The Theory of Money and Credit - Ludwig von Mises [52]
Investigations into the foundations of the value of money must eliminate those determinants that arise from the properties of the monetary material as a commodity, since these present no peculiarity that could distinguish the value of money from that of other commodities. The value of commodity money is of importance for monetary theory only insofar as it depends on the peculiar economic position of the money, on its function as a common medium of exchange. Changes in the value of the monetary material that arise from its characteristics as a commodity are consequently to be considered only so far as they seem likely to make it more or less suitable for performing the function of money. Apart from this, monetary theory must take the value of the monetary material that arises from its industrial usefulness as given.
The material of which commodity money is made must have the same value whether it is used as money or otherwise. Whether a change in the value of gold originates in its employment as money or in its employment as a commodity, in either case the value of the whole stock changes uniformly. [16]
It is otherwise with credit money and fiat money. With these, the substance that bears the impression is essentially insignificant in the determination of the value of the money. In some circumstances it may have a relatively high exchange value comprising a considerable fraction of the total exchange value of the individual coin or note. But this value, which is not based on the monetary properties of the coin or note, only becomes of practical importance at the moment when the value based on the monetary property vanishes, that is, at the moment when the individuals participating in commerce cease to use the coin or note in question as a common medium of exchange. When this is not the case, the coins or notes bearing the monetary impression must have a higher exchange value than other pieces of the same material so long as these are not marked out by any special characteristics.
Again, in the case of credit money the claims used as money have similarly a different exchange value from other claims of the same kind that are not used as money. The hundred-gulden notes which circulated as money in Austria-Hungary before the reform of the currency had a higher exchange value than, say, a government security with a nominal value of a hundred gulden, notwithstanding the fact that the latter bore interest and the former did not.
Until gold was used as money it was valued merely on account of the possibility of using it for ornamental purposes. If it had never been used as money, or if it had ceased to be so used, its present-day value would be determined solely by the extent to which it was known to be useful in industry. But additional opportunities of using it provided an addition to the original reasons for esteeming it; gold began to be valued partly because it could be used as a common medium of exchange. It is not surprising that its value consequently rose, or that at least a decrease in its value which possibly would have occurred for other reasons was counterbalanced. Nowadays the value of gold, our principal modern monetary material, is based on both possibilities of employment, on that for monetary purposes and on that for industrial purposes. [17]
It is impossible to say how far the present value of money depends on its monetary employment and how far on its industrial employment. When the institution of money was first established, the industrial basis of the value of the precious metals may have preponderated; but with progress in the monetary organization of economic life the monetary employment has become more and more important. It is certain that nowadays the value of gold is largely supported by its monetary employment, and that its demonetization would