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CHAPTER 23: The Return to Sound Money - Ludwig von Mises, The Theory of Money and Credit 
The Theory of Money and Credit, trans. H.E. Batson (Indianapolis: Liberty Fund, 1981).
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The Return to Sound Money
Monetary Policy and the Present Trend Toward All-round Planning
The people of all countries agree that the present state of monetary affairs is unsatisfactory and that a change is highly desirable. However, ideas about the kind of reform needed and about the goal to be aimed at differ widely. There is some confused talk about stability and about a standard which is neither inflationary nor deflationary. The vagueness of the terms employed obscures the fact that people are still committed to the spurious and self-contradictory doctrines whose very application has created the present monetary chaos.
The destruction of the monetary order was the result of deliberate actions on the part of various governments. The government-controlled central banks and, in the United States, the government-controlled Federal Reserve System were the instruments applied in this process of disorganization and demolition. Yet without exception all drafts for an improvement of currency systems assign to the governments unrestricted supremacy in matters of currency and design fantastic images of superprivileged superbanks. Even the manifest futility of the International Monetary Fund does not deter authors from indulging in dreams about a world bank fertilizing mankind with floods of cheap credit.
The inanity of all these plans is not accidental. It is the logical outcome of the social philosophy of their authors.
Money is the commonly used medium of exchange. It is a market phenomenon. Its sphere is that of business transacted by individuals or groups of individuals within a society based on private ownership of the means of production and the division of labor. This mode of economic organization—the market economy or capitalism—is at present unanimously condemned by governments and political parties. Educational institutions, from universities down to kindergartens, the press, the radio, the legitimate theater as well as the screen, and publishing firms are almost completely dominated by people in whose opinion capitalism appears as the most ghastly of all evils. The goal of their policies is to substitute “planning” for the alleged planlessness of the market economy. The term planning as they use it means, of course, central planning by the authorities, enforced by the police power. It implies the nullification of each citizen’s right to plan his own life. It converts the individual citizens into mere pawns in the schemes of the planning board, whether it is called Politburo, Reichswirtschaftsministerium, or some other name. Planning does not differ from the social system that Marx advocated under the names of socialism and communism. It transfers control of all production activities to the government and thus eliminates the market altogether. Where there is no market, there is no money either.
Although the present trend of economic policies leads toward socialism, the United States and some other countries have still preserved the characteristic features of the market economy. Up to now the champions of government control of business have not yet succeeded in attaining their ultimate goal.
The Fair Deal party has maintained that it is the duty of the government to determine what prices, wage rates, and profits are fair and what not, and then to enforce its rulings by the police power and the courts. It further maintains that it is a function of the government to keep the rate of interest at a fair level by means of credit expansion. Finally, it urges a system of taxation that aims at the equalization of incomes and wealth. Full application of either the first or the last of these principles would by itself consummate the establishment of socialism. But things have not yet moved so far in this country. The resistance of the advocates of economic freedom has not yet been broken entirely. There is still an opposition that has prevented the permanent establishment of direct control of all prices and wages and the total confiscation of all incomes above a height deemed fair by those whose income is lower. In the countries on this side of the Iron Curtain the battle between the friends and the foes of totalitarian all-round planning is still undecided.
In this great conflict the advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters. The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext to establish price control and thus step by step to realize their scheme of all-round planning. The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favorable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and “expansionist” monetary and credit management as the surest way toward prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation. While advocating high prices and wage rates as a panacea and praising the administration for having raised the “national income” (of course, expressed in terms of a depreciating currency) to an unprecedented height, they blamed private enterprise for charging outrageous prices and profiteering. While deliberately restricting the output of agricultural products in order to raise prices, statesmen have had the audacity to contend that capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of everything. And millions of voters have swallowed all this.
There is need to realize that the economic policies of self-styled progressives cannot do without inflation. They cannot and never will accept a policy of sound money. They can abandon neither their policies of deficit spending nor the help their anticapitalist propaganda receives from the inevitable consequences of inflation. It is true they talk about the necessity of doing away with inflation. But what they mean is not to end the policy of increasing the quantity of money in circulation but to establish price control, that is, futile schemes to escape the emergency arising inevitably from their policies.
Monetary reconstruction, including the abandonment of inflation and the return to sound money, is not merely a problem of financial technique that can be solved without change in the structure of general economic policies. There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom. Bent on disintegrating the market economy, the ruling parties will certainly not consent to reforms that would deprive them of their most formidable weapon, inflation. Monetary reconstruction presupposes first of all total and unconditional rejection of those allegedly progressive policies which in the United States are designated by the slogans New Deal and Fair Deal.
The Integral Gold Standard
Sound money still means today what it meant in the nineteenth century: the gold standard.
The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit’s purchasing power independent of the measures of governments. It wrests from the hands of the “economic tsars” their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse.
What is needed first of all is to force the rulers to spend only what, by virtue of duly promulgated laws, they have collected as taxes. Whether governments should borrow from the public at all and, if so, to what extent are questions that are irrelevant to the treatment of monetary problems. The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully—that is, 100 percent—covered by deposits paid in by the public. No backdoor must be left open where inflation can slip in. No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.
One of the goals of the reform suggested is to explode and to kill forever the superstitious belief that governments and banks have the power to make the nation or individual citizens richer, out of nothing and without making anybody poorer. The shortsighted observer sees only the things the government has accomplished by spending the newly created money. He does not see the things the nonperformance of which provided the means for the government’s success. He fails to realize that inflation does not create additional goods but merely shifts wealth and income from some groups of people to others. He neglects, moreover, to take notice of the secondary effects of inflation: malinvestment and decumulation of capital.
Notwithstanding the passionate propaganda of the inflationists of all shades, the number of people who comprehend the necessity of entirely stopping inflation for the benefit of the public treasury is increasing. Keynesianism is losing face even at the universities. A few years ago governments proudly boasted of the “unorthodox” methods of deficit spending, pump-priming, and raising the “national income.” They have not discarded these methods but they no longer brag about them. They even occasionally admit that it would not be such a bad thing to have balanced budgets and mon etary stability. The political chances for a return to sound money are still slim, but they are certainly better than they have been in any other period since 1914.
Yet most of the supporters of sound money do not want to go beyond the elimination of inflation for fiscal purposes. They want to prevent any kind of government borrowing from banks issuing banknotes or crediting the borrower on an account subject to check. But they do not want to prevent in the same way credit expansion for the sake of lending to business. The reform they have in mind is by and large bringing back the state of affairs prevailing before the inflations of World War I. Their idea of sound money is that of the nineteenth-century economists with all the errors of the British Banking School that disfigured it. They still cling to the schemes whose application brought about the collapse of the European banking systems and currencies and discredited the market economy by generating the almost regular recurrence of periods of economic depression.
There is no need to add anything to the treatment of these problems as provided in part three of this volume and also in my book Human Action. If one wants to avoid the recurrence of economic crises, one must avoid the expansion of credit that creates the boom and inevitably leads into the slump.
Even if for the sake of argument we neglect to refer to these issues, one must realize that conditions are no longer such as the nineteenth-century champions of bank-credit expansion had in mind.
These statesmen and authors regarded the government’s financial needs as the main and practically the only threat to the privileged bank’s or banks’ solvency. Ample historical experience had proved that the government could and did force the banks to lend to them. Suspension of the banknotes’ convertibility and legal-tender provisions had transformed the “hard” currencies of many countries into questionable paper money. The logical conclusion to be drawn from these facts would have been to do away with privileged banks altogether and to subject all banks to the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word. Free banking would have spared the world many crises and catastrophes. But the tragic error of nineteenth-century bank doctrine was the belief that lowering the rate of interest below the height it would have on an unhampered market is a blessing for a nation and that credit expansion is the right means for the attainment of this end. Thus arose the characteristic duplicity of the bank policy. The central bank or banks must not lend to the government but should be free, within certain limits, to expand credit to business. The idea was that in this way one could make the central banking function independent of the government.
Such an arrangement presupposes that government and business are two distinct realms of the conduct of affairs. The government levies taxes but it does not interfere with the way the various enterprises operate. If the government meddles with central-bank affairs, its objective is to borrow for the treasury and not to induce the banks to lend more to business. In making bank loans to the government illegal, the bank’s management is enabled to gauge its credit transactions in accordance with the needs of business only.
Whatever the merits or demerits of this point of view may have been in older days,10 it is obvious that it is no longer of any consequence. The main inflationary motive of our day is the so-called full-employment policy, not the treasury’s incapacity to fill its empty vaults from sources other than bank loans. Monetary policy is regarded—wrongly, of course—as an instrument for keeping wage rates above the height they would have reached on an unhampered labor market. Credit expansion is subservient to the unions. If a hundred or seventy years ago the government of a Western nation had ventured to extort a loan from the central bank, the public would unanimously have sided with the bank and thwarted the plot. But for many years there has been little opposition to credit expansion for the sake of “creating jobs,” that is, for providing business with the money needed for the payment of the wage rates which the unions, strongly aided by the government, force business to grant. Nobody took notice of warning voices when England in 1931 and the United States in 1933 entered upon the policy for which Lord Keynes, a few years later in his General Theory, tried to concoct a justification, and when in 1936 Blum, in imposing upon the French employers the so-called Matignon agreements, ordered the Bank of France to lend freely the sums business needed for complying with the dictates of the unions.
Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends. The main concern of capitalist private enterprise is to remove this scarcity as much as possible and to provide a continuously improving standard of living for an increasing population. The historian cannot help noting that laissez-faire and rugged individualism have to an unprecedented extent succeeded in their endeavors to supply the common man more and more amply with food, shelter, and many other amenities. But however remarkable these improvements may be, there will always be a strict limit to the amount that can be consumed without reducing the capital available for the continuation and, even more, the expansion of production.
