Wieser's Theory of Money

The first reaction from the Austrian camp came from Friedrich von Wieser, when he chose the value of money as the topic for his inaugural lecture at the University of Vienna on October 26, 1903. The lecture was published under the title “Der Geldwert und seine geschichtlichen Veränderungen” (The Value of Money and its Historical Changes).²⁴ It was the first statement of Wieser's ideas on how the theory of money related to the Austrian theory of value. Monetary theory remained at the center of Wieser's economic research until his death in 1926. He wrote two more lengthy papers for the 1909 Vienna meeting of the Verein für Socialpolitik, and also the lengthy entry on money for the postwar edition of the standard German social-science dictionary, the Handwörterbuch der Staatswissenschaften. He worked on this last piece until he was virtually on his deathbed.

These publications, which presented the first attempt to integrate marginal-value theory and monetary theory, reserved for Wieser a place of great authority among German-language monetary economists. His impact on German monetary thought was reinforced of course by his authority as one of the founding fathers of the Austrian School. But the main reason he rose to preeminence in monetary economics was that his ideas on money fit well with the established notions of the great majority of his colleagues—far better than the theory of money that Mises was about to present in 1912. Wieser was a representative of the Banking School, whose ideas reigned supreme in turn-of-the-century Germany; Mises developed the theory of the Currency School.²⁵,²⁶

All essential elements of Wieser's monetary thought were present in his initial 1903 lecture. According to his fundamental assumption, there was no such thing as a demand for money per se. To the extent that a good was used in indirect exchanges, it was not demanded as such, but only as an intermediary to obtain a “real good.” Money did not have value per se, but only represented the value of those other goods that could be exchanged for it. Wieser did not deny that historical media of exchange such as gold and silver were commodity monies, but in his view they were commodities only insofar as they were demanded for non-monetary purposes. Modern media of exchange such as paper money and “money surrogates” (legal claims on money that can be used in place of corresponding amounts of real money), which were used exclusively as exchange intermediaries, were not commodities at all. There was no demand for the paper notes themselves—only for the commodities for which they were exchanged. The value of the former was entirely derived from the demand for the latter.

But if modern money is not a commodity, what is it? And how can it be used in market exchanges if it cannot itself be the object of an exchange? Wieser insisted that while money does enable the “transfer” of commodities from one owner to another, it more importantly measures the value of the commodities it helps to transfer.²⁷ In short, money is essentially a standard of value, a measuring rod or numéraire, and it is used in market exchanges to measure the value of the commodities against which it is exchanged. For Wieser, this measuring process is essentially a ranking of the exchanged commodity against the total array of the other commodities from which money derives its value.²⁸

It is modern money's “elasticity,” according to Wieser, that makes it such an ideal standard of value. Praising Thomas Tooke, the great champion of the Banking School, Wieser argued that increases in the quantity of commodities induce a corresponding rise in the quantity of money surrogates and of the so-called velocity of money. These increases do not exercise an independent influence on money prices. Rather, their elasticity ensures that monetary equilibrium is automatically preserved at the existing purchasing power of money.²⁹

What about Helfferich's critique? Is it not circular to assert that money measures the value of commodities, if its own value is entirely derived from commodities? Wieser, who did not bother to mention Helfferich's book, probably thought that he had disposed of the circularity problem by stressing that money is not a commodity. There is no circularity because money is a mere placeholder for those other goods that can be bought with its help. The goods measure themselves, so to speak, through money. Of course market prices are not necessarily proportional to values, but as he had already argued in Natural Value (1889), this problem vanishes to the extent that the national economy approaches the ideal of a perfect communist society.

