The Theory of Money and Credit - Ludwig von Mises [163]
In lay circles this problem is regarded as long since solved. Money performs its function as a common medium of exchange in facilitating not only the sale of present goods but also the exchange of present goods for future goods and of future goods for present goods. An entrepreneur who wishes to acquire command over capital goods and labor in order to begin a process of production must first of all have money with which to purchase them. For a long time now it has not been usual to transfer capital goods by way of direct exchange. The capitalists advance money to the producers, who then use it for buying means of production and for paying wages. Those entrepreneurs who have not enough of their own capital at their disposal do not demand production goods, but money. The demand for capital takes on the form of a demand for money. But this must not deceive us as to the nature of the phenomenon. What is usually called plentifulness of money and scarcity of money is really plentifulness of capital and scarcity of capital. A real scarcity or plentifulness of money can never be directly perceptible in the community, that is, it can never make itself felt except through its influence on the objective exchange value of money and the consequences of the variations so induced. For since the utility of money depends exclusively upon its purchasing power, which must always be such that total demand and total supply coincide, the community is always in enjoyment of the maximum satisfaction that the use of money can yield.
This was not recognized for a long time and to a large extent it is not recognized even nowadays. The entrepreneur who would like to extend his business beyond the bounds set by the state of the market is prone to complain of the scarcity of money. Every increase in the rate of discount gives rise to fresh complaints about the illiberality of the banks' methods or about the unreasonableness of the legislators who make the rules that limit their powers of granting credit. The augmentation of fiduciary media is recommended as a universal remedy for all the ills of economic life. Much of the popularity of inflationary tendencies is based on similar ways of thinking. And it is not only laymen who subscribe to such views. Even if experts have been unanimous on this point since the famous arguments of David Hume and Adam Smith,[2] almost every year new writers come forward with attempts to show that the size and composition of the stock of capital has no influence on the level of interest, that the rate of interest is determined by the supply of and the demand for credit, and that, without having to raise the rate of interest, the banks would be able to satisfy even the greatest demands for credit that are made upon them, if their hands were not tied by legislative provisions. [3]
The superficial observer whose insight is not very penetrating will discover many symptoms which seem to confirm the above views and others like them. When the banks-of-issue proceed to raise the rate of discount because their note circulation threatens to increase beyond the legally permissible quantity, then the most immediate cause of their procedure lies in the provisions that have been made by the legislators for the regulation of their right of issue. The general stiffening of the rate of interest in the so-called money market, the market for short-term capital investments, which occurs, or at least should occur, as a consequence of the rise of the discount rate, is therefore, and with a certain appearance of justification, laid to the charge of national banking policy. Still more striking is the procedure of the central banks when they think it beyond their power to bring about the desired general dearness in the money