In older ages social reformers believed that all that was needed to improve the material conditions of the poorer strata of society was to confiscate the surplus of the rich and to distribute it among those having less. The falsehood of this formula, despite the fact that it is still the ideological principle guiding present-day taxation, is no longer contested by any reasonable man. One may neglect stressing the point that such a distribution can add only a negligible amount to the income of the immense majority. The main thing is that the total amount produced in a nation or in the whole world over a definite period of time is not a magnitude independent of the mode of society’s economic organization. The threat of being deprived by confiscation of a considerable or even the greater part of the yield of one’s own activities slackens the individual’s pursuit of wealth and thus results in a diminution of the national product. The Marxian socialists once indulged in reveries concerning a fabulous increase in riches to be expected from the socialist mode of production. The truth is that every infringement of property rights and every restriction of free enterprise impairs the productivity of labor. One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties.
Currency Reform in Ruritania
When compared with conditions in the United States or in Switzerland, Ruritania appears a poor country. The average income of a Ruritanian is below the average income of an American or a Swiss.
Once, in the past, Ruritania was on the gold standard. But the government issued little sheets of printed paper to which it assigned legal-tender power in the ratio of one paper rur to one gold rur. All residents of Ruritania were made to accept any amount of paper rurs as the equivalent of the same nominal amount of gold rurs. The government alone did not comply with the rule it had decreed. It did not convert paper rurs into gold rurs in accordance with the ratio 1 : 1. As it went on increasing the quantity of paper rurs, the effects resulted which Gresham’s law describes. The gold rurs disappeared from the market. They were either hoarded by Ruritanians or sold abroad.
Almost all the nations of the earth have behaved in the way the Ruritanian government did. But the rates of the inflationary increase of the quantities of their national fiat money have been different. Some nations were more moderate in issuing additional quantities, some less. The result is that the exchange ratios between the various nations’ local fiat-money currencies are no longer the same ratios that prevailed between their currencies in the period before they went off the gold standard. In those old days five gold rurs were equal to one gold dollar. Although today’s dollar is no longer the equivalent of the weight of gold it represented under the gold standard, that is, before 1933, 100 paper rurs are needed to buy one of these depreciated dollars. A short time ago eighty paper rurs could buy one dollar. If the present rates of inflation both in the United States and in Ruritania do not change, the paper rur will drop more and more in terms of dollars.
The Ruritanian government knows very well that all it has to do in order to prevent a further depreciation of the paper rur as against the dollar is to slow down the deficit spending it finances by continued inflation. In fact, in order to maintain a stable exchange rate against the dollar, it would not be forced to abandon inflation altogether. It would only have to reduce it to a rate in due proportion to the extent of American inflation. But, government officials say, it is impossible for Ruritania, being a poor country, to balance its budget with a smaller amount of inflation than the present one. For such a reduction would enjoin upon it the necessity of undoing some of the results of social progress and of relapsing into the conditions of “social backwardness” of the United States. The government has nationalized railroads, telegraphs, and telephones and operates various plants, mines, and branches of industry as national enterprises. Every year the conduct of affairs of almost all the public undertakings produces a deficit that must be covered by taxes collected from the shrinking group of nonnationalized and nonmunicipalized businesses. Private business is a source of the treasury’s revenue. Nationalized industry is a drain upon the government’s funds. But these funds would be insufficient in Ruritania if not swelled by more and more inflation.
From the point of view of monetary technique the stabilization of a national currency’s exchange ratio as against foreign, less-inflated currencies or against gold is a simple matter. The preliminary step is to abstain from any further increase in the quantity of domestic currency. This will at the outset stop the further rise in foreign-exchange rates and the price of gold. After some oscillations a somewhat stable exchange rate will appear, the height of which depends on the purchasing-power parity. At this rate it no longer makes any difference whether one buys or sells against currency A or currency B.
But this stability cannot last indefinitely. While an increase in the production of gold or an increase in the issuance of dollars continues abroad, Ruritania now has a currency the quantity of which is rigidly limited. Under these conditions there can no longer prevail full correspondence between the movements of commodity prices on the Ruritanian markets and those on foreign markets. If prices in terms of gold or dollars are rising, those in terms of rurs will lag behind them or even drop. This means that the purchasing-power parity is changing. A tendency will emerge toward an enhancement of the price of the rur as expressed in gold or dollars. When this trend becomes manifest, the propitious moment for the completion of the monetary reform has arrived. The exchange rate that prevails on the market at this juncture is to be promulgated as the new legal parity between the rur and either gold or the dollar. Unconditional convertibility at this legal rate of every paper rur against gold or dollars and vice versa is henceforward to be the fundamental principle.
The reform thus consists of two measures. The first is to end inflation by setting an insurmountable barrier to any further increase in the supply of domestic money. The second is to prevent the relative deflation that the first measure will, after a certain time, bring about in terms of other currencies the supply of which is not rigidly limited in the same way. As soon as the second step has been taken, any amount of rurs can be converted into gold or dollars without any delay and any amount of gold or dollars into rurs. The agency, whatever its appellation may be, that the reform law entrusts with the performance of these exchange operations needs for technical reasons a certain small reserve of gold or dollars. But its main concern is, at least in the initial stage of its functioning, how to provide the rurs necessary for the exchange of gold or foreign currency against rurs. To enable the agency to perform this task, it has to be entitled to issue additional rurs against a full—100 percent—coverage by gold or foreign exchange bought from the public.
It is politically expedient not to charge this agency with any responsibilities and duties other than those of buying and selling gold or foreign exchange according to the legal parity. Its task is to make this legal parity an effective real market rate, preventing, by unconditional redemption of rurs, a drop of their market price against legal parity, and, by unconditional buying of gold or foreign exchange, an enhancement of the price of rurs as against legal parity.
At the very start of its operations the agency needs, as has been mentioned, a certain reserve of gold or foreign exchange. This reserve has to be lent to it either by the government or by the central bank, free of interest and never to be recalled. No business other than this preliminary loan must be negotiated between the govern ment and any bank or institution dependent on the government on the one hand and the agency on the other hand.11 The total amount of rurs issued before the start of the new monetary regime must not be increased by any operations on the part of the government; only the agency is free to issue additional new rurs, rigidly complying in such issuance with the rule that each of these new rurs must be fully covered by gold or foreign exchange paid in by the public in exchange for them.
The government’s mint may go on to coin and to issue as many fractional or subsidiary coins as seem to be needed by the public. In order to prevent the government from misusing its monopoly of mintage for inflationary ventures and flooding the market, under the pretext of catering to peoples’ demand for “change,” with huge quantities of such tokens, two provisions are imperative. To these fractional coins only a strictly limited legal-tender power should be given for payments to any payee but the government. Against the government alone they should have unlimited legal-tender power, and the government, moreover, must be obliged to redeem in rurs, without any delay and without any cost to the bearer, any amount presented, either by any private individual, firm, or corporation or by the agency. Unlimited legal-tender power must be reserved to the various denominations of banknotes of one rur and upward, issued either before the reform or, if after the reform, against full coverage in gold or foreign exchange.
Apart from this exchange of fractional coins against legal-tender rurs the agency deals exclusively with the public and not with the government or any of the institutions dependent on it, especially not with the central bank. The agency serves the public and deals exclusively with that part of the public that wants to avail itself, of its own free accord, of the agency’s services. But no privileges are accorded to the agency. It does not get a monopoly for dealing in gold or foreign exchange. The market is perfectly free from any restriction. Everybody is free to buy or sell gold or foreign exchange. There is no centralization of such transactions. Nobody is forced to sell gold or foreign exchange to the agency or to buy gold or foreign exchange from it.
When these measures are once achieved, Ruritania is either on the gold-exchange standard or on the dollar-exchange standard. It has stabilized its currency as against gold or the dollar. This is enough for the beginning. There is no need for the moment to go further. No longer threatened by a breakdown of its currency, the nation can calmly wait to see how monetary affairs in other countries will develop.
The reform suggested would deprive the government of Ruritania of the power to spend any rur above the sums collected by taxing the citizens or by borrowing from the public, whether domestic or foreign. Once this is achieved, the specter of an unfavorable balance of payment fades away. If Ruritanians want to buy foreign products, they must export domestic products. If they do not export, they cannot import.
But, says the inflationist, what about the flight of capital? Will not unpatriotic citizens of Ruritania and foreigners who have invested capital within the country try to transfer their capital to other countries offering better prospects for business?
John Badman, a Ruritanian, and Paul Yank, an American, have invested in Ruritania in the past. Badman owns a mine, Yank a factory. Now they realize that their investments are unsafe. The Ruritanian government is committed to a policy that confiscates not only all the yields of their investments but step by step the substance too. Badman and Yank want to salvage what still can be salvaged; they want to sell against rurs and to transfer the proceeds by buying dollars and exporting them. But their problem is to find a buyer. If all those who have the funds needed for such a purchase think like them, it will be absolutely impossible to sell even at the lowest price. Badman and Yank have missed the right moment. Now it is too late.
But perhaps there are buyers. Bill Sucker, an American, and Peter Simple, a Ruritanian, believe that the prospects of the investments concerned are more propitious than Badman and Yank assume. Sucker has dollars ready; he buys rurs and against these rurs Yank’s factory. Yank buys the dollars Sucker has sold to the agency. Simple has saved rurs and invests his savings in purchasing Badman’s mine. It would have been possible for him to employ his savings in a different way, to buy producers’ or consumers’ goods in Ruritania. The fact that he does not buy these goods brings about a drop in their prices or prevents a rise which would have occurred if he had bought them. It disarranges the price structure on the domestic market in such a way as to make exports possible that could not be effected before or to prevent imports which were effected before. Thus it produces the amount of dollars which Badman buys and sends abroad.
A specter that worries many advocates of foreign-exchange control is the assumption that the Ruritanians engaged in export trade could leave the foreign-exchange proceeds of their business abroad and thus deprive their country of a part of its foreign exchange.
Miller is such an exporter He buys commodity A in Ruritania and sells it abroad. Now he chooses to go out of business and to transfer all his assets to a foreign country. But this does not stop Ruritania’s exporting A. As according to our assumption there can be profits earned by buying A in Ruritania and selling it abroad, the trade will go on. If no Ruritanian has the funds needed for engaging in it, foreigners will fill the gap. For there are always people in markets not entirely destroyed by government sabotage who are eager to take advantage of any opportunity to earn profits.
