A Critical Review of Mises's Theory of Money and Credit by Ludwig Von Mises VI /VII

Review By Chinedu Okoye 

Monetary Reconstruction

 

The Principle of Sound Money

The chapter kicks of with the “Classical Idea of Sound Money,” which was the principle that guided 19th century policies, and a product of Classical Political Economy. And also an essential part of the liberal doctrine developed in the 18th century social philosophy.

The doctrine sees the market as the best "even possible only, system of economic organizing society". Private ownership of the means of production are controlled by the best hands fitted for the job, and secures "for all members of society the fullest possible satisfaction of their needs." And assigns the consumer the power to choose between suppliers.

But this, he would point, requires an institution that secures members protection against "domestic gangsters and external influence". And this can be done only by armed resistance and repression.

The main political problem, he says, (or human problem), is how to prevent rulers from "becoming despots and enslaving the citizenry".

He went on to say that "it is impossible to grasp the the idea of sound money if one does not realize that it was devised as an instrument against despotic inroads on the part of the government". That is to protect individual property and wealth from the direct and indirect actions of an authoritarian government.

 

Sound Money Defined:

"The postulate of sound money was first brought up as a response to the princely practice of debasing coinage."

Sound Money therefore becomes two-faceted;

 

 

Summary:

 

Trump and Xi Jin Ping over the week, met and took in mild concessions, de-escalating the ongoing trade war. But this falls short of a comprehensive deal, as analysts would point out.

The Chinese President Xi Jin Ping agreed to “delay” export controls in rare earth metals for a year and also, resumed purchase of soybean from the US which has been zero for months, as the US soybean was boycotted in favor of Brazilian soy.

China also lifted restrictions on exports of rare earth metals for a year. In return; Trump agreed to pause tarrifs for a year. Essentially allowing the Chinese market industry access to the US.

The outcome appears positive but remains thin in substance, with China once again demonstrating its immense leverage over the U.S.”

 

Analyst Assertions:

Trump's assessment of a great deal of some sorts is over exaggerated, as the ”disruptions in global trade caused by Trump's chaotic tariff policies,” have only been postponed not eliminated.

This is instead of “coming away with a framework for resolving the fundamental differences between the two countries, the few details we have of the one-year truce struck on Thursday suggest a temporary stabilization of relations” Bloomberg Analysts reported, arguing that “China maintains significant leverage over the US.”

 

Why Beijing got the Better of the Deal:

Trump removed the proposed 100% tariffs on Chinese goods — initially slated for reinstatement on the 10th of this month — in exchange for Beijing’s delay in export controls for an extra year, for Beijing 's delay in “export controls on so-called rare earths critical minerals for a year and revive purchases of US soybeans.”

The latter they already need and are accustomed to, but the former can have exploitable loopholes, in the details. Thus, there remains no serious concession by the People's Republic of China and so no win for Trump, save for the surface level Soybean export increases to their largest customer.

The quantity agree was 25 million tons per year, "basically getting back to normal," said Brian Grete, (senior grain and livestock analyst at Commstock,) to Bloomberg. This is cause the annualized average for the years 2013/2014-2023 is $22.5 - $30 million.

China seem to have technical advantages in the mining of rare earth minerals which are instrumental to the production of; semiconductors and iPhones to MRI machines and even cancer treatments.

China has a near monopoly on rare earth minerals, and this hasn't changed. So it “threw a bone” at Trump knowing how desperate he is for a “win” he could spin, as it strengthens and “retain its leverage over the US.

 

ZE Remarks:

Trumps initial and preferred plan would be to was a complete reversal of the policy, but what he got was a delay. And the Soybean imports aren't so significant to either US or China on a grand scale.

Xi basically offered a partial relief with no permanent or long-term concessions, and teased the US President with half wins.

As said before on zero Equilibrium “The Trump administration seems erratic, and foreign governments are more than aware of how quickly things could change with regards policy formulation.”

Article Link 👇🏾

zeroequilibrium.com/2025/07/re-us-…

 In the paper above it was opined that:

 

“Washington is expected to dial back on its tone regarding isolating China, most probably disguised as a win, through a switch in negotiations strategy..… from Chinese isolation as the goal, to a US favorable trade agreement with no implications for China.”

 

This has been depicted in the shallow offerings the Chinese President proffered absent any substantial gains for the US. For rae earth metals restrictions where not eliminated but stalled, with the Soybean imports insufficient to move the trade balance needle, as other Chinese imports are no longer restricted for the time being.

