The Freeman 1972 - The Ludwig von Mises Institute

4 THE FREEMAN JanuaryWhile most "experts" make thegovernment, its powers and objectives,their point of departure formonetary deliberation, a few scholarscontinue to base their inquirieson the fundamental principlesthat flow from individual choiceand action. In their judgment, thefactors that affect the exchangerelations between various nationalcurrencies rest on the economicprinciples that determine the purchasingpower of each and everytype of medium of exchange,whether it is a precious metal orgovernment fiat money.As they see it, the purchasingpower of any monetary unit dependson the relation between thedemand for and the quantity ofmoney in individual cash holdings.The demand for money is purelyindividual, although a great manyextraneous factors may influencethis demand. There is, for' instance,the expectation of futurechanges in the exchange value ofmoney. An expected fall tends toreduce the demand for money andthus its purchasing power; an expectedrise brings about the opposite.Also, the availability of goodsaffects the demand for money. Inan expanding economy when moreand better goods are offered onthe market, the demand for moneytends to rise; in a declining economy,where capital is consumedand the division of labor breaksdown, the demand for money tendsto decline.!The Stock of MoneyThe supply of money is thestock of money available for exchange.During the ,age of thegold standard it consisted of goldbullion, gold coins and their varioussubstitutes, such as banknotes, tokens, and demand deposits.In this age of governmentcurrency, it consists of fiat moneyand its substitutes, such as tokensand demand deposits. The substitutesmay either be fully backedby money proper or else they arefiduciary, Le., uncovered. Thus, anexpansion or contraction of fiduciarymedia directly a,ffects thetotal quantity of money availablefor exchange.A change in the money relationthrough changes in either the demandfor money or the stock ofmoney affects changes in the purchasingpower of money. As onefactor of demand or supply cannotperfectly offset changes in theother factors, money can never beneutral. Now, if there a.re two ormore media of exchange, such asgold or silver, or va.rious fiat currencies,what determines the exchangeratio between the various'1 Ludwig von Mises, The Theory ofMoney and Credit (Irvington-on-Hudson,N. Y.: The Foundation for Economic Education,Inc., 1971), p. 97 et seq.