Introduction

Editor?s Introduction

I
The Significance Of Mises? Contribution

1. Prevailing Concepts of Our Century

The history of the 20th century has been the story of the growth of statism?the ever-increasing control of governments over the lives, actions, earnings, inheritances and other accumulations of their inhabitants. The underlying principle, seldom questioned, has been that those elected or appointed to official government positions are ?experts.? They are thought to know what is best for their trusting incompetent charges, even though, in some cases, the same incompetents are considered intelligent enough to choose their supposedly wiser rulers.

The motivating precept of this century has been the basic Marxian fallacy that in a free market society the rich grow richer and fewer in number while the poor grow ever poorer and larger in number. This in turn is based on the fallacy that employers set wage rates and producers set prices. It is thus almost universally believed that in a free society workers and consumers are totally at the mercy of rapacious business interests.

This ill-founded, but popular, concept of an unhampered economy has stimulated a demand for laws that limit the freedom of business organizations and confiscate the major [p. xviii] part of their earnings. Such laws are expected to correct what are considered the undesired trends of a market system. By the use of democratic means, laws are passed in attempts to thwart the ultimate disaster of a plutocratic oligarchy. These laws seize more and more of the wealth of the successful minority, while allocating much of the appropriated funds to the envious and less productive majority, with the political brokers retaining an ever-increasing share for themselves and their friends. The principles of a limited government have been superseded by the almost universal acceptance of the idea that everything must now be decided by a majority vote, even as to who should pay for the birth or non-birth of each baby and how each person?s earnings must be shared among the electorate.

This process of socialistic leveling has become so widely accepted that when a co-chairman of a Tenants for Political Action group was recently charged with using political influence to force landlords to subsidize tenants, she replied, ?I see nothing wrong with having political pressure. That?s the name of the game and that?s what this country is all about.?

Stealing, i.e., taking the property of others by force, is now considered legitimate if it is done by the political process of majority vote. Such short-sighted avarice and economic ignorance are widespread. Morality and sound economics are no longer considered reasonable guides for public actions. The result has been that politicians promise voters more than they can deliver. Further seizures of the earnings of the high producers of wealth no longer satisfy the demands of those who believe they are legally and morally entitled to more than consumers will voluntarily pay for their contributions to society. So, for years now, politicians have sponsored inflation, creating by law or regulation, more and more additional monetary units with which to pay the bills. One of the effects of this inflation has been ever higher prices, a fact that alarms the public.

2. Defining Inflation

In order to relieve themselves of the blame, the politicians and pressure groups who promote our inflationary processes [p. xix] have succeeded in changing the popular definition of inflation. Historically, periods of inflation have always been considered periods of rapid increases in the quantity of money. This was so in all reports of both the American and French Revolutions. It was also so during the post World War I inflations which reached their apex in Germany in 1923. However, those who favor the deceptive processes of inflation, as a means for transferring wealth from those who earn it to those they consider more worthy of it, have changed this definition of inflation. Inflation now means to almost everyone a rise in prices. Unfortunately, such higher prices are only one of the inevitable consequences of an increased quantity of money bidding for available goods and services.

This shift in the popular definition of inflation tends to hide from most people the obvious way to end inflation. When inflation is defined as ?higher prices,? most people conclude that it is businessmen who raise prices. Therefore, businessmen must be responsible for inflation. The way to end inflation is then thought to be the control or legal limitation of price rises.

It is true that businessmen raise prices. They would like to raise their prices with every sale. However, it would do business organizations no good to raise their prices, if there were not some customers who could and would pay the higher prices they ask. If no one bought their wares at the higher prices, those prices would soon come tumbling down. The higher prices that we have been seeing in recent decades have been made possible solely because governments have made available increasing quantities of money to politically favored customers who then can and do pay the higher prices. This means that those who do not share in the political allocation of the newly created money find their purchasing power greatly diminished. If they believe what they read in the papers or see on television, they blame businessmen rather than politicians for the higher prices which reduce the buying power of their earnings.

When inflation is defined as an increase in the quantity of money, the remedy becomes obvious. Businessmen cannot [p. xx] create money. Under present-day laws, only governments and their agencies can. To stop inflation, all that needs be done is for governments to stop authorizing any further increases in the quantity of money.

