Appendix: Classification of Monetary Theories
The industrial revolution and the specialization of labor have been transformative. No longer do the majority of people live in an agrarian society in which people produce primarily for their own consumption, but instead produce goods to be exchanged for the product of others. And as such, commercial trade and the token of exchange, namely money, is a common phenomenon.
As a consequence, there is a high level of concern about money, particularly among those who have no knowledge of the most fundamental economic theory. The result has been the promulgation of theories in regard to money that have very little to do with the nature of money itself. The widespread promulgation of misinformed ideas that range from the slightly flawed to the thoroughly idiotic would be risible, were not the consequences of the acceptance of such theories so damaging.
All the various points of view have on factor in common: they cannot be used to support any system that deals realistically with the processes of economic activity. "It is utterly impossible to employ them as foundations for a theory of exchange."
Catalytic and Acatalectic Monetary Doctrine
The "catalytic" theories of money concern themselves with exchange ratios, and are based loosely on the notion that the value of money derives from its ability to be traded for things, including other currencies.
The "acatalytic" theories of money seek to establish the value of money as something unto itself, independent of its use in exchange. Ultimately, this is absurd, but there are factors that would lead an uninformed individual to lend such theories some credence.
Catalytic theory can be divided into two forms of exchange: direct and indirect. In direct exchange of goods-for-goods, it is clear that the terms of exchange derive from the value of the goods in trade. In indirect exchange, the value of goods exchanged for money grants the appearance that money is of value, ignoring the fact that money is obtained merely to be traded for other goods via direct exchange. The larger and more complicated the market, the more circuitous a route by which one good is traded for another, and the more plausible it seems to consider money as a thing of value rather than a mere token of exchange.
As such, the notion of acatalytic monetary theory gained acceptance, to the point that certain scraps of acatalytic theory can be witnessed even in the writings of many catalytic theorists - lending them further credence when the author strained to make them compatible with an otherwise plausible (catalytic) body of theory.
There is also the notion of the dichotomy between theory and practice - and a "practical man" who ventures into the economic sphere, without any knowledge of the theory of economics, may achieve some degree of success without recognizing the connection of his activities to theory. The practical man is guided to espouse whatever notions support an action that seems to work, in a given set of circumstances, without consideration of the reasons. And as such, acatalytic doctrines find ready acceptance among those who have no patience for theory.
All acatalytic monetary doctrines have a common characteristic: they are not compatible with catalytic approaches to monetary doctrines. This does not mean they entirely refuse to address the function of money in exchange, but cannot do so in an explicit and well-though-out manner. An intensive attempt to reconcile acatalytic theory with exchange would result in contradiction.
In the simplest of terms, the value of money is based on the value of a commodity (metal) it represents - but to go further, and consider what gives the source commodity its value, is to arrive at a catalytic system: that goods are valued for their utility, mitigated by the difficulty in obtaining them. This leads to the notion of exchange value when comparing the utility of various goods, which is a catalytic approach.
The State Theory of Money
Another acatalytic doctrine maintains that the value of money derives from the command of the state, rather than the estimation of its value by independent parties in commercial exchange. In effect, the state commands and the subject obeys, and exercises no independent judgment in determining the price he is willing to offer or accept for any good, including his labor.
This is the central tenet of state control of economic activity, and it is necessarily true that a man, threatened with force, must give what is demanded and accept whatever is offered in return without raising objection. Such is the nature of robbery, by whatever name it is given, as it is not an act of exchange but of submission.
Such a system, which eschews any semblance to the qualities of a genuine theory, may refer to the amount of money exchanged for a good as a "price," but the amount exchanged is based on arbitrary whim, and is impervious to logic. One may attempt to rationalize or legitimize the notion of exchange by suggesting that the "state" considers the value of all items in trade - but there need be no logical basis for consideration.
Some attention is given to Knapp, whose attempt at explaining the function of money backed by the state was decidedly unenlightening. While it is possible to enumerate the laws and decrees pertaining to currency, it is not possible to consider their motives and effects. It is not unlike interpreting a religious text: one can explain what is suggested, but cannot disclose the reasons why it should be followed - merely that god, or the state, commands it.
The popularity of Knapp's doctrines in Germany led to the acceptance and use of fiat currency in Germany, even as the currency itself became worthless to the rest of the world. Knapp's disciples even went so far as to suggest the debasement of state currency was undertaken for a positive effect: "because it enabled us to sell foreign securities at a favorable rate." Only if one ignores the objective value of a currency in exchange for other currencies would it seem a benefit to be able to get more domestic money for less foreign currency.
(EN: It is mentioned that Knapp was not a "government hireling" and was not presumably motivated by a desire to legitimize the behavior of the German state, and Von Mises seems to regard him as an honorable man, though thoroughly misguided in his approach. However, much of the harm done to the German people was at the hands of Knapp's disciples, whose motivations were otherwise, and Knapp's misguided theories gave them the means to legitimize their actions.)
