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 money, 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.
—Murray N. Rothbard, “The Austrian Theory of Money,” in
Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 686.
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