3. Misdirection of the Economy

Unfortunately, higher prices are not the most important consequence of the political creation of new monetary units. These monetary units are endowed with full legal tender power. This means that, by law, they have the same purchasing power as all previously issued monetary units of the same name. New monetary units cannot be created by governments or anyone else without someone getting them and spending them first. Those who first receive these newly created monetary units are able to go out on the market and buy things they could not otherwise buy. They can and do buy things which other people would have bought with the money they had earned or saved. Thus every political creation of new money transfers wealth from workers and savers to those who are spending in the market place newly created monetary units which no one has earned.

As a result, the production facilities of the nation are gradually redirected with an ever larger percentage devoted to the satisfaction of those spending the newly created money. Those catering to the spenders of the newly created money find their sales going up and the politicians proudly point to the activity they have stimulated. On the other hand, those who can only spend what they have earned or saved find that they must reduce their purchases and their living standards.

As prices rise with the increased quantity of money, more and more new monetary units must be created to maintain the business activity dependent upon the creation of the new monetary units. As time passes, more and more production facilities are directed toward satisfying this demand which can only be maintained by increasing the quantity of money at an ever-increasing rate. This, of course, tends to lower the purchasing power of the monetary unit. Sooner or later, such increases in the quantity of money must come to an end, either [p. xxi] by a deliberate action stopping the creation of more monetary units, or by continuing until the purchasing power of that monetary unit approaches zero.

When inflations come to an end, as they must, those who have been producing and catering to those spending the newly created monetary units lose their customers. They must redirect their activities toward satisfying the only consumers left, those who have acceptable funds as a result of their contributions to the market. This redirection of the economy, popularly known as a recession or a depression, is actually a correction of the prior misdirection resulting from the inflation. It is a very painful period, particularly for two groups: (1) those who have been producing for the spenders of the newly created money, and (2) those who have become accustomed to spending money they have not earned. The suffering cannot be completely avoided, but it can be reduced to a minimum by permitting free market prices, wage rates and interest rates to direct the economy to the most efficient satisfaction of those who contribute to the economy. All political attempts to control prices, hold wage rates up and/or hold interest rates down interfere with the indicators that direct business enterprises toward the most efficient use of available capital and labor.

4. The Market Economy vs. the Welfare State

The simple facts stated above are seldom understood, because so few people have ever read or heard them. Rare are the schools, colleges, politicians or mass media who promulgate the simple economic fact that, in a truly free market society, it is the consumers who are sovereign. It is the consumers who determine the limits on the wage rates that may be paid and the interest rates that are profitable for both borrowers and lenders, as well as the ultimate prices of consumers goods. Consequently, there are very few people today who realize that when government serves only as a keeper of the peace, that is, as a protector of lives and property and a punisher of those who resort to force or fraud, it is the consumers who, by their voluntary purchases and refusals to [p. xxii] purchase, determine the incomes of all those who contribute to the market place. It is consumers who make some actresses, football stars and businessmen rich and it is consumers who retire to the sidelines those who do not satisfy them.

Whenever government interferes with the sovereignty of the consumers, it always helps some at the expense of others. It discourages the production of wealth, not only by reducing the incentives of producers but also by subsidizing the human tendency to indolence and parasitism. The unhampered market, where everyone, protected by government, is acting voluntarily, operates according to the Golden Rule. The more one contributes to the society, the more he or she receives in return. This is an incentive for everyone to contribute more of what consumers are buying as this is the most efficient means for increasing their own incomes.

When society forsakes the free market and the Golden Rule for the welfare state principles of transfer payments and special privileges for the politically powerful, it divides society into factions, each of which is struggling to get what that group considers its fair share of the wealth of others. No legislative body made up of human beings can ever divide available wealth in such a way as to satisfy every element of the population. So as long as funds are taken from some to give to others, there will be perpetual political struggles among the various pressure groups, each striving to get more for their members. Such political efforts must inevitably reduce the productivity of that society. As a consequence, the living standards of all will fall. While everyone suffers, those who are hurt most are the lowest income producers. More and more people will devote their efforts to preserving their wealth or obtaining more by political means, while fewer and fewer will save, invest and produce for the market place. There will be a growing number who will resort to violence in order to survive under the existing conditions. Only a trend toward a free and unhampered market can prevent this disastrous consequence.

