The Gold Standard vs. Fiat Paper Money

As the Austrian economist Ludwig von Mises (1881-1973) noted, during the 19th century all the major European powers developed currencies based upon the gold standard (such as this German Imperial 20 Mark coin issued in 1900, above). This policy was strongly supported by classical liberals as it provided a powerful means by which the power of government to debase or otherwise manipulate their currencies was severely restricted. During and immediately after the First World War (1914-1918) the connection between a nation's currency and gold became much looser, or even non-existent as in the case of the hyper-inflation which gripped Germany during the Weimar Republic (1922-23). The bottom image is of a 10 billion mark Mark banknote dated 26 October 1923 at the peak (or depth) of the hyperinflation when paper money had become all but worthless. Mises wrote a number of important essays on monetary and banking policy in the mid and late 1920s in which he denounced this move away from the gold standard and predicted that it would lead to severe economic dislocation, the political manipulation of currencies, and even the collapse of the monetary system.

[See Mises, On the Manipulation of Money and Credit (2011).]

Related Links:

• Collection: Money and Banking
• Collection: The Austrian School of Economics