Written by Carlos Bondone

(The following text was my lecture at the International Congress: “The Austrian School in the 21st century” celebrated in Rosario, Argentina, on September 28,29,30-2006)

(New Austrian currency theory and the theory of economic time)

Here goes this tight introductory summary to the theories which I develop fully in the book “Theory of Economic Relativity – The Solution to monetary [currency] crises – A critique to the present economic theories: Austrians, Keynesians and Quantitativists”. It initially emerged as an alternative currency theory to the 20th century’s one, led inevitably to reframing the macroeconomics derived from it, and concluded in the most relevant discovery: The Theory of Economic Time.

Diagnosis of the Austrian School by the end of 20th century that we must consider as a starting point for the 21st century.

Although the knowledge contributed by the School has become the plinth of economics as a science, it is evident that the present economic life – at all levels (scientific, academic, political, intellectual, institutional, etc.) — is dominated by principles which differ from those contributed by the “Austrian” knowledge.

If we were to explain the main causes for such state of things, my bet is that the essence of the problem resides in the dissatisfaction that Hayek had very well expressed about the state of the currency theory. This is clearly reflected nowadays by the fact that there is not a theory accepted as valid “in general”, in the sense that it may express the thoughts of the School as accepted in general by it. In other words, the Austrian School does not have a currency theory (and more important, one on economic time) that can be presented as representative of “its thought”, as it does have on other subjects (subjective value, market, capital, Say, etc). Because of this, we see different currency theories coexisting within the same School, which would not be an inconvenience in itself if we analyze it from the point of view of freedom of opinion, but is a very serious problem when we notice that many of these “alternative” theories are introduced in name of the School while their foundations actually belong to the theories which they try to reject (read Keynesians and Quantitativists).

The state of confusion of the current “Austrian” currency theories, comes hand in hand with what I have discovered in my research. I summarize these, as an introduction to my theories, by saying that the error comes from sharing the same primitive terms which nourish both Keynesians and Quantitativists as well. And that this is being sustained in two fundamental aspects: 1) for deviating from the basic primitive terms of Menger’s money theory (end of the 19th century) instead of “completing” it with a broader currency theory (becoming the former a component of the last); and 2) as a result of “forgetting” Menger’s Austrian currency primitive terms, the School developed in the 20th century an ad-hoc scaffolding of the currency theory, whose pillars are made of that same “basic” errors that the rest of theories developed by the other schools.

This state of things, certainly unnoticed by Menger’s disciples, is from where they tried to return to him and for such praiseworthy course (to maintain freedom, the theory of subjective value, etc.) they had to turn to a whole complex and contradictory theoretical scaffolding that took them to dead-end roads, ad-hoc theories, to base on the same mistaken primitive terms of the schools they were trying to fight, etc. What is most relevant of this state of things is that to mistake the theory of currency is to mistake everything pertinent to the understanding of the economy of the man in society, the so called “macroeconomics”, which is the main subject par excellence at all levels of the economic-social life.

For all the expressed herein, it is convenient to initiate the 21st century with a more reliable monetary theory and of the economic time which will allow us to appreciate in greater extent the rest of the knowledge contributed by the Austrian School, while refuting with more forceful arguments –not only for a matter of marketing— the theories that we considered unfortunate.

As an end to this introduction, I wish to emphasize that the synthesis of the error comes from not noticing that the study of economy must put in its center the economic time and not money, which is one more economic good like any other, and that having not observed this in this way is what has led theories to make their mistakes. Money is not such a special economic good as the theory treats it like.


As a summary, we can say that the School adopts like foundations of its theories the following concepts: subjective value; capital; money (Menger); spontaneous markets; intertemporary prices; and others. In some aspects these theories could be more or less discussed, but along with others, they are doubtlessly the standards of the School.


Interpersonal exchanges: they can be cash (present economic goods are exchanged: barter and money) or credit (present economic goods are exchanged for future economic goods).

Liquidity: once it is regarded as one more need to satisfy – the need to have an economic good that may allow to go beyond barter -, all the rest is reduced to study the economic good that satisfies it: currency.

Currency: it is the economic good that satisfies liquidity, which improves the state of barter. Thus, currency can acquire both the form of money (present economic good) or of credit (present economic goods for future ones).

Economic time: here is contained what I call the Theory of Economic Relativity (TER), which states that: Economic time is the only economic good which has no life in itself, that always must be materialized inevitably in another present economic good, a situation that does not occur to any other economic good, because they all have an existence of their own.