Let us emphasize this point again: If people want to consume what other people have produced, they must pay for it by giving the sellers something they themselves have produced or by rendering them some services. This is true in the relation between the people of the state of New York and those of Iowa no less than in the relation between the people of Ruritania and those of Laputania. The balance of payments always balances. For if the Ruritanians (or New Yorkers) do not pay, the Laputanians (or Iowans) will not sell.
The United States’ Return to a Sound Currency
With Washington politicians and Wall Street pundits the problem of a return to the gold standard is taboo. Only imbecile or ignorant people, say the professorial and journalistic apologists of inflation, can nurture such an absurd idea.
These gentlemen would be perfectly right if they were merely to assert that the gold standard is incompatible with the methods of deficit spending. One of the main aims of a return to gold is precisely to do away with this system of waste, corruption, and arbitrary government. But they are mistaken if they would have us believe that the reestablishment and preservation of the gold standard is Economically and technically impossible.
The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance. No bank must be permitted to expand the total amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash deposits in legal-tender banknotes from the public or by receiving a check payable by another domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day of the reform.
At the same time all restrictions on trading and holding gold must be repealed. The free market for gold is to be reestablished. Everybody, whether a resident of the United States or of any foreign country, will be free to buy and to sell, to lend and to borrow, to import and to export, and, of course, to hold any amount of gold, whether minted or not minted, in any part of the nation’s territory as well as in foreign countries.
It is to be expected that this freedom of the gold market will result in the inflow of a considerable quantity of gold from abroad. Private citizens will probably invest a part of their cash holdings in gold. In some foreign countries the sellers of this gold exported to the United States may hoard the dollar bills received and leave the balances with American banks untouched. But many or most of these sellers of gold will probably buy American products.
In this first period of the reform it is imperative that the American government and all institutions dependent upon it, including the Federal Reserve System, keep entirely out of the gold market. A free gold market could not come into existence if the administration were to try to manipulate the price by underselling. The new monetary regime must be protected against malicious acts by officials of the Treasury and the Federal Reserve System. There cannot be any doubt that officialdom will be eager to sabotage a reform whose main purpose is to curb the power of the bureaucracy in monetary matters.
The unconditional prohibition of the further issuance of any piece of paper to which legal-tender power is granted refers also to the issuance of the type of bills called silver certificates. The constitutional prerogative of Congress to decree that the United States is bound to buy definite quantities of a definite commodity, whether silver or potatoes or something else, at a definite price exceeding the market price and to store or to dump the quantities purchased must not be infringed. But such purchases are henceforth to be paid out of funds collected by taxing the people or by borrowing from the public.
It is probable that the price of gold established after some oscillations on the American market will be higher than $35 per ounce, the rate of the Gold Reserve Act of 1934. It may be somewhere between $36 and $38, perhaps even somewhat higher. Once the market price has attained some stability, the time will have come to decree this market rate as the new legal parity of the dollar and to secure its unconditional convertibility at this parity.
A new agency is to be established, the Conversion Agency. The United States government lends to it a certain amount, let us say one billion dollars, in gold bullion (computed at the new parity), free of interest and never to be recalled. The Conversion Agency has two functions only: First, to sell gold bullion at the parity price to the public against dollars without any restriction. After a short time, when the mint will have coined a sufficient quantity of new American gold coins, the Conversion Agency will be obliged to hand out such gold pieces against paper dollars and checks drawn upon a solvent American bank. Second, to buy, against dollar bills at the legal parity, any amount of gold offered to it. To enable the Conversion Agency to execute this second task it is to be entitled to issue dollar bills against a 100 percent reserve in gold.
The Treasury is bound to sell gold—bullion or new American coins—to the Conversion Agency at legal parity against any kind of American legal-tender bills issued before the start of the reform, against American token coins, or against checks drawn upon a member bank. To the extent that such sales reduce the government’s gold holdings, the total amount of all varieties of legal-tender paper sheets, issued before the start of the reform, and of member-bank deposits subject to check is to be reduced. How this reduction is to be distributed among the various classes of these types of currency can be left, apart from the problem of the banknotes of small denominations, to be dealt with later,12 to the discretion of the Treasury and the Federal Reserve Board.
It is essential for the reform suggested that the Federal Reserve System should be kept out of its way. Whatever one may think about the merits or demerits of the Federal Reserve legislation of 1913, the fact remains that the system has been abused by the most reckless inflationary policy. No institution and no man connected in any way with the blunders and sins of the past decades must be permitted to influence future monetary conditions.
The Federal Reserve System is saddled with an awkward problem, namely, the huge amount of government bonds held by the member banks. Whatever solution may be adopted for this question, it must not affect the purchasing power of the dollar Government finance and the nation’s medium of exchange have in the future to be two entirely separate things.
The banknotes issued by the Federal Reserve System as well as the silver certificates may remain in circulation. Unconditional convertibility and the strict prohibition of any further increase of their amount will have radically changed their catallactic character It is this alone that counts.
However, a very important change concerning the denomination of these notes is indispensable. What the United States needs is not the gold-exchange standard but the classical old gold standard, decried by the inflationists as orthodox. Gold must be in the cash holdings of everybody. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.
This state of affairs can be easily achieved by withdrawing all bills of the denominations of five, ten, and perhaps also twenty dollars from circulation. There will be under the suggested new monetary regime two classes of legal-tender paper bills: the old stock and the new stock. The old stock consists of all those paper sheets that at the start of the reform were in circulation as legal-tender paper, without regard to their appellation and legal quality other than legal-tender power. It is strictly forbidden to increase this stock by the further issuance of any additional notes of this class. On the other hand, it will decrease to the extent that the Treasury and the Federal Reserve Board decree that the reduction in the total amount of legal-tender notes of this old stock plus bank deposits subject to check, existing at the start of the reform, has to be effected by the final withdrawal and destruction of definite quantities of such old-stock legal-tender notes. Moreover, the Treasury is bound to withdraw from circulation, against the new gold coins, and to destroy, within a period of one year after the promulgation of the new legal gold parity of the dollar, all notes of five, ten, and perhaps also twenty dollars.
It does not require any special mention that the new-stock legal-tender notes to be issued by the Conversion Agency must be issued only in denominations of one dollar or fifty dollars and upward.
Old British banking doctrine banned small banknotes (in their opinion, notes smaller than £5) because it wanted to protect the poorer strata of the population, supposed to be less familiar with the conditions of the banking business and therefore more liable to be cheated by wicked bankers. Today the main concern is to protect the nation against a repetition of the inflationary practices of governments. The gold-exchange standard, whatever argument may be advanced in its favor, is vitiated by an incurable defect. It offers to governments an easy opportunity to embark upon inflation unbeknown to the nation. With the exception of a few specialists, nobody becomes aware in time of the fact that a radical change in monetary matters has occurred. Laymen, that is 9,999 out of 10,000 citizens, do not realize that it is not commodities that are becoming dearer but their tender that is becoming cheaper.
What is needed is to alarm the masses in time. The workingman in cashing his paycheck should learn that some foul trick has been played upon him. The President, Congress, and the Supreme Court have clearly proved their inability or unwillingness to protect the common man, the voter, from being victimized by inflationary machinations. The function of securing a sound currency must pass into new hands, into those of the whole nation. As soon as Gres ham’s law begins to come into play and bad paper drives good gold out of the pockets of the common man, there should be a stir. Perpetual vigilance on the part of the citizens can achieve what a thousand laws and dozens of alphabetical bureaus with hordes of employees never have and never will achieve: the preservation of a sound currency.
The classical or orthodox gold standard alone is a truly effective check on the power of the government to inflate the currency. Without such a check all other constitutional safeguards can be rendered vain.
The Controversy Concerning the Choice of the New Gold Parity
Some advocates of a return to the gold standard disagree on an important point with the scheme designed in the preceding section. In the opinion of these dissenters there is no reason to deviate from the gold price of $35 per ounce as decreed in 1934. This rate, they assert, is the legal parity, and it would be iniquitous to devalue the dollar in relation to it.
The controversy between the two groups, those advocating the return to gold at the previous parity (whom we may call the restorers) and those recommending the adoption of a new parity consonant with the present market value of the currency that is to be put upon a gold basis (we may call them the stabilizers), is not new. It has flared up whenever a currency depreciated by inflation has had to be returned to a sound basis.
The restorers look upon money primarily as the standard of deferred payments. A consistent restorer would have to argue in this way: People have in the past, that is, before 1933, made contracts in virtue of which they promised to pay a definite amount of dollars which at that time meant standard dollars, containing 25.8 grains of gold, nine-tenths fine. It would be manifestly unfair to the creditors to give the debtors the right to fulfill such contracts by the payment of the same nominal number of dollars containing a smaller weight of gold.
However, the reasoning of such consistent restorers would be correct only if all existing claims to deferred payments had been contracted before 1933 and if the present creditors of such contracts were the same people (or their heirs) who had originally made the contracts. Both these assumptions are contrary to fact. Most of the pre-1933 contracts have already been settled in the two decades that have elapsed. There are, of course, also government bonds, corporate bonds, and mortgages of pre-1933 origin. But in many or even in most cases these claims are no longer held by the same people who held them before 1933. Why should a man who in 1951 bought a corporate bond issued in 1928 be indemnified for losses which not he himself but one of the preceding owners of this bond suffered? And why should a municipality or a corporation that borrowed depreciated dollars in 1945 be liable to pay back dollars of greater gold weight and purchasing power?
