Mises on classical liberalism and the gold standard (1928)

Ludwig von Mises

In an essay written in 1928 the Austrian economist Ludwig von Mises (1881-1973) argued that the major reason why classical liberals in the 19th century favored money based on a gold standard was because it meant that the value of money/gold was “independent of any direct manipulation by governments, political policies, public opinion or parliaments”:

Monetary policy of the preliberal era was either crude coin debasement, for the benefit of financial administration (only rarely intended as Seisachtheia, 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…

With the attainment of gold monometallism, liberals believed the goal of monetary policy had been reached…. 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.

Mises had been an adviser to the Austrian government on money and banking matters following the First World War when the full extent of the massive losses, inflation, and national debt incurred during the war began to be realised. He also witnessed the hyperinflation the Weimar Republic suffered in 1923, the doomed attempts by Britain to return to a gold standard based upon pre-war exchange rates which did not take into account the dramatic changes in relative prices which had taken place during the war, and then the stock market collapse of 1929. Out of these momentous events he formulated his theory of money and the business cycle which in summary is a strong defence of the gold standard to prevent governments and their central banks from manipulating currency, and a theory of the business cycle which argued that government manipulation of interest rates for poltiical purposes created malinvestments by businesses which were eventually shown to be unsustainable and needed to be liquidated and reinvested elsewhere, thus causing a “depression.”