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• Foreword
• On the Manipulation of Money and Credit Three Treatises On Trade-cycle Theory
• Stabilization of the Monetary Unit— From the Viewpoint of Theory
• Introduction *
• I: The Outcome of Inflation
• II: The Emancipation of Monetary Value From the Influence of Government
• III: The Return to Gold
• IV: The Money Relation
• V: Comments On the “balance of Payments” Doctrine
• VI: The Inflationist Argument
• VII: The New Monetary System
• VIII: The Ideological Meaning of Reform
• Appendix: Balance of Payments and Foreign Exchange Rates *
• Monetary Stabilization and Cyclical Policy
• Preface *
• Part I: Stabilization of the Purchasing Power of the Monetary Unit
• I: The Problem
• II: The Gold Standard
• III: The “manipulation” of the Gold Standard
• IV: “measuring” Changes In the Purchasing Power of the Monetary Unit
• V: Fisher’s Stabilization Plan
• VI: Goods-induced and Cash-induced Changes In the Purchasing Power of the Monetary Unit
• VII: The Goal of Monetary Policy
• Part II: Cyclical Policy to Eliminate Economic Fluctuations
• I: Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle
• II: Circulation Credit Theory
• III: The Reappearance of Cycles
• IV: The Crisis Policy of the Currency School
• V: Modern Cyclical Policy
• VI: Control of the Money Market
• VII: Business Forecasting For Cyclical Policy and the Businessman
• VIII: The Aims and Method of Cyclical Policy
• The Causes of the Economic Crisis an Address
• I: The Nature and Role of the Market
• II: Cyclical Changes In Business Conditions
• III: The Present Crisis
• A.: Unemployment
• B.: Price Declines and Price Supports
• C.: Tax Policy
• D.: Gold Production
• IV: Is There a Way Out?
• The Current Status of Business Cycle Research and Its Prospects For the Immediate Future
• 1.: The Acceptance of the Circulation Credit Theory of Business Cycles *
• 2.: The Popularity of Low Interest Rates
• 3.: The Popularity of Labor Union Policy
• 4.: The Effect of Lower Than Unhampered Market Interest Rates
• 5.: The Questionable Fear of Declining Prices
• The Trade Cycle and Credit Expansion: the Economic Consequences of Cheap Money
• 1.: Introductory Remarks *
• 2.: The Unpopularity of Interest
• 3.: The Two Classes of Credit
• 4.: The Function of Prices, Wage Rates and Interest Rates
• 5.: The Effects of Politically Lowered Interest Rates
• 6.: The Inevitable Ending

VII

The Goal of Monetary Policy

1.

Liberalism and the Gold Standard

Monetary policy of the preliberal era was either crude coin debasement, for the benefit of financial administration (only rarely intended as Seisachtheia,1 i.e., to nullify outstanding debts), or still more crude paper money inflation. However, in addition to, sometimes even instead of, its fiscal goal, the driving motive behind paper money inflation very soon became the desire to favor the debtor at the expense of the creditor.

In opposing the depreciated paper standard, liberalism frequently took the position that after an inflation the value of paper money should be raised, through contraction, to its former parity with metallic money. It was only when men had learned that such a policy could not undo or reverse the “unfair” changes in wealth and income brought about by the previous inflationary period and that an increase in the purchasing power per unit [by contraction or deflation] also brings other unwanted shifts of wealth and income, that the demand for return to a metallic standard at the debased monetary unit’s current parity gradually replaced the demand for restoration at the old parity.

In opposing a single precious metal standard, monetary policy exhausted itself in the fruitless attempt to make bimetallism an actuality. The results which must follow the establishment of a legal exchange ratio between the two precious metals, gold and silver, have long been known, even before Classical economics developed an understanding of the regularity of market phenomena. Again and again Gresham’s Law, which applied the general theory of price controls to the special case of money, demonstrated its validity. Eventually, efforts were abandoned to reach the ideal of a bimetallic standard. The next goal then became to free international trade, which was growing more and more important, from the effects of fluctuations in the ratio between the prices of the gold standard and the suppression of the alternating [bimetallic] and silver standards. Gold then became the world’s money.