Interest: it is the price of the economic time, subjected to the TER, which implies that it is the price of currency when credit is adopted as such, but it is never the price of money. It follows directly from this that currency theory should not be treated under the lens of the theory of money (inconsistency of the IS/LM model).

Irregular Credits (IC): of all the irregularities that a credit can present, here I only emphasize the final materialization of it, i.e. the irregularity of credit for not specifying at the moment of its generation, the quality and amount of the present economic good which it will be cancelled with. Let us derive, later on, the consequences of a financial system which is mounted on currency with the form of irregular credit.

Total Wealth Equation: it is the one that leads us to express Saving as the aggregate of all the economic goods produced by man since the beginnings of time, not consumed until today. This takes us to relate such net aggregate as an equivalent of wealth or the amount of present economic goods. This way we can say that accumulated wealth is the aggregate of net savings (wealth stock), or that savings are wealth variations (wealth flow), which takes us to the accounting equation in which S (accumulated saving or wealth) = Consumption + Investment (capital) + Hoarding + Money + Inventories + (Cr-Dd: net credits and debts), which is equivalent to Say’s Law on stocks, as well as the accounting results chart is equivalent to the flow aspect of the same law. This equation makes it untenable to think about S = I “Equilibrium” (as any concept of equilibrium), since all the other components (except for “I”) on the right side of the equation would have to equal zero. From this equation derives the concept of total or aggregate demand, which I am not going to extend on. It explains the inconsistency of concepts like unemployment, underconsumption, and others. But it is important to highlight how Keynesian postulates fall apart by their own marketing of equations and charts.

Theory of prices: There exists a simpler theoretical context on prices, which allows us to understand and replace some of the current theoretical constructions (intertemporality of prices; prices in socialism, etc.).

I wish that the listing above could be taken as a slight exhibition of the total theories developed, for being this just a lecture.


Regarding the conclusions of my research, I am going to present a brief summary of the theories that I put under review, in order to give more solidity to the Austrian School’s path, or better said, to economic science’s path, facing the 21st century.

Currency theory after Menger. In his monetary development, Menger reaches up to his already known concept of money: “it is the commodity of greatest saleability used as a medium for exchange” (common use allows human beings not to incur in costs between the moment of its purchase and the one of its sale). Money, as described, allows man to exchange the goods he possesses with no need to make use of barter (practically impossible in society).

From then on, the currency and macroeconomic theory of the 20th century adopts the following statements, axioms or primitive terms:

1) It takes as essential the distinction among direct exchange (barter) versus indirect exchange (the one done with money taking part). Without realizing that such is a useful category for finance, but not for economics, which essential categories regarding exchange are: cash (exchange of present economic goods that can be carried out by means of barter and money) and credit (interpersonal exchange of present economic goods for future economic goods).

2) It defines money in a generic way as “everything that functions as money”, adopting as a concept for it: “the medium of exchange of common use”, without specifying if it refers to a present or future economic good, when this lack of precision is the key for the deviation of the whole currency theory developed in the 20th century. With that criterion, everything that transports is a vehicle, so a cart would be the same thing as an automobile. A task the Austrians adopt from Mises and his monetary replacements, and leads to treating money and credit in a confusing way – at times as different, at times as similar- (in the aforementioned book I make a very specific review, up to the extent of following the original texts of Mises, Keynes and Hayek and intercalating their hits and misses, in the key of my theories).

3) It puts money in the center of the economic theory instead of economic time, which is the economic good completely different to all others, what therefore makes emerge what I call the “Theory of Economic Relativity”. This theory, once installed, completely clears the path of currency and gives us a very simple theoretical field to continue the development of economic hypothesis starting back from the right concepts of the Austrians and the classics. To these it should be added the “macroeconomics” emerging from the TER and other conclusions derived as well, presented in the mentioned book, as well as the corrections and new hypothesis presented.

4) Because of making equal, confusing, or treating confusedly the theory of currency and the theory of money or because of confusing money with credit is that interest is deemed as the price of one or the other, alternatively.

As a result of these and other considerations that I display with these theories, it becomes evident that many of the theorems and/or postulates that all the present theories state, fall apart. This situation allows me to say that the differences between currency Austrians “post-Menger”, Keynesians and Quantitativists, are of degree and not of essence (among other things, due to the aspects indicated before).