In fact there are in present-day America hardly any consistent restorers who would recommend a return to the old pre-Roosevelt dollar. There are only inconsistent restorers who advocate a return to the Roosevelt dollar of 1934, the dollar of 15 5/21 grains of gold, nine-tenths fine. But this gold content of the dollar, fixed by the President in virtue of the Gold Reserve Act of January 30, 1934, was never a legal parity. It was, as far as the domestic affairs of the United States are concerned, merely of academic value. It was without any legal-tender validity. Legal tender under the Roosevelt legislation was only various sheets of printed paper. These sheets of paper could not be converted into gold. There was no longer any gold parity of the dollar. To hold gold was a criminal offense for the residents of the United States. The Roosevelt gold price of $35 per ounce (instead of the old price of $20.67 per ounce) had validity only for the government’s purchases of gold and for certain transactions between the American Federal Reserve and foreign governments and central banks. Those juridical considerations that the consistent restorers could possibly advance in favor of a return to the pre-Roosevelt dollar parity are of no avail when advanced in favor of the rate of 1934 that was not a parity.
It is paradoxical indeed that the inconsistent restorers try to justify their proposal by referring to honesty. For the role the gold content of the dollar they want to restore played in American monetary history was certainly not honest in the sense in which they employ this term. It was a makeshift in a scheme which these very restorers themselves condemn as dishonest.
However, the main deficiency of any form of the restorers’ arguments, whether they consistently advocate the McKinley dollar or inconsistently the Roosevelt dollar, is to be seen in the fact that they look upon money exclusively from the point of view of its function as the standard of deferred payments. As they see it, the main fault or even the only fault of an inflationary policy is that it favors the debtors at the expense of the creditors. They neglect the other more general and more serious effects of inflation.
Inflation does not affect the prices of the various commodities and services at the same time and to the same extent. Some prices rise sooner, some lag behind. While inflation takes its course and has not yet exhausted all its price-affecting potentialities, there are in the nation winners and losers. Winners—popularly called profiteers if they are entrepreneurs—are people who are in the fortunate position of selling commodities and services the prices of which are already adjusted to the changed relation of the supply of and the demand for money while the prices of commodities and services they are buying still correspond to a previous state of this relation. Losers are those who are forced to pay the new higher prices for the things they buy while the things they are selling have not yet risen at all or not sufficiently. The serious social conflicts which inflation kindles, all the grievances of consumers, wage earners, and salaried people it originates, are caused by the fact that its effects appear neither synchronously nor to the same extent. If an increase in the quantity of money in circulation were to produce at one blow proportionally the same rise in the prices of every kind of commodities and services, changes in the monetary unit’s purchasing power would, apart from affecting deferred payments, be of no social consequence; they would neither benefit nor hurt anybody and would not arouse political unrest. But such an evenness in the effects of inflation—or, for that matter, of deflation—can never happen.
The great Roosevelt-Truman inflation has, apart from depriving all creditors of a considerable part of principal and interest, gravely hurt the material concerns of a great number of Americans. But one cannot repair the evil done by bringing about a deflation. Those favored by the uneven course of the deflation will only in rare cases be the same people who were hurt by the uneven course of the inflation. Those losing on account of the uneven course of the deflation will only in rare cases be the same people whom the inflation has benefited. The effects of a deflation produced by the choice of the new gold parity at $35 per ounce would not heal the wounds inflicted by the inflation of the two last decades. They would merely open new sores.
Today people complain about inflation. If the schemes of the restorers are executed, they will complain about deflation. As for psychological reasons, the effects of deflation are much more unpopular than those of inflation; a powerful proinflation movement would spring up under the disguise of an antideflation program and would seriously jeopardize all attempts to reestablish a sound-money policy.
Those questioning the conclusiveness of these statements should study the monetary history of the United States. There they will find ample corroborating material. Still more instructive is the monetary history of Great Britain.
When, after the Napoleonic wars, the United Kingdom had to face the problem of reforming its currency it chose the return to the prewar gold parity of the pound and gave no thought to the idea of stabilizing the exchange ratio between the paper pound and gold as it had developed on the market under the impact of the inflation. It preferred deflation to stabilization and to the adoption of a new parity consonant with the state of the market. Calamitous economic hardships resulted from this deflation; they stirred social unrest and begot the rise of an inflationist movement as well as the anticapitalistic agitation from which after a while Engels and Marx drew their inspiration.
After the end of World War I England repeated the error committed after Waterloo. It did not stabilize the actual gold value of the pound. It returned in 1925 to the old prewar and preinflation parity of the pound. As the labor unions would not tolerate an adjustment of wage rates to the increased gold value and purchasing power of the pound, a crisis of British foreign trade resulted. The government and the journalists, both terrorized by the union leaders, timidly refrained from making any allusion to the height of wage rates and the disastrous effects of the union tactics. They blamed a mysterious overvaluation of the pound for the decline in British exports and the resulting spread of unemployment. They knew only one remedy, inflation. In 1931 the British government adopted it.
There cannot be any doubt that British inflationism got its strength from the conditions that had developed out of the deflationary currency reform of 1925. It is true that but for the stubborn policy of the unions the effects of the deflation would have been absorbed long before 1931. Yet the fact remains that in the opinion of the masses, conditions gave an apparent justification to the Keynesian fallacies. There is a close connection between the 1925 reform and the popularity that inflationism enjoyed in Great Britain in the thirties and forties.
The inconsistent restorers advance in favor of their plans the fact that the deflation they would bring about would be small, since the difference between a gold price of $35 and a gold price of $37 or $38 is rather slight. Now whether this difference is to be regarded as slight or not is a matter of an arbitrary judgment. Let us for the sake of argument accept its qualification as slight. It is certainly true that a smaller deflation has less undesirable effects than a bigger one. But this truism is no valid argument in favor of a deflationary policy the inexpediency of which is undeniable.
The present unsatisfactory state of monetary affairs is an outcome of the social ideology to which our contemporaries are committed and of the economic policies which this ideology begets. People lament over inflation, but they enthusiastically support policies that could not go on without inflation. While they grumble about the inevitable consequences of inflation, they stubbornly oppose any attempt to stop or to restrict deficit spending.
The suggested reform of the currency system and the return to sound monetary conditions presuppose a radical change in economic philosophies. There cannot be any question of the gold standard as long as waste, capital decumulation, and corruption are the foremost characteristics of the conduct of public affairs.
Cynics dispose of the advocacy of a restitution of the gold standard by calling it utopian. Yet we have only the choice between two utopias: the utopia of a market economy, not paralyzed by government sabotage on the one hand, and the utopia of totalitarian all-round planning on the other hand. The choice of the first alternative implies the decision in favor of the gold standard.
On the Classification of Monetary Theories
(This Appendix was first published as a journal article in 1917-1918, it was later used as a chapter in the 2nd German edition of 1924, but was then relegated to the Appendix in the Batson translation of 1934.)
Catallactic and Acatallactic Monetary Doctrine
The phenomenon of money occupies so prominent a position among the other phenomena of economic life, that it has been speculated upon even by persons who have devoted no further attention to the problems of economic theory, and even at a time when thorough investigation into the processes of exchange was still unknown. The results of such speculations were various. The merchants and, following them, the jurists who were closely connected with mercantile affairs, ascribed the use of money to the properties of the precious metals, and said that the value of money depended on the value of the precious metals. Canonist jurisprudence, ignorant of the ways of the world, saw the origin of the employment of money in the command of the state; it taught that the value of money was a valor impositus. Others, again, sought to explain the problem by means of analogy. From a biological point of view, they compared money with the blood; as the circulation of the blood animates the body, so the circulation of money animates the economic organism. Or they compared it with speech, which likewise had the function of facilitating human Verkehr (interchange, trade). Or they made use of juristic terminology and defined money as a draft by everybody on everybody else.
All these points of view have this in common: they cannot be built into any system that deals realistically with the processes of economic activity. It is utterly impossible to employ them as foundations for a theory of exchange. And the attempt has hardly been made; for it is clear that any endeavor to bring, say, the doctrine of money as a draft into harmony with any explanation of prices must lead to disappointing results. If it is desired to have a general name for these attempts to solve the problem of money, they may be called acatallactic, because no place can be found for them in catallactics.
The catallactic theories of money, on the other hand, do fit into a theory of exchange ratios. They look for what is essential in money in the negotiation of exchanges; they explain its value by the laws of exchange. It should be possible for every general theory of value to provide a theory of the value of money also, and for every theory of the value of money to be included in a general theory of value. The fact that a general theory of value or a theory of the value of money fulfills these conditions is by no means a proof of its correctness. But no theory can prove satisfactory if it does not fulfill these conditions.
It may seem strange that acatallactic views on money were not completely suppressed by the growth of the catallactic doctrine. There were many reasons for this.
It is not possible to master the problems of theoretical economics unless questions of the determination of prices (commodity prices, wages, rent, interest, etc.) are at first dealt with under the supposition of direct exchange, indirect exchange being temporarily left out of account. This necessity gives rise to a division of the theory of catallactics into two parts—the doctrine of direct, and that of indirect, exchange. Now so abundant and difficult are the problems of pure theory, that the opportunity of putting part of them on one side, at least for the time being, has been very welcome. So it has come about that most recent investigators have devoted either no attention at all or very little to the theory of indirect exchange; any way, it has been the most neglected section of our science. The consequences of this omission have been most unfortunate. They have been expressed not only in the sphere of the theory of indirect exchange, the theory of money and banking, but also in the sphere of the theory of direct exchange. There are problems of theory full comprehension of which can be attained only with the aid of the theory of indirect exchange. To seek a solution of these problems, among which, for example, is the problem of crises, with no instruments but those of the theory of direct exchange, is inevitably to go astray.
Thus the theory of money was meanwhile surrendered to the acatallactists. Even in the writings of many catallactic theorists, odd relics of acatallactic views are to be found. Now and then statements are met with which are not in harmony with their authors’ other statements on the subject of money and exchange and which obviously have been accepted merely because they were traditional and because the author had not noticed that they clashed with the rest of his system.
On the other hand, the currency controversy had aroused greater interest than ever in questions of monetary theory just at the time when the coming modern theory was devoting very little attention to them. Many “practical men” ventured into this sphere. Now the practical man without general economic training who begins to meditate upon monetary problems at first sees nothing else and limits his investigation to their immediate restricted sphere without taking account of their connections with other things; it is therefore easy for his monetary theory to become acatallactic. That the “practical man,” so proudly looked down upon by the professional “theorist,” can proceed from investigations of monetary problems to the most penetrating comprehension of economic theory, is best shown by the development of Ricardo. The period of which we speak saw no such development. But it produced writers on monetary theory who did all that was necessary for the monetary policy of the time. From among a large number it is only necessary to mention two names—Bamberger and Soetbeer. A considerable portion of their activity was devoted to fighting the doctrines of contemporary acatallactists.