With the attainment of gold monometallism, liberals believed the goal of monetary policy had been reached. (The fact that they considered it necessary to supplement monetary policy through banking policy will be examined later in considerable detail.) The value of gold was then independent of any direct manipulation by governments, political policies, public opinion or parliaments. So long as the gold standard was maintained, there was no need to fear severe price disturbances from the side of money. The adherents of the gold standard wanted no more than this, even though it was not clear to them at first that this was all that could be attained.

2.

“Pure” Gold Standard Disregarded

We have seen how the purchasing power of gold has continuously declined since the turn of the century. That was not, as frequently maintained, simply the consequence of increased gold production. There is no way to know whether the increased production of gold would have been sufficient to satisfy the increased demand for money without increasing its purchasing power, if monetary policy had not intervened as it did. The gold exchange and flexible standards were adopted in a number of countries, not the “pure” gold standard as its advocates had expected. “Pure” gold standard countries embraced measures which were thought to be, and actually were, steps toward the exchange standard. Finally, since 1914, gold has been withdrawn from actual circulation almost everywhere. It is primarily due to these measures that gold declined in value, thus generating the current debate on monetary policy.

The fault found with the gold standard today is not, therefore, due to the gold standard itself. Rather, it is the result of a policy which deliberately seeks to undermine the gold standard in order to lower the costs of using money and especially to obtain “cheap money,” i.e., lower interest rates for loans. Obviously, this policy cannot attain the goal it sets for itself. It must eventually bring not low interest on loans but rather price increases and distortion of economic development. In view of this, then, isn’t it simply enough to abandon all attempts to use tricks of banking and monetary policy to lower interest rates, to reduce the costs of using and circulating money and to satisfy “needs” by promoting paper inflation?

The “pure” gold standard formed the foundation of the monetary system in the most important countries of Europe and America, as well as in Australia. This system remained in force until the outbreak of the World War [1914]. In the literature on the subject, it was also considered the ideal monetary policy until very recently. Yet the champions of this “pure” gold standard undoubtedly paid too little attention to changes in the purchasing power of monetary gold originating on the side of money. They scarcely noted the problem of the “stabilization” of the purchasing power of money, very likely considering it completely impractical. Today we may pride ourselves on having grasped the basic questions of price and monetary theory more thoroughly and on having discarded many of the concepts which dominated works on monetary policy of the recent past. However, precisely because we believe we have a better understanding of the problem of value today, we can no longer consider acceptable the proposals to construct a monetary system based on index numbers.

3.

The Index Standard

It is characteristic of current political thinking to welcome every suggestion which aims at enlarging the influence of government. If the Fisher and Keynes proposals2 are approved on the grounds that they are intended to use government to make the formation of monetary value directly subservient to certain economic and political ends, this is understandable. However, anyone who approves of the index standard because he wants to see purchasing power “stabilized” will find himself in serious error.

Abandoning the pursuit of the chimera of a money of unchanging purchasing power calls for neither resignation nor disregard of the social consequences of changes in monetary value. The necessary conclusion from this discussion is that stability of the purchasing power of the monetary unit presumes stability of all exchange relationships and, therefore, the absolute abandonment of the market economy.

The question has been raised again and again: What will happen if, as a result of a technological revolution, gold production should increase to such an extent as to make further adherence to the gold standard impossible? A changeover to the index standard must follow then, it is asserted, so that it would only be expedient to make this change voluntarily now. However, it is futile to deal with monetary problems today which may or may not arise in the future. We do not know under what conditions steps will have to be taken toward solving them. It could be that, under certain circumstances, the solution may be to adopt a system based on an index number. However, this would appear doubtful. Even so, an index standard would hardly be a more suitable monetary standard than the one we now have. In spite of all its defects, the gold standard is a useful and not inexpedient standard.

Part II

Cyclical Policy to Eliminate Economic Fluctuations

[1. ][According to Mises, Seisachtheia (Greek) was a term used in the seventh century bc to mean “shaking off of burdens.” It described measures enacted to cancel in full or in part public and private debts; creditors then had to bear any loss, except to the extent that they might be indemnified by the government.—Ed.]

[2. ][See above, p. 61, n. 3—Ed.]