Wieser also analyzed the determination of the value of money from a completely different angle by introducing the diachronic perspective: how the value of money is based in changes over time. Again, he did not explicitly mention the Helfferich critique, but his diachronic determination of the value of money, implic-itly, refutes the charge of circular reasoning. The Helfferich critique applies only to attempts at a synchronic determination of the purchasing power of money: one cannot derive market prices for today's money from today's value of money, but this criticism does not apply if the value of today's money depends on yesterday's prices. Wieser showed that this was in fact the case. The apparent circularity vanishes and a pure causal chain appears: money prices from two days ago determine the value of money yesterday, which determines money prices today, etc.

Wieser argued that the value of money had a “historical source” in the needs that are satisfied by those commodities that were first used as money. This original usevalue of the original money-commodity was the base from which further changes to the purchasing power of money occurred. At each point, the past value of money served as a basis to evaluate the commodities that were now being exchanged. Insofar as these exchanges modified already existing prices, or added new prices to the total array of commodity prices, the value of money was itself modified, thus changing the basis for future measurements.³⁰ Wieser stressed that his theory implied that (1) money could come into existence only as commodity money, but (2) once it had come into existence and a historical basis for future modifications of its value had been created, it no longer had to remain commodity money. A pure paper money was therefore possible at some later stage.³¹

Wieser placed great emphasis on this point because it alone seemed to explain recent events in the development of the Austro-Hungarian monetary system. Before 1892, Austria-Hungary had officially been on a silver standard. But in order to finance its wars of 1848–1849, 1859–1860, and 1866, the monarchy had issued great quantities of paper notes. These notes were irredeemable at the time of issue, but there were hopes of future redeemability, and thus they were used as money. Their circulation was further bolstered through legal-tender laws. Because redemption was uncertain, the bills circulated at a discount. But in early 1879, something completely unusual occurred: silver sold at a discount and the government bills began circulating at a premium. What had happened? During the previous years, silver production had increased considerably, and in many countries silver had been replaced by gold as a currency. With diminished demand and increased supply, it was only natural that the price of silver fell drastically.³²

Or was it? Wieser believed that the event was actually a refutation of what he called the “metallistic” theory of money. According to this theory, the value of money did not come from demand, but from the inherent value of the metal that was used as money. The champions of metallism could therefore easily explain why paper circulated at a discount—after all, it was not real money. But they were at a loss to explain how the paper money could ever become more valuable than the supposedly real money. For thirteen years, the Austro-Hungarian monetary system seemed to be real-world proof of the possibility of a pure fiat money. And Wieser's diachronic theory of the value of money delivered the only available explanation of this phenomenon.

But this did not exhaust the explanatory power of Wieser's approach to monetary analysis. Making use of his measuring-rod theory of money, Wieser also gave an original account of the secular rise of money prices.³³ He argued that this phenomenon resulted from a great transformation observable in all developed nations, namely, the abandonment of barter and the adoption of monetary exchanges. In short, the purchasing power of money decreased because the monetary economy became ever more widespread.³⁴ Wieser argued as follows: because more and more commodities were exchanged against money, the marginal value of these additional commodities constantly decreased; this lower marginal value led in turn to a corresponding decrease of the marginal value of money, that is, to a lower purchasing power of money.

Six years later, he presented important clarifications of his theory in “Der Geldwert und seine Veränderungen” (The Value of Money and its Changes), a lengthy paper he wrote for the 1909 Vienna meeting of the Verein.³⁵ In this paper he made his case for the full integration of monetary theory and general value theory, spelling out how his theory of the value of money related to the subjectivist theory of value.

The central argument of what later came to be called the “income theory of the value of money” runs as follows: as an individual's income increases, the value of the marginal money unit decreases. Consider an individual agent who, in a given period, spends his entire disposable monetary income at given prices on consumers' goods. Wieser argued that the subjective marginal value of money was derived from (equal to) the utility of the least important consumers' good that he could buy with this income. Equipped with the knowledge of his subjective marginal value of money, which henceforth serves him as a personal measuring rod, the agent then sets out to buy and sell goods on the market, always measuring them in comparison to the utility of the least important consumers' good he can afford to buy.³⁶