 

Also from another paper in July we argued that, “Beijing on the other hand will most likely leverage it's established economic alliances, to consolidate and strengthen economic partnerships that extend beyond trade to investment partnerships and economic cooperation ”

 

Article Link 👇🏾 US China Trade War, Winners and Losers, and Implications for the Global Economy

zeroequilibrium.com/2025/04/us-chi…

 

The Speech at the Asian Summit in sustaining production lines gives plays exactly that scenario if increased partnerships.

 

No concrete solution has been achieved but the temporary respite is good for markets as US stocks rise with NASDAQ hitting new highs.

 

China however, remains unshaken, and just showed it's importance and dominapnce without tipping its hand or setting far away from set course. The Trump administration, however is fighting in all fronts, and seems less strategic, methodical, it resolute in their objectives.

Sound Money meant a metallic standard, where standard coins or tokens/paper money redeemable (in gold/silver) on demand and without delay. (So for every token or paper money in circulation there should be a standardized ratio of the chosen metal backing it up. Preventing the Central Bank from devaluing money on purpose through inflationary policies, without acquiring more of the metal (gold).

For a time there was unanimity in the spport for sound money, till the battle of the standards arose. A debate between what metal to use —i.e., gold or silver. The defeat of silver and victory of gold made the principle of sound money essentially means: The Gold Standard.

At the end of the 19th century there became a unanimous agreement by both business and States men in the choice of gold as the standard for sound money.

Though professors, bankers statesmen and even paper editors where in support of the gold standard, Mises admits that their dismissal of counter theories lacked scientific support at the time however impregnable the concept.

He says also that; "the attempts to demonstrate their reasonableness from the point of view of Classical Value Theory were not very convincing". The champions of the New Value Theory "restricted their studies to the problems of direct exchange and left the treatment of money and baking to routinists unfamiliar with economics."

This is to say that they left our how banking (borrowing and lending) would be affected. The modern doctrine of value, the subjectivist or marginal utility doctrine was unable to explain the problems of money's purchasing power.

Mises argues that the glyd standard lost popularity because there was simply no attempt to demonstrate it's merits.

Hence the gold standard has shortcomings that were not dealt with.

On the alleged shortcomings of the gold Standard:

The allure of the gold standard stems from the fact that "it renders the determination of the monetary unit's purchasing power independent of the policies of the government". Gold can only be inflationary when there's an exponential and surprises increase in its supply, as in California and Australia in the mid 19th century.

When that happened there were calls for the abandonment of the gold standard, from fears of a "probable depreciation". However these criticism subsided and the gold standard was declared deflationary.

But over the generations, prior to Mises' work, it became clear that commodity prices and wages tend to rise, even with the gold standard. Those against the gold standard he said were asking not for a reversal of the prevailing tendency for prices and wages to drop (since it didn't), but for and accelerated pace of of an already upward trend in prices of goods and labor (wages). (A simple definition of Inflationism).

The popularity of Inflationism he said was as a result of a misapprehension of its effects. People want prices of the commodities (or services) they sell to increase whilst that of which the buying stays the same. And so for the naive mind there is a miraculous phenomenon in the Fiat money.

The enthusiasts of (extreme) Inflationism do not see that the workings of inflation and the promise it holds is "conditioned by the ignorance of the public". They are aware that exchange ratios between economic goods vary, but they do not seem conscious of the fact that the exchange-ratio between money and all other economic goods vary as well.

So, when the inevitable consequences of inflation happens they do not see it as money getting cheaper, but commodities and services becoming dearer.

The paradox of this is that one commodity cannot get cheaper in relative to another, without the latter becoming more dearer (that is increased demand), relative to the other. This an only happen when the supply of the commodity that has lost value, increases (relative to its demand), more than the latter commodity.

For exchange-ratios to change, one commodity has to become relatively cheaper, and in the case of money, it is no different as increases in Money supply reduces its exchange-value and/or ratio in relation to other economic value. Since money is the medium through which exchanges are made, an increase demand of a "dear" commodity translates to an increase in supply of money for said commodities.

The system becomes one not of intentional deception, but of a rational consideration. As money supply reductionism, translates to commercial and business restrictions. As not all profitable ventures are backed by readily available capital of the entrepreneur. Such a policy is only self defeating when overstretched.

