Ludwig von Mises

Hence, the statement that the cost of living is different in different localities only means that the same individual cannot secure the same degree of satisfaction from the same stock of goods in different places.

There are two parts to the problem of measuring the objective exchange-value of money. First we have to obtain numerical demonstration of the fact of variations in the objective exchange-value of money; then the question must be decided whether it is possible to make a quantitative examination of the causes of particular price movements, with special reference to the question whether it would be possible to produce.So far as the first-named problem is concerned, it is self-evident that its solution must assume the existence of a good, or complex of goods, of unchanging objective exchange-value. The fact that such goods are inconceivable needs no further elucidation.If the one is proved to be soluble, then so also is the other; and proof of the insolubility of the one is also proof of the insolubility of the other.

Fiat-money! Let the State 'create' money, and make the poor rich, and free them from the bonds of the capitalists! How foolish to forego the opportunity of making everybody rich, and consequently happy, that the State's right to create money gives it! How wrong to forego it simply because this would run counter to the interests of the rich! How wicked of the economists to assert that it is not within the power of the State to create wealth by means of the printing press!- You statesmen want to build railways, and complain of the low state of the exchequer? Well, then, do not beg loans from the capitalists and anxiously calculate whether your railways will bring in enough to enable you to pay interest and amortization on your debt. Create money, and help yourselves.

To measure is to determine the ratio of one quantity to another which is invariable or assumed to be invariable. Invariability in respect of the property to be measured, or at least the legitimacy of assuming such invariability, is a sine qua non of all measurement. Only when this assumption is admissible is it possible to determine the variations that are to be measured.

He who cares to go to the trouble of demonstrating the uselessness of index numbers for monetary theory and the concrete tasks of monetary policy will be able to select a good proportion of his weapons from the writings of the very men who invented them.

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e. of anti-democratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism.

Paper money in time of war, the new notes will first go into the pockets of the war contractors. 'As a result, these persons' demands for certain articles will increase and so also the price and the sale of these articles, but especially in so far as they are luxury articles. Thus the position of the producers of these articles will be improved, their demand for other commodities will also increase, and thus the increase of prices and sales will go on, distributing itself over a constantly augmented number of articles, until at last it has reached them all.

When jurists and business men assert that the depreciation of money has a very great influence on all kinds of debt relations, that it makes all kinds of business more difficult, or even impossible, that it invariably leads to consequences that nobody desires and that everybody feels to be unjust, we naturally agree with them. In a social order that is entirely founded on the use of money and in which all accounting is done in terms of money, the destruction of the monetary system means nothing less than the destruction of the basis of all exchange. Nevertheless, this evil cannot be counteracted by ad hoc laws designed to remove the burden of the depreciation from single persons, or groups of persons, or classes of the community,

Local differences in the prices of commodities whose natures are technologically identical are to be explained on the one hand by differences in the cost of preparing them for consumption (expenses of transport, cost of retailing etc.) and on the other hand by the physical and legal obstacles that restrict the mobility of commodities and human beings.

The social displacements that occur as consequences of variations in the value of money result solely from the circumstance that this assumption never holds good. In the chapter dealing with the determinants of the objective exchange-value of money it was shown that variations in the value of money always start from a given point and gradually spread out from this point through the whole community.

Other inflationists realize very well that an increase in the quantity of money reduces the purchasing power of the monetary unit. But they endeavour to secure inflation none-the-less, because of its effect on the value of money; they want depreciation, because they want to favour debtors at the expense of creditors and because they want to encourage exportation and make importation difficult.

Every separate economic agent maintains a stock of money that corresponds to the extent and intensity with which he is able to express his demand for it in the market. If the objective exchange-value of all the stocks of money in the world could be instantaneously and in equal proportion increased or decreased, if all at once the money-prices of all goods and services could rise or fall uniformly, the relative wealth of individual economic agents would not be affected. Subsequent monetary calculation would be in larger or smaller figures; that is all.

All index-number systems, so far as they are intended to have a greater significance for monetary theory than that of mere playing with figures, are based upon the idea of measuring the utility of a certain quantity of money. The object is to determine whether a gramme of gold is more or less useful to-day than it was at a certain time in the past. As far as objective use-value is concerned, such an investigation may perhaps yield results. We may assume the fiction, if we like, that, say, a loaf of bread is always of the same utility in the objective sense, always comprises the same food value. It is not necessary for us to enter at all into the question of whether this is permissible or not.

We can easily imagine a monetary organization which, by the exclusive use of notes or clearing-house methods, allows all transfers to be made with the instrumentality of sums of money that never change their position in space.If differences due to the geographical position of money are disregarded in this way, we get the following law for the exchange-ratio between money and other economic goods: every economic good, that is ready for consumption (in the sense in which that phrase is usually understood in commerce and technology), has a subjective use-value qua consumption good at the place where it is and qua production good at those places to which it may be brought for consumption.

But when States did debase the coinage, it was always from purely fiscal motives. The government needed financial help, that was all; it was not concerned with questions of currency policy.

No individual and no nation need fear at any time to have less money than it needs. Government measures designed to regulate the international movement of money in order to ensure that the community shall have the amount it needs, are just as unnecessary and inappropriate as, say, intervention to ensure a sufficiency or corn or iron or the like. This argument dealt the Mercantilist Theory its death-blow.

So far as variations in the objective exchange-value of money are foreseen, they influence the terms of credit transactions. If a future fall in the purchasing power of the monetary unit has to be reckoned with, lenders must be prepared for the fact that the sum of money which a debtor repays at the conclusion of the transaction will have a smaller purchasing power than the sum originally lent. Lenders, in fact, would do better not to lend at all, but to buy other goods with their money. The contrary is true for debtors. If they buy commodities with the money they have borrowed and sell them again after a time, they will retain a surplus over and above the sum that they have to pay back. The credit transaction results in a gain for them. Consequently it is not difficult to understand that, so long as continued depreciation is to be reckoned with, those who lend money demand higher rates of interest and those who borrow money are willing to pay the higher rates. If, on the other hand, it is expected that the value of money will increase, then the rate of interest will be lower than it would otherwise have been.

Naive inflationism demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money.