At present, acatallactic doctrines of money find ready acceptance among those economists who have no use for “theory.” Those who, openly or implicitly, deny the necessity of theoretical investigation are not in a position to demand of a monetary doctrine that it should be possible to fit it into a theoretical system.
The “State” Theory of Money
The common characteristic of all acatallactic monetary doctrines is a negative one; they cannot be fitted into any theory of catallactics. This does not mean that they involve a complete absence of views as to the value of money. Without any such views, they would not be monetary doctrines at all. But their theories of the value of money are constructed subconsciously; they are not made explicit; they are not completely thought out. For if they were consistently thought out to their logical conclusions, it would become obvious that they were self-contradictory. A consistently developed theory of money must be merged into a theory of exchange, and so cease to be acatallactic.
According to the naivest and most primitive of the acatallactic doctrines, the value of money coincides with the value of the monetary material. But to attempt to go farther and begin to inquire into the grounds of the value of the precious metals, is already to have arrived at the construction of a catallactic system. The explanation of the value of goods is sought either in their utility or in the difficulty of obtaining them. In either case, the starting point has been discovered for a theory of the value of money also. Thus this naive approach, logically developed, conducts us automatically to the real problems. It is acatallactic, but it leads to catallactics.
Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce.13 The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money. By stressing the contrast between valor impositus and bonitas intrinseca, the canonists did indeed make it possible for scholastic sophistry to reconcile the Roman-canonist legal system with the facts of economic life. But at the same time they revealed the intrinsic futility of the doctrine of valor impositus; they demonstrated the impossibility of explaining the processes of the market with its assistance.
Nevertheless the nominalistic doctrine did not disappear from monetary literature. The princes of the time, who saw in the debasement of money an important means of improving their financial position, needed the justification of this theory, If, in its endeavors to construct a complete theory of the human economy, the struggling science of economics kept itself free from nominalism, there were nevertheless always enough nominalists for fiscal needs. At the beginning of the nineteenth century, nominalism still had representatives in Gentz and Adam Müller, writing in support of the Austrian monetary policy of the Bankozettel period. And nominalism was used as a foundation for the demands of the inflationists. But it was to experience its full renascence in the German “realistic” economics of the twentieth century.
An acatallactic monetary theory is a logical necessity for the empirico-realistic trend in economics. Since this school, unfavorable to all “theory,” refrains from propounding any system of catallactics, it is bound to oppose any monetary doctrine that leads to such a system. So at first it avoided any treatment of the problem of money whatever; so far as it did touch upon this problem (in its often admirable work on the history of coinage and in its attitude toward political questions), it retained the traditional Classical theory of value. But gradually its views on the problem of money glided unconsciously into the primitive acatallactic ideas described above, which regard money made of precious metal as a good that is valuable “in itself.” Now this was inconsistent. To a school that has inscribed the device of etatism on its banner, and to which all eco nomic problems appear as questions of administration, the state theory of nominalism is more suitable.14 Knapp completed this connection. Hence the success of his book in Germany.
The fact that Knapp has nothing to say about the catallactic monetary problem, the problem of purchasing power, cannot be regarded as an objection from the point of view of a doctrine which repudiates catallactics and has abandoned in advance any attempt at a causal explanation of the determination of prices. The difficulty over which the older nominalistic theories had come to grief did not exist for Knapp, whose public consisted solely of the disciples of the realistic economics. He was able—in fact, considering his public, he was bound—to abandon all attempt at an explanation of the validity of money in commerce. If important questions of monetary policy had arisen in Germany in the years immediately succeeding the appearance of Knapp’s work, then the inadequacy of a doctrine that was unable to say anything about the value of money would naturally have soon become evident.
That the new state theory did compromise itself immediately it was put forward, was due to its unlucky attempt to deal with currency history from an acatallactic point of view. Knapp himself, in the fourth chapter of his work, had briefly related the monetary history of England, France, Germany, and Austria. Works on other countries followed, by members of his seminar. All of these accounts are purely formal. They endeavor to apply Knapp’s scheme to the individual circumstances of different states. They provide a history of money in Knappian terminology.
There could be no doubt of the results that were bound to follow from these attempts. They expose the weaknesses of the state theory. Currency policy is concerned with the value of money, and a doctrine that cannot tell us anything about the purchasing power of money is not suitable for dealing with questions of currency policy. Knapp and his disciples enumerate laws and decrees, but are unable to say anything about their motives and effects. They do not mention that there have been parties supporting different currency policies. They know nothing, or nothing of great importance, about bimetallists, inflationists, or restrictionists; for them, the supporters of the gold standard were led by “metallistic superstition,” the opponents of the gold standard were those who were free from “prejudices.” They studiously avoid all reference to commodity prices and wages and to the effects of the monetary system on production and exchange. Beyond making a few remarks about the “fixed rate of exchange,” they never touch upon the connections between the monetary standard and foreign trade, the problem which has played so great a part in currency policy. Never has there been a more miserable and empty representation of monetary history.
As a result of the World War, questions of currency policy have again become very important, and the state theory feels itself obliged to produce something on topical questions of currency policy. That it has nothing more to say about these than about the currency problems of the past is shown by Knapp’s article “Die Währungsfrage bei einem deutsch-österreichischen Zollbündnis” in the first part of the work published by the Verein für Sozialpolitik: Die wirtschaftliche Annäherung zwischen dem deu tschen Reiche und seinen Verbündeten. There can hardly be two opinions about this essay.
The absurdity of the results at which the nominalistic doctrine of money is bound to arrive as soon as it begins to concern itself with the problems of monetary policy is shown by what has been written by Bendixen, one of Knapp’s disciples. Bendixen regards the circumstance that the German currency had a low value abroad during the war as “even in some ways desirable, because it enabled us to sell foreign securities at a favourable rate.”15 From the nominalistic point of view this monstrous assertion is merely logical.
Bendixen, incidentally, is not merely a disciple of the state theory of money; he is at the same time a representative of that doctrine also which regards money as a claim. In fact, acatallactic views can be blended according to taste. Thus Dühring, who in general regards metallic money as “an institution of Nature,” holds the claim theory but at the same time rejects nominalism.16
The assertion that the state theory of money has been disproved by the events of currency history since 1914 must not be understood to mean that it has been disproved by “facts.” Facts per se can neither prove nor disprove; everything depends upon the significance that can be given to the facts. So long as a theory is not thought out and worked up in an absolutely inadequate manner, then it is not a matter of supreme difficulty to expound it so as to explain the “facts”—even if only superficially and in a way that can by no means satisfy truly intelligent criticism. It is not true, as the naive scientific doctrine of the empirico-realistic school has it, that one can save oneself the trouble of thinking if one will only allow the facts to speak. Facts do not speak; they need to be spoken about by a theory.
The state theory of money—and all acatallactic theories of money in general—breaks down not so much because of the facts as because of its inability even to attempt to explain them. On all the important questions of monetary policy that have arisen since 1914, the followers of the state theory of money have maintained silence. It is true that even in this period their industry and zeal have been demonstrated in the publication of ample works; but they have not been able to say anything on the problems that occupy us nowadays. What could they, who deliberately reject the problem of the value of money, have to say about those problems of value and price which alone constitute all that is important in the monetary system? Their peculiar terminology does not bring us a step nearer to a decision about the questions that are agitating the world at present.17 Knapp is of the opinion that these questions do not need to be solved except by the “economists,” and concedes that his doctrine has nothing to say about them.18 But if the state theory does not help to elucidate the questions that seem important to us, what is its use? The state theory is not a bad monetary theory; it is not a monetary theory at all.19
To ascribe to the state theory a large share of the blame for the collapse of the German monetary system, does not imply that Knapp directly provoked the inflationary policy that led to it. He did not do that. Nevertheless, a doctrine that does not mention the quantity of money at all, that does not speak of the connection between money and prices, and that asserts that the only thing that is essential in money is the authentication of the state, directly encourages fiscal exploitation of the “right” of creating money. What is to prevent a government from pouring more and more notes into circulation if it knows that this will not affect prices, because all rises in prices can be explained by “disturbed trade conditions” or “disturbances in the home market,” but on no account whatever by anything to do with money? Knapp is not so incautious as to speak of the valor impositus of money as did the canonists and jurists of past generations. All the same, his doctrine and theirs lead indifferently to the same conclusions.
Knapp, unlike some of his enthusiastic disciples, was certainly not a government hireling. When he said anything, he said it from genuine personal conviction. That speaks well for his own trustworthiness, but it has no bearing on that of his doctrine.
It is quite incorrect to say that the monetary doctrine of etatism springs from Knapp. The monetary doctrine of etatism is the balance-of-payments theory, which Knapp only refers to casually in speaking of the “pantopolic origin of the exchange rates.”20 The balance-of-payments theory, if an untenable, is at least a catallactic, theory of money. But it was invented long before Knapp’s time. It had already been propounded, with its distinction between the internal value (Binnenwert) and the external value (Aussenwert) of money, by the etatists, by Lexis, for example.21 Knapp and his school added nothing to it.
But the etatist school is responsible for the facility and rapidity with which the state theory of money succeeded in becoming the accepted doctrine in Germany, Austria, and Russia. This school had struck out catallactics, the theory of exchange and prices, as superfluous from the series of problems with which economics was concerned; it undertook the attempt to represent all the phenomena of social life merely as emanations of the exercise of power by princes and others in authority. It is only a logical extension of its doctrine to endeavor eventually to represent money also as being created merely by force. The younger generation of etatists had so little notion even of what economics really was concerned with, that it was able to accept Knapp’s paltry discussion as a theory of money.
