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The Austrian Theory of Money by Murray N. Rothbard
becomes the appropriate concept for analyzing the uniquely broad
monetary function of being held as stock for later sale. Mises was also
able to explain the dema nd for cash balances as the resultant of marginal
utilities on value scales that are strictly ordinal for each individual. In the
course of his analysis Mises built on the insight of his fellow Austrian
Franz Cuhel to develop a marginal utility that was strictly ordinal,
lexicographic, and purged of all traces of the error of assuming the
measurability of utilities.
The relative utilities of money units as against other goods
determine each person's demand for cash balances, that is, how much of
his income or wealth he will keep in cash balances as against how much
he will spend. Applying the law of diminishing (ordinal) marginal utility
of money and bearing in mind that money's "use" is to be held for future
exchange, Mises arrived implicitly at a falling demand curve for money
in relation to the purchasing power of the currency unit. The purchasing
power of the money unit, which Mises also termed the "objective
exchange-value" of money, was then determined, as in the usual supply-
and-demand analysis, by the intersection of the money stock and the
demand for cash balance schedule. We can see this visually by putting
the purchasing power of the money unit on the y-axis and the quantity of
money on the x-axis of the conventional two-dimensional diagram
corresponding to the price of any good and its quantity. Mises wrapped
up the analysis by pointing out that the total supply of money at any
given time is no more or less than the sum of the individual cash
balances at that time. No money in a society remains unowned by
someone and is therefore outside some individual's cash balances.
While, for purposes of convenience, Mises's analysis may be
expressed in the usual supply-and-demand diagram with the purchasing
power of the money unit serving as the price of mo ney, relying solely on
such a simplified diagram falsifies the theory. For, as Mises pointed out
in a brilliant analysis whose lessons have still not been absorbed in the
mainstream of economic theory, the purchasing power of the money unit
is not simply the inverse of the so-called price level of goods and
services. In describing the advantages of money as a general medium of
exchange and how such a general medium arose on the market, Mises
pointed out that the currency unit serves as unit of account and as a
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