On the Index-Number Method: he said it was "very crude and imperfect means of 'measuring' changes occuring in the monetary unit's purchasing power" this is true, but as I stipulated before, the price index (CPI) is a signal for direction of travel one that barely moves in opposite direction to actual in-demand goods and services. And so can be a useful guide, depending on the mode of application.

Mises agrees with this somewhat by accepting that "the Index-Number method, not withstanding it's inadequacy, plays an important role in the process which in the course of an inflationary movement makes the people inflation-conscious. Once the use of index numbers become commo, the government is forced to slow down the pace of inflation".

A middle ground:

"In the economists eyes, the main issue is not that inflation is morally reprehensible but that it cannot work except when resorted to with great restraint and even so, for a limited period of time."

By this he believes that inflation cannot be considered as an alternative to a permanent standard like gold. And policies should only be temporary.

Whilst I agree with the point of having a restraint, inflationary money –where deflationary money is the only alternative,–, is better an more sustainable than the permanent standard.

Whilst the inflationists argue that the gold standard collapse and will never be revived as nations are no longer willing to comply with it, Mises argues that the gold didn't collapse but was abolished by the government to "pave way for Inflation".

However in reality, money supply was too restricted and deflation ensued leading to lesser profitability and growth.

Credit Expansion as the Cause of Recurring Economic Crises:

The New Money supply he said did not remove the international standard of gold. The policy of going off gold did not relieve the country's monetary authorities from taking into account the value of their money in gold terms.

The inevitable failure of credit expansion, Mises' argues is the outcome of the fact that it is impossible to substitute Fiat money from non existing capital goods, and whilst credit expansion can create a boom, such is bound to slump in a depression. And this is what brings about the recurring of reoccurring periods of economic crises.

The Ful Employment Doctrine:

Inflationists present their doctrines in several varieties. But there remains one essential element. The most naive version being the "alleged insufficient money supply". When entrepreneurs posit that their sales are slow because their customers don't have enough money, Mises' rightly points that what they mean is they want an increased money supply for their customers whilst their remains unchanged –a specific type of of inflation not a general one.

This first inflow of new money into his customers hands (or would-be customers), permits him to reap inflationary gains, and infers that he would be favored by the fact that prices of his commodities (with the new money now increasing effective demand) and services would increase first, and higher than that of those he intends to buy.

So nobody who would be on the losing side advocates inflation. Of course this is a naive take, as prices rise to different degrees and at different times in response to increases in money supply. Also a credit expansion geared towards consumption as the scenario above implies, can do nothing but increase prices.

However, the same amount of money supply increase, geared towards procurement of production goods ( materials, equipment, specialized labor, etc), would overtime be associated with productivity gains that enables higher output to compensate (at least to a reasonable extent), for the natural inflationary consequences.

But the new money would move to producers first, and benefit the sellers of production goods, which then trickle down to the goods and services they're more likely to consume with this increase in cash holdings. As productivity increases, so does output and wages, sequentially, dampening the effects of price increases.

A scenario where producers aren't able to secure sufficient capital, would lead to stable prices (as money) only because of the gap in notional and effective demand. Deflationism in its extreme becomes as bad as Inflationism in its extreme.

 

Mises Critique of Keynes' and Classical Economists:

The full employment doctrine was expounded by Adam Smith and reviewed by Keynes, who brought up a credible argument against Say's Law (that supply doesn't always create it's own demand), but was deemed at a loss  and "in a new attire essentially the same errors which Smith and Say since demolished", Mises argues.

Wage rates he says are a market phenomenon and if a man cannot get his desire wage he would lower his price else he remains unemployed. So if a government or unions fix wages at a higher rate than the ability or willingness of employers to pay, a part of those who seek employment would remain jobless.

This was explained in Keynes' General Theory, as a natural trait of he labor market. He argues that there would always be some level of unemployment because of aggregate demand deficiency, and that the economy can actually settle at equilibrium with unemployment.

Whilst classical beleived market would always clear, a point Keynes refuted, as workers cannot simply lower their wages (just as producers cannot simply lower the price of their goods), to get employed.

Furthermore he argued that aggregate demand determines employment and output, and that government interventions where needed to induce aggregate demand where private sector falls short. Mises either misunderstood Keynes or was oblivious to the fact that the market can never deliver full employment or clear always when market forces change.

