Drawing on Mises' 1912 work, The Theory of Money and Credit, North says money can be defined in six words:
money is the most marketable commodity. [Mises] had in mind gold and silver coins, but his theory encompassed any commodity that can or has served as money in history. . .There's more.
Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange. He argued that the development of money was an unplanned outcome of the decisions of individuals who sought to increase their wealth by increasing their productivity. . .
What had originally been a commodity valued for some other characteristic increasingly was valued for the purpose of facilitating exchange. In other words, this commodity became money. . .
[G]overnments began to extend their control over money because they recognized that they could increase their extraction of wealth from private citizens with greater efficiency if they taxed people's monetary income rather than taxing their individual output. . . It was not that the state was the origin of money; it was that money became a tool of the expansion of the state.
The confusion regarding monetary theory and practice has several aspects. First, there is conceptual confusion. There is a lack of understanding of how the free market works. The two fundamental rules governing free-market pricing are these:I eagerly await the balance of North's series. I wonder if one of Ben Bernanke's lieutenants will read it.
1. Supply and demand
2. High bid wins
When you apply these two principles to any area of the economy, you have the conceptual tools necessary to understand the basics of economic causation. All deviations from free-market economic theory invariably involve the abandonment of one or both of these two principles of economic analysis. This certainly applies in the area of monetary theory and monetary policy.