'The Yield From Money Held' Reconsidered
by Hans-Hermann Hoppe: State
or Private Law Society
Memorial Lecture, Prague, April 24, 2009
occupies an honored place in the history of economic thought and
of the "Viennese" or "Austrian" school of economics in particular.
In his book Zur
Lehre von den Bedürfnissen (1907), Cuhel presented
for the first time a strictly ordinal interpretation of
marginal utility and thus contributed to a systematic advance of
pure economic theory. Since this lecture is named in Cuhel's honor,
I felt it appropriate that I, too, should discuss here a purely
theoretical problem of economics. My subject is not the general
theory of value, however, but, more specifically, the theory of
I have chosen
the title of my lecture after a famous article by William H. Hutt,
"The Yield from Money Held."
Like Hutt, I want to attack the following notion: that money held
in cash balances and deposit accounts is somehow "unproductive,"
"barren," or "sterile," offering a "yield of nil;" that only consumer
goods and producer (investment) goods are productive of human
welfare; that the only productive use of money lies in its "circulation,"
i.e., in its spending on consumer or producer goods; and that
the holding, i.e., the not spending, of money diminishes future
consumption and production.
This view is
extremely popular within the economics profession and outside. Hutt
offers many examples of its proponents. I will offer only two here.
The first is John Maynard Keynes. One famous quote from his General
Theory will suffice for my purpose: "An act of individual
saving," by which Keynes means cash holding or "hoarding" instead
of consumption or investment spending,
– so to speak – a decision not to have dinner to-day. But
it does not necessitate a decision to have dinner
or buy a pair of boots a week hence or a year hence or to
consume any specified thing at any specified date. Thus it
depresses the business of preparing to-day's dinner without
stimulating the business of making ready for some future act
of consumption. It is not a substitution of future consumption-demand
for present consumption-demand – it is a net diminution of
Here it is:
the holding of money, i.e., the not spending of it on either consumer
or investment goods, is unproductive, indeed detrimental. According
to Keynes, the government or its central bank must create and then
spend the money that "savers," i.e., the holders of cash balances,
are unproductively holding back, so as to stimulate both consumption
and investment. (Needless to say, this is precisely what governments
and central banks are presently doing to supposedly rectify the
current economic crisis.)
example is from closer to home, i.e., from the proponents of "free
banking" such as Lawrence White, George Selgin, and Roger Garrison.
According to them, an (unanticipated) increase in the demand for
money "pushes the economy below its potential," (Garrison) and
requires a compensating money-spending injection from the banking
Here it is
again: an "excess demand for money" (Selgin & White) has no
positive yield or is even detrimental; hence, help is needed.
For the free bankers help is not supposed to come from the government
and its central bank, but from a system of freely competing fractional-reserve
banks. However, the idea involved is the same: the holding of
(some, "excess") money is unproductive and requires a remedy.
I do not
want to engage in a textual critique of Keynes or the "free bankers"
here. I only mentioned them to further elucidate the idea that
I want to attack, and to indicate how widespread – and consequential
– its acceptance is within the economics profession, both inside
and outside Keynesian circles. Unlike Hutt, who proceeds "critically"
in his article, i.e., through a textual examination of various
authors, and arrives at his own contrary view of the (positive)
yield from money held in a rather indirect and circumstantial
way, I want to proceed "apodictically": by way of a positive demonstration
of money's unique productivity.
The first natural
response to the thesis that money held in or added to cash balances
is unproductive is to counter, why, then, if money held in or added
to cash balances is unproductive of human welfare, do people hold
them or add to them? If cash holdings are indeed "good for nothing,"
no one would hold or add to them – and yet almost everyone does
so all the time! And since all money is always held or hoarded by
someone – when it "circulates," it only leaves one holding hand
to be passed into another – money must be continuously
"good for something" all the while it is being held (which is always).
what this "good for something" of money is, it is best to ask,
when, under what conditions, would there be no demand
for cash holdings? Interestingly, wide agreement exists within
the economics profession on the answer. It has been most lucidly
stated by Ludwig von Mises. No money, and no demand for cash balances,
would exist in "general equilibrium," or as Mises calls it, within
the imaginary construction of an "evenly rotating economy." In
this construction, all uncertainty is by assumption removed from
human action. Everyone knows precisely the terms, times, and locations
of every future action, and accordingly all exchanges can be prearranged
and take the form of direct exchanges.
system without change in which there is no uncertainty whatever
about the future, nobody needs to hold cash. Every individual
knows precisely what amount of money he will need at any future
date. He is therefore in a position to lend all the funds
he receives in such a way that the loans fall due on the date
he will need them.
this fundamental insight, we can state as a first provisional
conclusion concerning the positive theory of money that money
and cash balances would disappear with the disappearance of uncertainty
(never) and, mutatis mutandis, that the investment in
money balances must be conceived of as an investment in certainty
or an investment in the reduction of subjectively felt uneasiness
outside the imaginary construction of an evenly rotating economy,
uncertainty exists. The terms, times, and locations of all future
actions and exchanges cannot be predicted perfectly (with certitude).