Schumpeter’s Attempt to Formulate a Catallactic Claim Theory
To call money a claim is to suggest an analogy to which there is no real objection. Although this comparison, like all others, falls short at certain points, it may nevertheless make it easier for many to form a conception of the nature of money. Admittedly analogies are not explanations, and it would be a gross exaggeration to speak of a claim theory of money, for mere construction of an analogy does not take us even halfway to any sort of monetary theory that can be expressed in intelligible arguments. The only possible way of building a monetary theory upon the claim analogy would be to regard the claim, say, as a ticket of admission to a room of limited size, so that an increase in the number of tickets issued would mean a corresponding diminution of the amount of room at the disposal of each ticketholder. But the danger in this way of thinking is that taking this illustration as a starting point could lead only to the drawing of a contrast between the total amount of money and the total amount of commodities; but this amounts to nothing but one of the oldest and most primitive versions of the quantity theory, the untenability of which needs no further discussion.
Thus until recently the claim analogy led a precarious existence in the expositions of monetary doctrine, without having any greater significance—as was imagined—than that of a means of expression that could easily be understood by all. Even in the writings of Bendixen, who would have been glad to see his obscure arguments designated a claim theory, the claim concept has no greater significance ascribed to it. But very recently an ingenious attempt has been made by Schumpeter to arrive at a real theory of the value of money starting from the claim analogy, that is, an attempt to construct a catallactic claim theory.
The fundamental difficulty that has to be reckoned with in every attempt to construct a theory of the value of money starting from the claim concept is the necessity for comparing the quantity of money with some other total, just as in the ticket illustration the total number of tickets is compared with the total amount of room available. Such a comparison is a necessity for a doctrine which regards money as “claims” whose peculiarity consists in the fact that they do not refer to definite objects but to shares in a mass of goods. Schumpeter seeks to avoid this difficulty by starting, in elaboration of a line of argument first developed by Wieser, not from the quantity of money, but from the sum of money incomes, which he compares with the total prices of all consumption goods.22 There might be some justification for such a comparison if money had no other use than to purchase consumption goods. But such an assumption is obviously quite unjustifiable. Money bears a relationship, not only to consumption goods, but also to production goods; and—the point is a particularly important one—it does not serve only for the exchange of production goods against consumption goods but very much oftener for the exchange of production goods against other production goods. So Schumpeter is only able to maintain his theory by simply putting out of consideration a large part of that which circulates as money. He says that commodities are actually related only to the circulating portion of the total quantity of money, that only this portion has an immediate connection with the sum of all incomes, that it alone fulfills the essential function of money. Thus “to obtain the quantity of money in circulation, which is what we are concerned with,” the following items, among others, have to be eliminated:
2 “Sums that are unemployed but awaiting employment”
3 Reserves by which we are to understand those sums of money “below which the economic agents never let their holdings fall; in order to be prepared for unexpected demands”
But even the elimination of these sums is not enough; we must go still farther. For the total incomes theory is “not concerned even with the total quantity of money in circulation.” In addition we must exclude “all those sums that circulate in the ’income-distributing’ markets, in the real estate, mortgage, security and similar markets.”23
These limitations do not merely serve, as Schumpeter thinks, to demonstrate the impossibility of dealing statistically with the notion of money in effective circulation; they also cut away the ground from beneath his own theory. All that needs to be said about the separation of hoards, unemployment sums, and reserves, from the remaining amount of money has already been mentioned above.24 It is inadmissible to speak of “sums that are unemployed but awaiting employment.” In a strict and exact sense—and theory must take everything in a strict and exact sense—all money that is not changing owners at the very moment under consideration is awaiting employment. Nevertheless, it would be incorrect to call such money “unemployed”; as part of a reserve it satisfies a demand for money, and consequently fulfills the characteristic function of money. And when Schumpeter further proposes to eliminate the sums in circulation in the income-distributing markets, we can only ask, What then remains?
Schumpeter has to do violence to his own theory in order to make it appear even fairly tenable. It cannot be compared with the point of view which opposes the total stock of money to the total demand for it (that is, to the total demand of economic agents for reserves), because it does not really attempt to solve more than a small part of the problem. To be of any use, a theory must try to explain the whole of the problem that is before us. Schumpeter’s theory arbitrarily splits up the stock of money and the demand for money in order to institute a comparison that would otherwise be impossible. If Schumpeter starts from the statement that the total quantity of money is distributed between three spheres, the sphere of circulation, that of hoards and reserves, and that of capital, then, if he wishes to provide a complete theory of money, the comparison which he makes for the sphere of circulation between total incomes and total amount of consumption goods should be repeated for the two other spheres also; for these also are not without significance in the determination of the value of money. Variations in the amount of money demanded or available for hoards and reserves—to retain this vague distinction—or for the sphere of capital, influence the value of money just as much as variations in the sphere of circulation. No theory of the value of money with pretensions to completeness dare omit an explanation of the influence on the value of money exerted by processes in the sphere of hoards and reserves and in that of capital.
We see, then, that even Schumpeter has not been able to make a complete catallactic theory of money out of the claim theory. The fact that his attempt to make the claim theory into a catallactic theory of money obliged him to set such extraordinary limits to the problem is the best proof that a comprehensive catallactic theory of money cannot be constructed on the basis of the claim analogy. His having arrived in the course of his admirable discussion at conclusions for the rest which do not differ essentially from those which have been discovered in other ways and with other instruments by the catallactic doctrine of money is merely to be ascribed to his having found them in the theory of money already and having therefore been able to adopt them. They by no means follow from the fragmentary theory of money that he himself has put forward.
It is no longer necessary to continue to argue against the nominalistic theory of money. For theoretical economics it has long been finished with. Nevertheless, the nominalist controversy has propagated errors in the history of doctrine that need to be weeded out.
First of all, there is the use of the term metallism. The expression comes from Knapp. “Those writers who start from weight and fineness and see in the stamp nothing but an attestation of these properties,” Knapp christens metallists. “The metallist defines the unit of value as a certain quantity of metal.”25
This definition of metallism given by Knapp is by no means a clear one. It should be pretty well known that there can hardly have been a single writer worth mentioning who has thought of the unit of value as consisting of a quantity of metal. But it must be remembered that, with the exception of the nominalists, there has never been a school so easily satisfied in the interpretation of the concept of value as that of Knapp, for whom the unit of value “is nothing but the unit in which the amount of payments is expressed.”26
But it is easy to see what Knapp means by metallism even if he does not explicitly say it. For Knapp metallism is all the theories of money that are not nominalistic;27 and since he formulates the nominalistic doctrine with precision, it is clear what he understands by metallism. That those theories of money which are not nominalistic have no uniform characteristic, that there are catallactic and acatallactic theories among them, that each of these two groups is again divided into various opposed doctrines, is either unknown to Knapp, or willfully overlooked by him. For him, all nonnominalistic theories of money are but one. Nowhere in his writing is there anything to suggest that he knows of the existence of other monetary doctrines than that which regards metallic money as material valuable “in itself.” He even completely ignores the existence of economic theories of value—not merely the existence of any particular theory but the existence of all of them. He invariably polemizes against the only theory of money known to him, which he believes to be the only theory opposed to nominalism, and which he calls metallism. His arguments are useless because they apply only to this one acatallactic doctrine which, with all other acatallactic theories, including nominalism, was long ago overthrown by economic science.
All controversial writers have to set themselves limits. In any field that has been much worked over it is impossible to confute all opposing views. The most important opposing opinions, the typical ones, those which seem to threaten most one’s own point of view, must be selected, and the rest passed over in silence. Knapp writes for the German public of the present day, which, under the influence of the etatistic version of political economy, acquainted only with acatallactic theories of money, and even among these only with those which he calls metallistic. The success that he has met with here shows that he was right in directing his criticism only against this version, which is hardly represented in literature, and on the other hand in ignoring Bodin, Law, Hume, Senior, Jevons, Menger, Walras, and everybody else.
Knapp makes no attempt at all to determine what economics says about money. He only asks, “What does the educated man think of when he is asked about the nature of money?”28 He then criticizes the views of the “educated man,” that is, apparently, the layman. Nobody will deny him the right to do this. But it is not permissible, having done it, to set up these views of the educated man as those of scientific economics. Nevertheless, this is what Knapp does when he describes the monetary theory of Adam Smith and David Ricardo as “entirely metallistic” and adds: “This theory teaches that the unit of value (the pound sterling) is definable as a certain weight of metal.”29 The mildest thing that can be said about this assertion of Knapp’s is that it is entirely unfounded. It most bluntly contradicts the views of Smith and Ricardo on the theory of value, and it does not find the least support in any of their writings. It will be obvious to all who have even only a superficial acquaintance with the value theory of the Classicals and their theory of money that Knapp has here committed an incomprehensible error.
But neither were the Classicals “metallists” in the sense that their only contribution to the problems of paper money was “indignation.”30 Adam Smith expounded the social advantages arising from the “substitution of paper in the room of gold and silver money” in a manner that has hardly been equaled by any writer before or after him.31 But it was Ricardo, in his pamphlet “Proposals for an Economical and Secure Currency,” published in 1816, who elaborated this point of view and recommended a monetary system under which precious-metal money should be entirely eliminated from actual domestic circulation. This suggestion of Ricardo’s was the basis of that monetary system, first established at the end of the last century in India, then in the Straits Settlements, then in the Philippines, and finally in Austria-Hungary, that is usually known nowadays as the gold-exchange standard. Knapp and his fellow enthusiasts for “modern monetary theory” could easily have avoided the mistakes they made in explaining the policy followed by the Austro-Hungarian Bank between 1900 and 1911, if they had taken note of what Smith and Ricardo had said in these passages.32
The Concept of “Metallism” in Wieser and Philippovich
Knapp’s mistakes in the history of theory have unfortunately already been accepted by other writers. This started with the attempt to expound Knapp’s theory in the most kindly manner possible, that is, to judge its weaknesses gently and if possible to credit it with some sort of usefulness. But this was not possible without reading into the state theory things that simply cannot be found in it, things in fact which definitely contradict both its spirit and its letter, or without taking over Knapp’s mistakes in the history of theory.