To return to the metaphor of religion, the state theory of money requires the acceptance of the value of fiat currency in opposition to the facts of reality that can be readily witnessed. It is for this reason that the proponents of fiat currency have been silent on all questions of monetary policy since 1914: they have no basis to address them, and the facts stand in opposition to what they wish to continue to believe.
In effect, "the state theory is not a bad monetary theory; it is not a monetary theory at all."
Schumpeter's Attempt to Formulate a Catalytic Theory
To refer to money as "a claim" is a suitable analogy, and was at one time entirely accurate, as the token of money represented a claim to a quantity of goods. In the Roman market, grain was money, but trade took place in tokens that could be redeemed for grain. However, there is some danger in constructing a theory of money by stretching that analogy: an analogy can be used to illustrate a point, but a theory cannot be based entirely upon analogy.
By one analogy, money is likened to tickets of admission to a room of limited size, such that the more tickets are printed, the less amount of space is actually "owned" by each ticket holder. But application of this analogy to money and commodities is untenable, precisely in that it maintains tat the "pool" of commodities represented by money remains fixed.
Schumpeter attempts to avoid this foible by considering not the present quantity of money, but from the sum of money incomes, which he compares to the sum of prices for all goods. This also seems a serviceable theory, until one considers that "all goods" represents both production and consumption goods, and that "all money" fails to consider that portion of money that is not used to purchase immediate goods, but is set aside for future purchases.
Thus, to arrive at an estimate of money and goods in circulation, one must disqualify from calculation any money or goods that are not in present circulation - without consideration of the consequences of their being put into circulation again, which could occur at any time.
Von Mises goes on to further elaborate of the foibles of such an arbitrary exclusion of goods and money from Schumpeter's theory - which, in effect, serves to undermine the theory itself. (EN: Though I suspect that it would have a semblance of accuracy when limited to viewing historical exchange - at a given point in time, a specific amount of money and a specific amount of goods had been in circulation, and one could calculate the value of money and goods involved in historical exchanges. But it does not deal well with the present or future, where the volume of money and goods is subject to fluctuate.)
Metallism
It is common for proponents of the acatalytic theories to dismiss the notion of a gold standard with the pejorative term "metallism," suggesting that the attachment of value to a physical object such as a mineral is next of kin to superstition or pagan religion. It is necessary for such theorists to be dismissive of any tangible standard of value, as it is their intent to substitute an arbitrary and imaginary standard as being just as good, if not better.
It must be conceded that the choice of a commodity to be used as a basis for money is entirely arbitrary. At various times in history, such commodities as salt, wheat, or tobacco have been the standard of money. However, because the standard on which money is based is arbitrary does not mean that it can be dispensed of.
Commercial trade is, in most instances, the trade of goods - one good is traded for another. And while money provides a medium by which the trades that are meaningful to the traders may be conducted (the tailor who sells clothing for money and uses the money to buy cloth, cares not what medium might be used to back that money), money itself must represent real value in order to be serviceable as a means of exchange.
(EN: Von Mises continues to refute certain theorists of his time, chiefly Knapp, for their dismissal of the necessity for money to represent actual value rather than imaginary, especially in that their dismissal of metal is not followed by a plausible substitute, not is there any detail of how fiat currency can claim and defend its value if it cannot be redeemed for anything of value to anyone. This might be more interesting to a contemporary reader, in a situation where fiat money is the coin of the realm, except that it is too specific to the arguments made by Knapp, a theorist who was evidently in much favor at the time, but who has been largely forgotten by history.)
Unfortunately, Knapp's theories gained some acceptance by other writers, who sough to accept Knapp's conclusions without careful consideration of the strength of his premises. And while Knapp has been discredited, certain of his theories have been carried forward.
Von Mises presents the arguments of Weisre and Phillipovich on the topic of the relationship between the value of money and the value of metal - that money has a value that is not based on the subjective use-value of the material it represents. In terms of gold specifically, the demand of gold for use in commerce has caused its value to exceed its benefit in industrial application: a ring made of gold is no better a ring than one made of pewter, and is only more expensive because the demand for gold in commerce makes gold more scarce. In effect, were gold not used for currency, jewelry would be much cheaper because gold isn't really that useful as a substance.
From there, it is suggested that the exchange value of a metal should be no greater than its value as an industrial material. And because it does not coincide, then the additional value of money in the market is largely illusory and is not, in fact, substantiated by the actual value of the metal.
The flaw in such arguments should be fairly obvious: that the value of goods in the market does not rely merely on the value to be obtained from their use, but from the difficulty of producing them and, most significantly, their scarcity. In terms of their functional value as foodstuffs, there is no difference in the use-value of wine and beer, yet wine is valued more highly than beer due to the cost of production and scarcity. These are valid components of the value of any commodity, and cannot be casually dismissed as insignificant or imaginary.
The English Schools of Banking Theory
Von Mises reflects on a few anonymous assertions (of "a writer" and "another writer") - it's a few paragraphs, apparently dashed off as an afterthought, the chief point of which is that some of the newer schools of theory are merely restatements of existing doctrines. Specifically, that some of the "new" schools of theory arising in England do not differ significantly from those that have been around for decades.