Mises’ Regression Theorem: it postulates that money, before being so, was merchandise and if we want to know which part of the present value of it corresponds to its function as money, such assignment is achieved by going back in time and seeing how much the merchandise was worth at the immediate-previous precise moment before it was used like money, this is, like a merchandise exclusively. Because this is in line with what Menger said, that money was previously merchandise (requisite not necessary in my theory, since something can begin being money without having been merchandise before, which gives to it an entrance without corset to Hayek’s basket of goods). But that is not characteristic of money alone, but of any good that increases its value (price) in proportion to the properties that are discovered in it to satisfy other necessities. Then, face to the past, the person who may need to know how the total demand of a good is made of, in relation to the partial ones it is composed of, to study the market, it is his problem; and face to future, it is not necessary to make use of the “purchasing power” that it will have in the future when he gives it away, because that happens to any merchandise, since it is the function that the economic agent gives to it, that of acquiring it to sell it, which is no more than its “power of purchase” or “exchange power”. To sum up, such theorem as specific of money is not necessary, neither for the study of its past (previous value as merchandise), nor towards the future (purchasing power).

With my theory, there is no need for any regression theorem for the “most special” money and from it to be able to apply the theory of the subjective value.

Equilibrium Theory “of both worlds”: it is what made Keynes develop his theory: of the real and the currency world (that he called the money market where its price was determined – incorrectly related or treated as same to the concept of interest-) and to look for the balance of each world (market) in particular and of both, combined. It is obvious that he did not find it, but he “discovered” unemployment (for that reason he had to reject Say’s Law) as a “stretching variable” to obtain balance, which does not exist and is in vain to seek for (as it is the study of comparing natural or real interest rate with the currency interest rate, as if they were different entities, which can only derive of accepting the existence of two different worlds). This position I call it “the equilibrium solution”, as this was what it was being looked for.

It is fundamental to understand that it accepts the theory of the two worlds to equilibrate (real and “virtual”) any theory that accepts, or does not reject its foundations from the beginning (as the TER does) the following primitive terms (central aspect from which it will be understood why the Austrians post Menger share, explicitly and/or tacitly, theory with Keynes and Friedman): direct exchange different from indirect exchange (instead of focusing the study in cash exchange and credit); partial wealth equation (instead of that on total wealth, which avoids the mistaken study of concepts as saving, hoarding, speculation, precaution, etc., aliens to accounting); to define interest confusedly and alternatively as the price of money (and not the price of economic time), which when exchanged interpersonally is called credit, which price is the interest, which being economic time is subjected to the TER and it causes the relation interest-prices to be the same thing when credit is used as currency, as it is paper money and its “secondary” expansion because of the fiduciary media, as well as it avoids Wicksell’s idea of infinite interest rates, from where Keynes “infiltrates in” and so the inconsistent statement of the so called transmission mechanism money-price-interest; to accept or reject without suitable backing the underconsumption theory (because of the partial wealth equation and not total wealth’s); not being able to solve Patinkin’s prices dichotomy (for being unable to realize that it does not exist); not being able to understand why IS-LM curves and their derivatives cannot explain real events and for that reason they fell in disuse; to consider as problems in themselves and/or of money, subjects like Gresham’s Law, Say’s Law, Gibson’s Paradox, Garrison’s graphs, Phillips’ curves, endogenous/exogenous money, zero interest (incongruence of that category in the economic man, not even to mention the feasibility of it to be negative, what does exist is improper appropriation of wealth – directly with Paper Money and indirectly with Fiduciary Media-, national currency and central banks versus free banking and reserves 100%, without understanding that the essential is the study of the irregular credits); neutral money (homogeneity and proportionality of the currency “expansion”, of impossible application); to inadequately accept or reject the quantitative money theory – in its different versions -, without understanding the conceptual error of Friedman when he explains the causal relation between amount of currency and prices (based erroneously on treating as equals present and future wealth, this is, money and credit); employment-unemployment; inflation-deflation-devaluation; “Locke’s problem”; to expect that there would be no currency policy or to hope it to be “neutral” within irregular financial systems; to seek for the solution in free banking and the incorrect statement of Hayek’s basket of goods (instead of using a more reliable theory which may center the study in the regular versus irregular currency systems); etc.

It is evident that all this can be summarized saying that as long as we have a new currency theory (that presents currency theory at a higher level of generality than that of money, which competes with credit to satisfy the need of liquidity, and this last at the same time can be regular or irregular) we have to redefine all the macroeconomics which was supported by the previous currency theories (and this is the case because currency if and only if interpersonal exchange, and this one if and only if macroeconomy). In other words, all the macroeconomics of the 20th century, based on the currency theories of the 20th century, is redefined. In regard to the phases of the currency theory, I want to emphasize the ones I consider adequate (versus those of Hayek in which it is introduced all the development of the 20th century): first phase: Menger’s money theory, which reaches up to identifying money as currency, which I generalize saying that money “is the present economic good that is used as currency”; second phase: the one that places currency (means of exchange of common use) in a higher category to money, since it permits to incorporate credit as currency, which at the same time can be regular or irregular. This phase arises as a result of the introduction of the TER. At the same time, this phase, expounds with total clarity that every currency policy directly leads to improper appropriation of wealth (directly with PM and indirectly with FM), and it is the most tempting economic mechanism used as a means of power in detriment of freedom. The theories of “fair” distribution of wealth should center their focus in the damages that irregular financial systems generate, which destabilize the whole economic system, not only the relation consumption-investment via business expectations.