First, Wieser must be mentioned. Wieser draws a contrast between two monetary theories. “For the metallists, money has an independent value, arising from itself, from its substance; for modern theory, its value is derived from that of the objects of exchange, the commodities.”33 Again, in another place, Wieser says: “The value of the monetary material is a conflux from two different sources. It is constituted from the use value which the monetary material obtains by reason of its various industrial employments—for jewelry, for utensils, for technical uses of all kinds—and from the exchange value which the money obtains by reason of being a means of payment ... The service performed by the coins as a medium of exchange and that performed by the money in its industrial uses, lead in combination to a common estimate of its value ... We may ... assert, that each of the two services is independent enough to be able to go on existing even if the other ceased. Just as the industrial functions of gold would not cease if gold were no longer coined, so its monetary functions would not come to an end if the state decided to forbid its use in industry and requisitioned it all for minting ... The dominant metallistic opinion is different. From this point of view, the metal value of the money means the same thing as the use value of the metal; it has only the one source—industrial employment—and if the exchange value of the money coincides with its metal value, then it is nothing but a reflection of the use value of the metal. According to the prevailing metallistic opinion, money made from valueless material is inconceivable; for, it is said, money could not measure the value of commodities if it was not valuable itself, by virtue of the material from which it is made.”34
Here Wieser contrasts two theories of the value of money: the modern and the metallistic. The theory which he calls the modern is the monetary theory that logically follows from that theory of value which traces value to utility. Now since the utility theory has only recently received scientific exposition (to have contributed to which is one of Wieser’s great merits), and since it undoubtedly may nowadays be regarded as the prevailing doctrine (pace Wieser himself, who calls metallism the prevailing doctrine), it may well be admissible to call that monetary theory which is based upon it the modern theory κατ ὲξοχὴν. But in so doing we must not forget that, just as the subjective theory of value can look back over a long history, so also the theory of money corresponding to it is already more than two hundred years old. For example, as early as the year 1705 John Law had expressed it in classical form in his Money and Trade. A comparison of Law’s arguments with those of Wieser will demonstrate the fundamental agreement between their views.35
But this theory, which Wieser calls the modern, is certainly not the doctrine of Knapp; in Knapp, not the slightest suggestion of it can be discovered. All that it has in common with his nominalism, which ignores the problem of the value of money, is the fact that neither is “metallistic.”
Wieser himself sees quite clearly that his theory has nothing to do with that of Knapp. Unfortunately however, he takes over from Knapp the opinion that according to the “prevailing metallistic opinion,” the “metal value of the money means the same as the use value of the metal.” Several serious mistakes in the history of theory are here all mixed up together.
The first thing to observe is that by metallism Wieser means something different from Knapp. Wieser contrasts the “modern” theory of the value of money with the “metallistic,” and describes exactly what he understands by the terms. According to this, the two views are opposed to each other; the one excludes the other. But, for Knapp, the theory that Wieser calls the modern theory is just as metallistic as the others. The truth of this can easily be demonstrated.
In his principal book, Knapp never mentions the names of any writers who themselves have dealt with the problem of money; neither does he quote any work on the subject. He nowhere argues against any of the trains of thought that are usually met with in the abundant literature of money. His quarrel is always only with the metallism that he sets up as the general opinion on money. In his preface, it is true, he refers expressly to two writers as metallists: Hermann and Knies.36 But both Hermann and Knies expounded theories very similar to the “modern” theory expounded by Wieser. This should not appear strange, for both of these writers take their stand on the subjective theory of value,37 from which the “modern” doctrine of the value of money logically follows, so that both regard the foundation of the use-value of the precious metals as lying both in their monetary uses and their “other” uses.38 Between Wieser and Knies there is a difference, it is true, concerning the effect on the monetary function of the possibility of cessation of the “other” functions. Yet Knapp could not have regarded this as the decisive characteristic, or he would have been sure to mention it somewhere, and in fact he has nothing more to say about it than about any other problem of the value of money.
It is, indeed, not among the economists that we must seek the metallists, as they are portrayed by Knapp and his school. Knapp knows very well why he always argues only against this arbitrary caricature of a metallist, and prudently refrains from quoting chapter and verse for the opinions that he puts in the mouth of this metallist. In fact the metallist that Knapp has in mind is none other than Knapp himself; not the Knapp that wrote the State Theory of Money, but the Knapp that, “disregarding all theory” as he himself testifies, used to lecture on the “pragmatic” of the monetary system;39 the Knapp that, as one of the standard-bearers of historicism in political economy, had thought that a substitute for thinking about economic problems could be found in the publication of old documents. If Knapp had not looked down so arrogantly on the work of the much abused “theorists,” if he had not disdained to have anything to do with it, he would have discovered that he had been entertaining an entirely false opinion of its content. The same is true of Knapp’s disciples. Indeed, their leader Bendixen openly admits that he was once a “metallist.”40
It is by no means desirable to follow Wieser’s example in giving the title of prevailing doctrine to the view that the value of the monetary material arises solely from its industrial employment. Surely a view concerning money that has been rejected by Knies cannot be regarded as the prevailing doctrine.41 There can be no question that the whole literature of money, so far as it is based on the conclusions of modern theory is not metallistic in Wieser’s sense; but neither, for that matter, is any other catallactic theory of money.
In fact Wieser’s opinion of the monetary theories of his precursors has been distorted by his acceptance of the expression metallism. He himself did not fail to notice this; for he supplements the remarks quoted above with the following words: “The dominant doctrine does not remain true to itself, for it ... develops a special theory to explain the exchange value of money. If the value of money was always limited by the use value of the metal, what influence would remain to be exerted by the demand for money the velocity of circulation, or the amount of credit substitutes?” The solution of this apparent contradiction must be sought in the fact that what Wieser calls the prevailing metallistic doctrine is in the very sharpest contrast to those catallactic theories which “develop a special theory to explain the exchange value of money.”
Like Wieser, Philippovich also draws a contrast between two theories of the value of money; the nominalistic (represented by Adam Müller, Knapp, and others; Philippovich also includes Adolf Wagner in this group); and those which reject the nominalistic attitude. As representing this second group, he names only my Theorie des Geldes und der Umlaufsmittel.42 He adds the remark that, in discussing the value of money, I had been forced to admit that the value of commodity money only bears upon the theory of the value of money insofar as it depends upon its function as a common medium of exchange.43 In this, through following the historical views of Knapp, Philippovich falls into the same errors as Wieser.
While Wieser rejects the chartal and nominal theory of money, Philippovich confesses his allegiance to it, but at the same time interprets it in a way that entirely effaces the difference between the catallactic and the nominalistic conception. On the one hand, he declares that “the essential thing about the monetary unit is its nominal Geltung or validity as a unit of value.” And on the other hand, he says that “the monetary unit is not really this technically defined quantity of precious metal, but its power of purchase or payment.”44 These are two theses that cannot be reconciled. We have already met the former, as Knapp’s definition; the latter is the starting point of all catallactic theories of money. A sharper contrast could hardly be imagined.
That the identification of the monetary unit with purchasing power, so far from expressing Knapp’s views, completely contradicts them, may be clearly deduced from several passages in his writings.45 The very thing that characterizes nominalism—like all acatallactic theory in general—is the fact that it does not speak of the value, the purchasing power, of money. It is easy to show how irreconcilable are the two theses that Philippovich propounds. Within the limits of his own theory, Knapp is formally correct when he defines the mark as “the third part of the preceding unit of value, the thaler.”46 However uninformative this definition may be, it contains nothing contradictory in itself. It is otherwise when Philippovich declares that “the silver mark, as the third part of the thaler, was previously the unit of money for reckoning purposes, which, in the experience of economic agents, represented a certain purchasing power. This purchasing power had to be retained in the unit of coinage of the new metal; that is, the mark as a gold coin had to represent the same quantity of value as had previously been represented by the silver mark. The technical determination of the unit of coinage therefore has the aim of maintaining the value of the monetary unit.”47 These sentences, in connection with those previously quoted, can apparently only mean that the reform of the German monetary system had aimed to establish the purchasing power of the thaler at its transmitted level. But this can hardly be Philippovich’s real opinion.
There is yet another historical error that has been taken over by Philippovich from Knapp, namely, the belief that the catallactic doctrine of money disregards actual experience, “which provides examples enough of the forced circulation of state paper money.”48 Any catallactic writing, including the first edition of the present book, which is the only work referred to by Philippovich in this connection, would prove the contrary. It is possible to assert that the catallactists have not solved the problem of such paper money in a satisfactory manner—that is still an open question; but it will not do to assert that they have disregarded its existence. This is a particularly important point, because many of Knapp’s disciples think that catallactic theories of money have been confuted by the paper-money economics of the war period; as if this was not a problem that has been dealt with by all monetary theories since Ricardo.
When Knapp’s mistakes about the views on monetary theory of earlier and contemporary economists have been accepted by two such eminent experts in the history and literature of political economy as Wieser and Philippovich, it should not surprise us if the majority of those now at work in Germany on monetary problems base their history of theory entirely on Knapp.
Note: The Relation of the Controversy About Nominalism to the Problems of the Two English Schools of Banking Theory
A writer identifies the metallistic theory with the currency principle and calls the chartal theory “a variety of the old banking principle.”49 Again, another writer is of the opinion that there is “a certain justification for giving the name of economic nominalism to the doctrine of the Currency School, so far as it is based upon a like treatment of both metallic and paper money.”50 Both would appear to be mistaken. The opposition between the two famous schools of the theory of credit lies in quite another sphere.51 Knapp and his disciples have never so much as perceived the problems with which they were concerned, much less attempted to solve them.
Bendixen’s doctrine of the creation of money, which is connected only accidentally and loosely with Knapp’s nominalism, is admittedly nothing but an exaggerated and extremely naive version of the Banking principle. It is a particularly characteristic sign of the low state of German economic theory that for many years Bendixen’s doctrine could have been regarded as something new without it being remarked that it was at most only in the way in which it was expounded that it differed from the doctrine that had been predominant in Germany for decades.
