much or how little money they will exchange for; in other words, how the Exchange Value of money itself is determined.²¹

Money, according to Mill, did not influence the wealth of nations whatsoever—it just “reflected” or “corresponded to” the underlying non-monetary reality. Menger, Jevons, and Walras also endorsed this view and, consequently, they accorded all their attention to the supposedly “real” factors of the economy, to the neglect of monetary theory.

Neither champions nor opponents of the new economic theory failed to notice this neglect. The Swedish economist Knut Wicksell observed that the new discoveries in value theory had not been applied to money,²² and the brilliant German economist Karl Helfferich even thought the new marginalist approach could not be applied to money. In his book Das Geld, the future director of Deutsche Bank and German Minister of Finance argued that in the marginal-utility approach (which in his understanding explained the market prices of goods as a consequence of the psychological utility of the various services of these goods) the price-determining utility of a good depended exclusively on the available quantity of the good. But in the case of money, this exclusive dependency could never be given. While the services derived from any other good were independent of its market price, the services derived from the use of money depended directly on its market prices (that is, its purchasing power). In other words, the marginal utility of money depends not only on its quantity, but also on its market prices. Therefore any attempt to explain the value of money on the basis of the marginalist approach involved an inescapable circle: the market price for money could not be inferred from its marginal utility, because its utility itself depended on its market price.²³