In his 1903 lecture, Wieser had emphasized that because the value of money is merely derivative, it is not really money that is exchanged on the market: real goods are exchanged against one another.³⁷ Money subdivides “the original exchange” into “two separate parts.” First commodity A is exchanged for a sum of money; then this sum is exchanged against some other commodity, B. In 1909, Wieser further clarified this view, stating that demand and supply on the market were manifest only in A and B, whereas money was “merely interposed.” According to Wieser this was the only difference between direct and indirect exchange. The benefit of this interposition is that money makes a “great social bookkeeping” possible. Wieser uses language borrowed from the warehouse business to describe economic processes within the national economy. In his metaphor, each quantity of money functions as a deposit receipt that can be easily transferred from one member of the community to another, thereby giving them both access to a common pool where each deposits the fruit of his labor:

Between all those, who throw commodities into the national-economic process in order to take out commodities in turn, there is some great national bookkeeping the meaning of which is that everyone has to throw in a real value that is as large as the value that he wants to take out.³⁸

Mises later called this characterization of the nature of money “assignment theory” (Anweisungstheorie) because its essence is to conceive of money as a token.³⁹ The theory goes back to the eighteenth century, to John Law, the greatest champion of inflation before Keynes. Blurring the difference between money and credit, Law wrote:

Domestick Trade depends on the Money. A greater Quantity employes more People than a lesser Quantity.... They may be brought to Work on Credit, and that is not practicable, unless the Credit have a Circulation, so as to supply the Workman with necessaries; If that's suppos'd, then that Credit is Money, and will have the same effects, on Home, and Forreign Trade.⁴⁰

In the mid-nineteenth century, the assignment theory came to be fully developed in the writings of the champions of the Banking School.⁴¹ From there it made its way into the Germanies. Early German proponents of the Anweisungstheorie were Otto Michaelis and Adolf Wagner. The latter wrote:

The idea of money is the one of a transferable IOU for the services that the money owner has provided to civil society. It empowers this money owner to withdraw the value equivalent of his services, in terms of goods he desires, from any owner of the latter.⁴²

In the age of the Historical School, which despised economic theorizing, Wagner's writings on money became the primary source of information on these topics. He converted the next few generations of German-language economists to the principles of the Banking School.⁴³ In Austria, his ideas were developed by Wieser, Schumpeter, and Hilferding. The very first German-language economist who contested this new orthodoxy was Mises. He sought to vindicate the principles of the Currency School, which he blended with Menger's analysis of money. At the heart of his theory is the insight that money is an economic good in its own right, not just a representation of other goods.

Nothing precise is known about how Mises came to hold these views, but Menger's influence was certainly compounded by Böhm-Bawerk's analogous perspectives on the subject. He had emphasized the crucial points in his university lectures:

Money is by its nature a good like any other good; it is merely in greater demand and can circulate more widely than all other commodities. Money is no symbol or pledge; it is not the sign of a good, but bears its value in itself. It is itself really a good.⁴⁴

It is not surprising that Böhm-Bawerk and Mises came to radically different policy conclusions from Wieser and Schumpeter. Whereas Mises held that the stock of money was ultimately irrelevant, Wieser stressed that money's function as a measuring rod must not be interfered with. Its value should be as stable as possible, and all destabilizing influences should be eliminated. Wieser suggested that one could optimize the national currency by abolishing commodity money and putting a pure paper money in its place. In fact, paper would be more stable because its value is not subject to the influence of the non-monetary demand for the monetary commodity.⁴⁵

Wieser also clarified his theory that the secular increase of money prices was a consequence of the substitution of monetary exchanges for barter. He argued that the development of the monetary economy brings ever more factors of production within the network of monetary exchanges. The money prices that have to be paid for these factors (which before were paid in natura) represent an increase of the monetary costs of production; and these increased costs have to be “added to” the selling prices. It is obvious that in this process aggregate monetary income increases while aggregate real income does not change, thus the value of money decreases. Quod erat demonstrandum.⁴⁶