These simple conclusions become evident (these are not the only ones):

  • My theories are a continuation of those of Menger, since he arrived at the theory of money and from there I continue to develop the theory of currency, which his is part of. There is no doubt that these theories constitute the continuation of the Austrian School, which makes us remember the great Hayek, who finished his currency studies admitting that it did not exist, and that he could not elaborate a consistent currency theory. He could only say, “I believe that this is the way to it…”; but it is evident that the issue starts before the statements on free banking and the basket of goods, those practical solutions, which he suggests as a result of not being provided with solid theory (something that he admits from the very moment in which he displays these solutions).
  • The TER and the new currency theory “releases” us from all the “macroeconomic” scaffolding of the 20th century and it allows us to avoid discussions on problems that are only originated because of those theories. These daily examples go:
    1. Paradox of the interest: the term “paradox” arises from the intention to solve the problem of shortage generating greater shortage, and the term interest, because it is applied to this economic entity par excellence. In other words, it is the summary of the currency policies which are forced to raise interest rate to solve the currency problem (inflation). Because of all the theoretical arsenal that sustains the present economic policies is that we see titles in the news like the following: ‘Interest rate in dollars raises – The dollar is fortified’. But if the dollar is a credit, and if the one in debt has to raise the interest rate to sustain his credit, it is evident that he is less reliable, that “strength” has diminished. It is evident that in my theory this is not a paradox.
    2. Saving, hoarding, speculation and others: these are key tools to justify intervention of the State, since their variations alter price levels, etc. Because it is impossible to try to develop theories with the intention of freeing markets from the State intervention, as long as it is not understood in greater depth how reality operates, which means to understand that the currency theory resides in understanding the essence, causes and effects of irregular credits, especially when they acquire the form of currency by the monopoly of the State.

All these economic categories that are used to justify State intervention, are originated (among other things) in the ignorance of the TER and in accepting the partial wealth equation in which they are sustained, and the currency policies intended to “avoid” market “illnesses” (“denounced” by such incomplete equation), they are the tools developed in the 20th century to correct the problems derived from that underlying theory. Because by the use of the equation of total wealth, I find it very simple and clear to demonstrate that it does not exist such thing as “two worlds to equilibrate”, at the same time that the same concept allows us to tear down all that inadequate scaffolding, in the same popular language – which has to be recognized as due to the greater and more “picturesque” diffusion of Keynesianism – that are shown to us by graphs and equations which take us to the nonexistent axiom S=I, IS/LM curves, Samuelson’s 45º curve, etc. To sum up, if the present economic goods of any exchange are contributed by their proprietors, it is evident that the only reason to be of the irregular financial systems (PM and FM) is manipulation, by those who have power, of the economic time of their subjects, where manipulation is appropriation of wealth (direct and/or indirect). Because of all this, the note at the beginning of chapter IX in “Theory of economic relativity…” says: “irregular credits are an infiltrated totalitarian tool in democracy” , supported by the politics-banking power combined, which turns it impossible to make real the idea that the central and “private” banks can be independent of the political issues, situation that is not solved with the idea of free banking, but unless we go way deeper until reaching the irregular credits layer. After this, then, the news title which says “the financial system expanded credits in a 19% compared to…” is inadmissible since the real thing is the inverse: “the credit made available of the financial system was expanded a 19%, compared to…” .

To sum up, any irregular financial system, equivalent to which is known as currency policy, implies improper appropriation of wealth. The theory to understand reality is not longer neither more complicated than that.

I finish then this summary by saying that all the effort of the Austrian School after Menger was an attempt to “return” to Menger (as an example see the regression theorem) from the currency and macroeconomic theory of the 20th century which, deviated from him, his disciples adopted without being aware of.

Then the theories that I present, are the continuation of the currency theory initiated by Menger, and at the same time they demonstrate that the idea is not “return” to Menger, but to start off from him.
Rosario, September 2006


Translator Note: The distinction between money and currency is essential in this work. The author places the term “currency” as a more general categorization than that implied in “money” . Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular.

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