Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

532 Money, Bank Credit, and Economic Cyclesquantities of goods and services exchanged over a period oftime. The lack of homogeneity makes this an impossible sum. 32Mises also points out the absurdity of the concept of “velocityof money,” which is defined simply as the variable which,dependent on the others, is necessary to maintain the balanceof the equation of exchange. The concept makes no economicsense because individual economic agents cannot possibly actas the formula indicates. 33Therefore the fact that monetarists’ equation of exchangemakes no mathematical or economic sense reduces it to a mereideogram at most, or, as the Shorter Oxford English Dictionaryputs it, “a character or figure symbolizing the idea of a thingwithout expressing the name of it, as the Chinese characters,etc.” 34 This ideogram contains an undeniable element of truthinasmuch as it reflects the notion that variations in the moneysupply eventually influence the purchasing power of money(i.e., the price of the monetary unit in terms of every good and32 Murray N. Rothbard argues that the “general price level,” P, is aweighted average of prices of goods which vary in quantity and qualityin time and space, and the denominator is intended to reflect the sum ofheterogeneous amounts expressed in different units (the year’s total productionin real terms). Rothbard’s brilliant, perceptive critical treatmentof monetarists’ equation of exchange appears in his book, Man, Economy,and State, pp. 727–37.33 “For individual economic agents, it is impossible to make use of the formula:total volume of transactions divided by velocity of circulation.”Mises, The Theory of Money and Credit, p. 154. The concept of velocity ofmoney only makes sense if we intend to measure the general price levelover a certain time period, which is patently absurd. It is pointless to considerthe prices of goods and services over a period of time, e.g., a year,during which the quantity and quality of goods and services producedvary, as does the purchasing power of the monetary unit. It so happensthat from an individual’s point of view prices are determined in eachtransaction, each time a certain amount of money changes hands, so an“average velocity of circulation” is inconceivable. Moreover from a“social” standpoint, at most we might consider a “general price level” withrespect to a certain point in time (not a period), and thus the “velocity of circulationof money” concept is totally meaningless in this case as well.34 The Shorter Oxford English Dictionary, 3rd ed. (Oxford: Oxford UniversityPress, 1973), vol. 1, p. 1016.