The Theory of Money and Credit - Ludwig von Mises [60]
The unsatisfactory results offered by the subjective theory of value might seem to justify the opinion that this doctrine and especially its proposition concerning the significance of marginal utility must necessarily fall short as a means of dealing with the problem of money. Characteristically enough, it was a representative of the new school, Wicksell, who first expressed this opinion. Wicksell considers that the principle which lies at the basis of all modern investigation into the theory of value, namely, the concept of marginal utility, may well be suited to explaining the determination of exchange ratios between one commodity and another, but that it has practically no significance at all, or at most an entirely secondary significance, in explaining the exchange ratios between money and other economic goods. Wicksell, however, does not appear to detect any sort of objection to the marginal-utility theory in this assertion. According to his argument, the objective exchange value of money is not determined at all by the processes of the market in which money and the other economic goods are exchanged. If the money price of a single commodity or group of commodities is wrongly assessed in the market, then the resulting maladjustments of the supply and demand and the production and consumption of this commodity or group of commodities will sooner or later bring about the necessary correction. If, on the other hand, all commodity prices, or the average price level, should for any reason be raised or lowered, there is no factor in the circumstances of the commodity market that could bring about a reaction. Consequently, if there is to be any reaction at all against a price assessment that is either too high or too low it must in some way or other originate outside the commodity market. In the further course of his argument, Wicksell arrives at the conclusion that the regulator of money prices is to be sought in the relations of the commodity market to the money market, in the broadest sense of the term. The cause which influences the demand for raw materials, labor, the use of land, and other means of production, and thus indirectly determines the upward or downward movement of commodity prices, is the ratio between the money rate of interest (Darlehnszins) and the "natural" or equilibrium rate of interest (natürliche Kapitalzins), by which we are to understand that rate of interest which would be determined by supply and demand if real capital was itself lent directly without the intermediation of money. [20]
Wicksell imagines that this argument of his provides a theory of the determination of the objective exchange value of money. In fact, however, all that he attempts to prove is that forces operate from the loan market on the commodity market which prevent the objective exchange value of money from rising too high or falling too low. He never asserts that the rate of interest on loans determines the actual level of this value in any way; in fact, to assert this would be absurd. But if we are to speak of a level of money prices that is "too high" or "too low," we must first state how the ideal level with which the actual level is compared has been established. It is in no way sufficient to show that the position of equilibrium is returned to after any disturbance, if the existence of this position of equilibrium is not first explained. Indubitably, this is the primary problem, and its solution leads directly to that of the other; without it, further inquiry must remain unfruitful, for the state of equilibrium can only be maintained by those forces which first established it and continue to reestablish it. If the