Action is by nature speculative and subject to error. Presently
unpredictable surprises can occur. Whenever double coincidences
of wants between pairs of prospective buyers and sellers are absent,
for instance, i.e., when one does not want what the other has to
sell or vice versa, any direct trade (exchange) becomes impossible.
Faced with this challenge of unpredictable contingencies, man can
come to value goods on account of their degree of marketability
(rather than their use-value for him as consumer or producer goods)
and consider trading also whenever a good to be acquired is more
marketable than that to be surrendered, such that its possession
would facilitate the future acquisition of other directly or indirectly
serviceable goods and services. That is, a demand for media
of exchange can arise, i.e., a demand for goods valued on account
of their marketability or resalability.
a more easily and widely resalable good is preferable to a less
easily and widely resalable good as a medium of exchange, "there
would be," as Mises writes,
tendency for the less marketable of a series of goods used
as media of exchange to be one by one rejected until at last
only a single commodity remained, which was universally employed
as a medium of exchange; in a word, money.
brief reconstruction of the origin of money is familiar, insufficient
attention has been drawn to the fact that, as the most easily
and widely salable good, money is at the same time the most universally
present – instantly serviceable – good (which
is why the interest rate, i.e., the discount rate of future goods
against present goods, is expressed in terms of money)
and, as such, the good uniquely suited to alleviate presently
felt uneasiness about uncertainty. Because money can be employed
for the instant satisfaction of the widest range of possible
needs, it provides its owner with the best humanly possible
protection against uncertainty. In holding money, its owner gains
in the satisfaction of being able to meet instantly, as they unpredictably
arise, the widest range of future contingencies. The investment
in cash balances is an investment contra the (subjectively felt)
aversion to uncertainty. A larger cash balance brings more relief
from uncertainty aversion.
The term uncertainty
aversion is meant here in its technical sense, as opposed to
risk aversion. The categorical distinction between uncertainty
on the one hand and risk on the other was introduced into
economics by Frank H. Knight and further elaborated on by Ludwig
von Mises with his distinction between case probability
and class probability.
of class probability) are contingencies against which it is possible
to take out insurance, because objective long-run probability
distributions concerning all possible outcomes are known and predictable.
We know nothing about an individual outcome, but we know everything
about the whole class of events, and we are certain about
the future. Insofar as man faces a risky future, then, he does
not need to hold cash. To satisfy his desire to be protected against
risk, he can buy or produce insurance. The sum of money that he
spends on insurance is an indication of the height of his aversion
to risk. Insurance premiums are money spent, not held,
and are as such invested in the physical production structure
of producer and consumer goods. The payment of insurance reflects
a man's subjectively felt certainty concerning (predictable)
future contingencies (risks).
contrast, insofar as man faces uncertainty he is, quite
literally, not certain concerning future contingencies,
i.e., as to what he might want or need and when. In order to be
protected against unpredictable contingencies at unpredictable
moments, he cannot invest in producer goods (as in the case of
risk insurance); for such investments would reflect his certainty
concerning particular future needs. Only present, instantly
serviceable goods can protect against unpredictable contingencies
(uncertainty). Nor does a man want to invest in consumer goods
for uncertainty protection. For an investment in consumer goods,
too, is an expression of certainty concerning specific momentary
or immediately impending wants. Only money, on account of its
instant and unspecific wide-ranging salability, can protect him
against uncertainty. Thus, just as insurance premiums are the
price paid for protection against risk aversion, so cash holdings
are the price paid for protection against uncertainty aversion.
To the extent
that a man feels certain regarding his future needs, he will invest
in consumer or producer goods. To invest in money balances is
to invest neither in consumer goods nor producer goods. Unlike
consumer and producer goods, which are used up in consumption
or production, money is neither used up through its use as a medium
of exchange nor transformed into another commodity. To invest
in cash balances means, I am uncertain about my present
and future needs and believe that a balance of the most easily
and widely saleable good on hand will best prepare me to meet
my as-of-yet unknown needs at as-of-yet unknown times.
If a person
then adds to his cash balance, he does so because he is confronted
with a situation of (subjectively perceived) increased uncertainty
regarding his future. The addition to his cash balance represents
an investment in presently felt certainty vis-à-vis a future
perceived as less certain. In order to add to his cash balance,
a person must restrict his purchases or increase his sales of nonmoney
goods (producer or consumer goods). In either case, the outcome
is an immediate fall in certain nonmoney goods' prices. As the result
of restricting his purchases of x, y, or z, the money price of x,
y, or z will be lowered (as compared to what it would have been
otherwise), and likewise, by increasing his sales of a, b, or c,
their prices will fall. The actor thus accomplishes exactly and
immediately what he wants. He commands a larger (nominal and real)
cash balance and is better prepared for an increasingly uncertain
future. The marginal utility of the added cash is higher than (ranks
above) the marginal utility of the nonmoney goods sold or unbought.
He is better off with more cash on hand and less nonmoney goods,
otherwise he would not have reallocated his assets in this way.