Translator’s Note on the Translation of Certain Technical Terms
It is never possible to be certain that the full significance of a technical term has been brought out in a translation. A short list of the original German terms for the kinds of money and money substitutes mentioned in the present work, and of the English expressions which have been used to translate them, is therefore appended.
The word Umlaufsmittel presented a peculiarly difficult problem. There is no established English equivalent for the sense in which Professor Mises uses the term. “Circulating medium,” the literal translation, is clearly inappropriate, for it suggests associations with currency which are quite foreign to Professor Mises’ meaning. “Bank money” is inadequate, for Umlaufsmittel includes, not merely bank deposits, but also money substitutes issued by the state (such as token money). “Credit instrument,” which at first sight might appear satisfactory, is inconsistent with Professor Mises’ insistence on the difference between Umlaufsmitteln and bills of exchange; and, furthermore, Professor Mises explicitly argues that the issue of Umlaufsmitteln is not a credit transaction in the more fundamental sense. For want of a better equivalent, therefore, the expression “fiduciary medium” has been adopted. It accords with Professor Mises’ definition of Umlaufsmitteln as money substitutes not covered by money,52 and it evokes associations with the controversies about the Peel Act of 1844 that are in harmony with Professor Mises’ attitude. It also draws attention to Professor Mises’ emphasis upon the similarity between uncovered bank deposits and uncovered notes.
The following equivalents for other technical terms have also been adopted:53
Money in the broader sense (Geld im weiteren Sinne)
Money in the narrower sense (Geld im engeren Sinne)
Money substitute (Geldsurrogat)
Commodity money (Sachgeld)
Credit money (Kreditgeld)
Fiat money (Zeichengeld)
Token money (Scheidemünzen)
Money certificate (Geldzertifikat)
Commodity credit (Sachkredit)
Circulation credit (Zirkulationskredit)
The following diagram shows the relationships between some of these terms in Professor Mises’ system:
Ludwig von Mises (1881-1973) was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. A library of his books would total twenty-one volumes if confined to first editions, forty-eight volumes if all revised editions and translations were included, and still more if the Festschriften and other volumes containing contributions by him were added.
Von Mises’ writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. His contributions to economic theory include important clarifications on the quantity theory of money, the theory of the trade cycle, the integration of monetary theory with economic theory in general, and a demonstration that socialism must fail because it cannot solve the problem of economic calculation. Mises was the first scholar to recognize that economics is part of a larger science of human action, a science which Mises called “praxeology”.
Ludwig von Mises received doctorates in law and economics from the University of Vienna in 1906. In 1909 he became Economic Advisor to the Austrian Chamber of Commerce (comparable to the U.S. Department of Commerce). After serving in World War I, he became Professor of Economics at the University of Vienna and, in 1934, Professor of International Relations at the Graduate Institute of International Studies in Geneva. In 1945 he became Visiting Professor at New York University where he remained until his retirement in 1969. In a lecturing and teaching career that spanned many continents and more than half a century, Mises numbered among his students one Nobel Laureate, F. A. Hayek, two presidents of the American Economic Association, Gottfried Haberler and Fritz Machlup, and many other economists of international reputation.
His major works are The Theory of Money and Credit (1912), Socialism (1922), Human Action (1949), Theory and History (1957), Epistemological Problems of Economics (1960), and The Ultimate Foundations of Economic Science (1962).
Murray N. Rothbard, who wrote the Introduction, is Professor of Economics at the Polytechnic Institute of New York. He is the author of Man, Economy, and State, America’s Great Depression, and many other books, essays, and articles.
Silver Demereteia of Syracuse
The silver Demereteia, which is used in the jacket design, was struck by Gelon, Lord of Syracuse, celebrating his victory over the Carthaginians in the decisive battle of Himera in Sicily. On one side of the coin is a charioteer, symbolizing Gelon’s forces, with the winged goddess of Victory, Nike, crowning the chariot with laurel. The lion in flight below represents the defeated Carthaginians. On the other side is a head, possibly that of the goddess Arethusa, since the dolphins surrounding her stand for the sea around the island of Ortygia on which the goddess was worshipped. Or, the head could be that of Gelon’s queen, Demerete, whose name was given to the coin (Demereteia) and all others of the same issue (Demereteion) in honor of her gift of personal jewelry to the treasury of Syracuse in the war with Carthage. Another legend has it that Demerete gained favorable terms for the vanquished Carthaginians and received from them a hundred talents of gold which she contributed to financing the striking of the Demereteia.
The Greeks had learned the art of coinage from the Lydians who had invented it around 700 The Lydian Empire comprised most of what is now Turkey. The first Lydian coinage was developed by private individuals—goldsmiths, bankers, merchants—not by authority of the Emperor. The need for coinage as a reliable medium of exchange derived from Lydia’s position as the industrial power of the ancient world. Prior to the development of coinage, media of exchange were clumsy bars or pieces of metal.
The Greek city states adopted coinage but habitually and shamelessly debased their coins. Said Demosthenes: “the majority of states are quite open in using silver coins diluted with copper and lead.” Only Athens, excepting its one major devaluation by Solon, maintained throughout its history the purity of its coinage, a fact which does much to explain the extension of Athenian commercial and political power over all of Greece.
[10. ]About the fundamental error of this point of view, see chap. 19 above.
[11. ]For the only exception to this rule, see next paragraph below.
[12. ]See pp. 493-94 below.
[13. ]See Endemann, Studien in der romanisch-kanonistischen Wirtschafts- und Rechtslehre bis gegen Ende des 17. Jahrhunderts (Berlin, 1874-1883), vol. 2, p. 199.
[14. ]See Voigt, “Die staatliche Theorie des Geldes,” Zeitschrift für die gesamte Staatswissenschaft 62: 318 f.
[15. ]Bendixen, Währungspolitik und Geldtheorie im Lichte des Weltkriegs (Munich and Leipzig, 1916), p. 37 (2d ed., 1919, p. 44).
[16. ]Dühring, Cursus der National-und Sozialökonomie, 3d ed. (Leipzig, 1892), pp. 42 ff., 401.
[17. ]See also Palyi, Der Streit um die staatliche Theorie des Geldes (Munich and Leipzig, 1922), pp. 88 ff.
[18. ]Knapp, Staatliche Theorie des Geldes, 3d ed. (1921), pp. 445 ff.
[19. ]To imagine that the state theory is a juristic theory, is to be ignorant of the purpose that a juristic theory of money has to fulfill. Anybody who holds this opinion should refer to any work on the law of contract and note what questions are there dealt with in the chapter on money.
[20. ]Knapp, op. cit., pp. 206, 214.
[21. ]Lexis, “Papiergeld,” in Handwörterbuch der Staatswissenschaften, 3d. ed., vol. 6, pp. 987 ff.
[22. ]Schumpeter, “Das Sozialprodukt und die Rechenpfennige,” Archiv für Sozialwissenschaft und Sozialpolitik 44: 635, 647 ff.
[23. ]Ibid., pp. 665 f.
[24. ]See above, pp. 168 ff.
[25. ]Knapp, op. cit., p. 281; “Die Beziehungen Oesterreichs zur staatlichen Theorie des Geldes,” Zeitschrift für Volkswirtschaft, &c. 17: 440.
[26. ]Knapp, Staatliche Theorie, pp. 6 f.
[27. ]“Alle unsere Nationalökonomen sind Metallisten,” Knapp, “Über die Theorien des Geldwesens,” Jahrbuch für Gesetzgebung, &c. 33: 432.
[28. ]Knapp, “Die Währungsfrage vom Staat aus betrachtet,” Jahrbuch für Gesetzgebung, &c. 41: 1528.
[29. ]Knapp, “Über die Theorien des Geldwesens,” p. 430.
[30. ]Ibid., p. 432.
[31. ]See also pp. 332 f. above.
[32. ]From the pamphlet of Ricardo’s referred to above it may suffice to quote the following passage only: “A well-regulated paper currency is so great an improvement in commerce that I should greatly regret if prejudice should induce us to return to a system of less utility. The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps toward the improvement of commerce and the arts of civilized life; but it is no less true, that, with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied” (Works, 2d ed. [London, 1852], p. 404). Thus the real appearance of Ricardo’s “metallistic indignation.”
[33. ]Wieser, Über die Messung der Veränderungen des Geldwerts, p. 542.
[34. ]Wieser, “Theorie der gesellschaftlichen Wirtschaft,” Grundriss der Sozialökonomik (Tübingen, 1924), p. 316.
[35. ]See the passages quoted on pp. 125 f. above.
[36. ]See Knapp, Staatliche Theorie, 1st ed., pp. 5, 7.
[37. ]See Zuckerkandl, Zur Theorie des Preises mit besonderer Berücksichtigung der geschichtlichen Entwicklung der Lehre (Leipzig, 1899), pp. 98, 115 f.
[38. ]See Hermann, Staatswirtschaftliche Untersuchungen, 2d ed. (Munich, 1870), p. 444; Knies, Das Geld, 2d ed. (Berlin, 1885), p. 324.
[39. ]Knapp, Staatliche Theorie, p. 5.
[40. ]Bendixen, op. cit., p. 134.
[41. ]See Wieser, “Theorie der gesellschaftlichen Wirtschaft,” p. 317.
[42. ][Of which the present work is a translation. H.E.B.]
[43. ]Philippovich, Grundriss (Tübingen, 1916), p. 275.
[45. ]See esp. Knapp, Schriften des Vereins für Sozialpolitik, vol. 132, pp. 560 ff.
[46. ]Knapp, Geldtheorie, staatliche in H. d. S., 3d ed.
[47. ]Philippovich, op. cit.
[48. ]Ibid., pp. 272 ff.
[49. ]Lansburgh, Kriegskostendeckung (Berlin, 1915), pp. 52 ff.
[50. ]Bortkiewicz, Frage der Reform, A. s. P. G., vol. 6, p. 98,
[51. ]See pp. 379 ff. above.
[52. ]See p. 155 above.
[53. ]See also pp. 146 n and 247 n above.