Mises then goes on to say that that only an increase in capital investment can raise real wage rates. To "increase the per-head quota of capital invested" he says. Another way of saying increases purchases of production goods, but by pure laissez-faire capitalism, "as far as operation is not sabotaged by government and labor unions".

The assumption here is that, at every point in time, the skills in supply match the skills in demand, and that prices of all goods and services both in terms of money and in terms of each other in a direct and indirect exchanges respectively, are completely flexible.

Because this assumption doesn't hold, the argument that a complete laissez-faire capitalism can guarantee real wage growth is unrealistic.

Increasing the supply of money until full employment is reached is and has always been a fallacy that cannot be attributed to Keynes.

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The Emergency Argument for Inflation:

Here Mises refers to a political argument for inflation that requires "special analysis", and is resorted to only I  books and speeches. It's supporters he says, "fully accept the teachings of the sound-money doctrine" and do.not share the same errors as "inflation quacks".

In full awareness of the "evils" of inflation they believe that emergencies exist which "peremptorily require or at least justify recourse to inflation". A nations sovereignty at the cost of a temporary abandonment of sound-money would face no reasonable objections.

But still he adds that inflation adds nothing to the defence of ones territory for the armed forces "must be provided for our of the available means by restricting consumption for non-vital purposes, by intensifying production to increase output, and by consuming a part of capital previously accumulated".

What Mises didn't recognize is that in extreme circumstances (like war), production could be stifled and/or rationed to accommodate the allocation of capital to the production of military equipment. And that in doing so, the country can leverage on its future production in order to finance the military action with debt. To which there would also, at the time be no reasonable objections, so far as the roles liberties and the country's sovereignty is at stake.

The idea that the great emergency can be solved without inflation, is akin to saying that matter can be held in place without gravity.

Contemporary Currency Systems:

 Here he discusses three different standards of monetary systems; the Inflexible gold standard, the illusive standard and 

The Inflexible Gold Standard:

The mark of all varieties of the gold standard and the gold-exchange . unit". The parity was understood as not to be changed. It became no consequence if one held gold mint coins i...r bank notes s they were redeemable in demand (if need be)..

The Orthodox ir Classical gold standard however differed in degree. Here gold coins,, Bank notes, cheques and fractional coins were employed simultaneously in business affairs and existed side by side. This is as opposed to the gold-exchange standard where the Central Bank exchanged or sold gold for currency notes at rates that did not ecmxceed the legal established parity.

And "by no more than the gold point margin would be under the Classical Standard. Thus both the Classical and Gold-exchange standards were Inflexible and neither was less integrated than the other into the international system of gold standard.

The flexible standard:

This is a development that happened between WW1 and WW2. it's main features were;

1. The domestic standard of parity against gold and foreign exchange not fixed by law but by government agency entrusted with that responsibility.

2. This flexible parity becomes subject to sudden changes and it's flexibility geared towards it resulting in lowering the exchange-value of the domestic currency against gold and currencies that didn't drop.

3. The only method available method for preventing a currency's exchange-value from dropping below parity becomes unconditional redemption. The more modern beaurcrat finds the condition unpleasant and would rather peg the currency to a ratio of available gold and not have to be forced to honor it entertain redemption claims.

But "the nexion pegging and redeeming mean exactly the same thing" as they imply that a currency would not be allowed to drop below a certain point. Where the government refuses to allow for free flowing exchange rates (to gold and other currencies), under this flexible standard, the pegging is usually resumed at a lower level in the future taking the domestic currency's objective exchange-value down with it.

4. Pegging operations are usually the ourview of the Central Bank. If the government practices restraint in the issuance of credit or Fiat money inflationary currency systems can prevail for a series of years. But this freely vacillating currency gives the owner no claim against the monetary authority in the way of redemption.

 

The Illusive Standard:

This he says is based on a falsehood. Where the government fronts an illusory parity different from market realities. Knowing there is no convertibility at that price, it clings on to the "pretence" . Strict enforcement would eventually discourage monetary transactions with foreign entities and countries.

The government goes on to "expropriate" foreign currency s owned by it's subjects and indemnifies it by paying the amount of the domestic currency according to enforced exchange-ratios.

The government becomes the only seller of foreign currency and in compliance with its self made decree it would only sell at the official rate.

However selling foreign exchange below its market price subsidizes imports and placing an duty charge in exports. As it will be more expensive than the nominal market price suggests under a free floating or flexible but realistic peg.