There is more investment in the removal of perceived uncertainty,
and there is less investment in needs, present or future, considered
does not change if there is a general increase in the
demand for money, i.e., if all or most people try to increase
their cash holdings, in response to heightened uncertainty. With
the total quantity of money given, the average size of cash holdings
cannot increase, of course. Nor is the total quantity of producer
and consumer goods that make up the physical production structure
affected by a general increase in the demand for money. It remains
unchanged. In generally striving to increase the size of their
cash holdings, however, the money prices of nonmoney goods will
be bid down, and the purchasing power per unit money will correspondingly
rise. Thus, the (increased) demand for and the (given) supply
of money are equilibrated again, but at a higher purchasing power
per unit money and lower prices of nonmoney goods. That is, even
if nominal cash balances cannot rise as a result of a general
increase in the demand for money, the real value of cash
balances can; and it is this increase in the value of real
cash balances that brings about precisely and immediately the
effect desired: being better prepared for a future deemed as less
No one cares
about the nominal number of money units in his possession. Rather,
people want to keep cash with a definite amount of purchasing
power on hand. If the purchasing power per unit money increases
as the result of an increased demand for cash holdings, each unit
of money confronted with an array of generally lower nonmoney
goods prices can do a better job in affording its owner protection
suffice as my attempt to provide a positive demonstration of the
unique productivity of cash holdings as "yielders of certainty"
in an uncertain world. Only a brief additional comment concerning
the present, unprecedentedly severe economic crisis and the consequences
that our theoretical considerations imply for its solution seems
to be in order.
I shall say
nothing here about the cause of the present crisis, except that
I consider it another, spectacular vindication of the so-called
Austrian – or "Mises-Hayek" – business-cycle theory. In any case,
the crisis has led to heightened uncertainty. People want more
certainty vis-à-vis a future considered far less certain
than before. Accordingly, their demand for cash increases. With
the quantity of money given, the higher demand for money can be
satisfied only by bidding down nonmoney goods' prices. Consequently,
as the overall "level" of prices falls, the purchasing power per
unit money correspondingly rises. Each unit of money is productive
now of more certainty, and the desired level of uncertainty protection
is restored. The crisis is ended.
to the crisis suggested instead by most economists and pundits
and officially adopted by governments everywhere is entirely different.
It is motivated by the here-criticized, fundamentally flawed doctrine
that money held in or added to cash balances is money unproductively
withheld from production and consumption. The additions to their
cash holdings that people want to bring about are thus interpreted,
wrongly, as a diminution of human welfare. Accordingly, huge efforts
are now undertaken to increase the amount of spending. But this
stands at cross purpose to the general public's needs and desires:
in order to be better protected against heightened perceived uncertainty,
prices must fall and the purchasing power of money must rise.
Yet with an influx of additional, newly created money, prices
will be higher and the purchasing power per unit money will be
lower than otherwise. Thus, as the result of the current monetary
policy, the restoration of the desired level of uncertainty protection
will be delayed and the crisis prolonged.
William H. Hutt, "The Yield from Money Held," in: Freedom
and Free Enterprise: Essays in Honor of Ludwig von Mises,
ed. M. Sennholz, Chicago: Van Nostrand, 1956, pp. 196-216.
John Maynard Keynes, The
General Theory of Employment, Interest, and Money, New
York: Harcourt, Brace, and World, 1964, p. 210.
Roger Garrison, "Central Banking, Free Banking, and Financial
Crises," Review of Austrian Economics 9, no.2, 1996,
p. 117; George Selgin & Lawrence White, "In Defense of Fiduciary
Media," Review of Austrian Economics 9, no. 2, 1996,
For a detailed critique of Keynes see Hans-Hermann Hoppe, "Theory
of Employment, Money, Interest, and the Capitalist Process:
The Misesian Case Against
Keynes"; for a detailed critique of the free banking doctrine
see idem, "How is Fiat Money Possible?" Review
of Austrian Economics 7, no. 2, 1994 and idem,
"Against Fiduciary Media," Quarterly Journal of Austrian
Economics 1, no.1, 1998.
are collected in Hans-Hermann Hoppe, The
Economics and Ethics of Private Property, 2nd Edition,
Auburn, Al.: Ludwig von Mises Institute, 2006.
Ludwig von Mises, Human
Action, Chicago: Regnery, 1966, p. 249.
Ludwig von Mises, Theory
of Money and Credit, Irvington, N.Y.: Foundation for Economic
Education, 1971, pp. 32-33.
Frank H. Knight, Risk, Uncertainty
and Profit, Chicago: University of Chicago Press, 1971;
Ludwig von Mises, Human Action, chap. VI.
Hans-Hermann Hoppe, "The Limits of Numerical Probability," Quarterly
Journal of Austrian Economics, 10. no. 1, 2007, and idem,
"On Certainty and Uncertainty," Review of Austrian Economics,
10, no.1, 1997.
Hoppe [send him mail] is distinguished
fellow at the Ludwig von Mises Institute
and founder and president of the Property
and Freedom Society. His books include Democracy:
The God That Failed
Myth of National Defense.
Visit his website.
Best of Hans-Hermann Hoppe