Ludwig von Mises' Theories on Money and Banking: Functions, Value, and Price Formation, Slides of Banking and Finance

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Mises on

Money & Banking

Function(s) of Money,

Measuring Value

I. Course Description

II. Origin of Money

A. Not “invented” B. Menger’s theory

III. Function vs. Functions of Money

IV. Objective Theory of Value

V. Modern Subjective Theory A. No Equality of Value B. Objective Prices, Subjective Valuations C. Ordinal vs. Cardinal Ranking

VI. Does Money “Measure” Prices?

A. Money Not “Invented”

B. Menger’s Theory of Origin

of Money

2. Liquidity or “Saleability”

3. Medium of Exchange

(Taken from Murphy’s Lessons for the Young Economist, pdf available online.)

5. Qualities ( not Definition!) of a Good

Medium of Exchange

• Divisible
• Durable
• Convenient market value by

weight

• Homogeneous, identifiable units
• Easy to transport

III. The Function vs.

Functions of Money

Mises argues that the function of money

is to serve as a medium of exchange.

This subsumes other typical functions

touted by other economists, such as:

• Store of value
• Standard of deferred payments
• Unit of account

V. Modern Subjective Theory

of Value

Carl Menger

William Stanley Jevons

Leon Walras

A. No Equality of Value

C. Ordinal vs. Cardinal

Examples of cardinal numbers: 1, 325.33, pi Examples of ordinal numbers: 1st, 4th, 26th

Subjective value theorist uses concept of “preferences” to explain acts of exchange. Thus valuation and preferences are always ordinal rankings, not cardinal measurements of “utility” intensity.

Analogy: We can rank our friends. It makes sense to say, “Sally is a better friend than John.” It doesn’t make sense to say, “I attribute 13% more friendship units to Sally than to John.”

VI. Does Money

“Measure” Prices?

No, not really.

 Mises says prices consist in money; money doesn’t really “measure” prices.