As man and the world exist, every human being has unlimited wants, while the goods and services available for satisfying [p. xxiii] those wants are always limited. The economic problem is one of determining how we can best satisfy more and more human wants by ever increasing the quantities of goods and services available. No political intervention can improve upon the unhampered market processes which allocate available limited quantities to those consumers able and willing to pay the highest prices. The ability of people to pay such market prices arises from the prior valuation consumers have placed upon their individual contributions. Thus consumers, by their bidding in the market place, set all prices. This competition of consumers also sets the height of the income of each worker and investor. Consumers thus establish each worker?s wage rates and the amounts that can be paid for raw materials and borrowed capital.

In such an unhampered market, businessmen are merely middlemen competing for the favors of consumers, whose purchases determine those who can expand and those who must contract their activities, including their work forces. No business can long pay higher wage rates or raw material prices than those that can be paid with what they receive from their customers. Nor can any employer long make high profits by paying lower wage rates than those that customers will voluntarily repay. Those who attempt to do so soon find other employers will bid their workers away in their attempt to attract more customers with lower prices which squeeze profits. So, in the long run, it is always the consumers who determine the shares of total production allocated to each participant, be he investor, employer or employee.

5. Mises? Monumental Merit

Building on those who preceded him, the late Ludwig von Mises (1881-1973) made all this clear in his Human Action and other writings. Starting with the a priori premise that all men act in attempts to improve their future situations, he deduced not only a consistent and comprehensive theory of free men operating in an unhampered market, but also an irrefutable one. In his writings, he also spelled out the inevitable undesirable consequences of the many forms of political interferences [p. xxiv] with the market processes of free men and women who do not resort to force or fraud. From his first book in 1902 through the last piece Mises wrote for publication seventy years later,⁽¹⁾ the contributions of this Austrian-born economist were voluminous, but always succinct and relevant to the prime problems of our century. In this writer?s judgment, Mises remains the greatest economist of the 20th century. As a theorist, he was a genius who not only foresaw the problems of our century, he analyzed, understood and provided scientific solutions which no one has as yet been able to refute. If his ideas had been more widely read and accepted, the world would not be in the terrible state we now find it.

The acute perceptions and sound judgment of Mises were first evident in the 1912 edition of his Theorie des Geldes und der Umlaufsmittel (The Theory of Money and Credit). In this great book, written at least two years before World War I, Mises foresaw the revival of inflation at a time when his contemporaries believed that no great nation would ever again resort to irredeemable paper money. At a time when the cause of monetary panics and recurring economic crises was a baffling mystery to bankers, economists and politicians the world over and when the United States was considering the report of a four-year study by its National Monetary Commission, Mises? book presented his monetary theory of the trade cycle, a fundamental explanation of such crises. Unfortunately, his original spadework appeared only in German. Accordingly, only a few Americans were familiar with its contents before the passage of the Federal Reserve Act in December, 1913. If his great contribution had then been known, understood and accepted, there would have been no post World War I inflations and no 1929 depression. The whole history of our century would have been vastly different and living standards the world over would have been much higher than the world has ever known.

Unfortunately, the significance of Mises? revelation is not [p. xxv] yet generally known or appreciated. Mises devoted a great part of his life to attempts to improve and elaborate on his presentation of what has since become known as the Austrian trade cycle theory. This volume includes several of those attempts which have not previously been available in English. They provide invaluable insights which are helpful for understanding our present predicament and the solutions that could lead us out of our present economic wilderness.

6. The German 1923 Prototype

The first, Stabilization of the Monetary Unit?From the Viewpoint of Theory, was sent to the printers in January 1923, more than eight months before the German mark crashed. Our monetary situation today (1977) certainly has some similarity with that of Germany in late 1922. We have a paper money standard. Its purchasing power is dropping constantly and has been for a period of years. The making of long-term financial commitments is fast becoming impossible. As in Germany after World War I, our government has been trying to stabilize the value of our monetary unit; but the result has been a continuous inflation by any definition, with no end in sight. As Mises wrote then, ??We should be happy just to return to the monetary situation we once enjoyed.?

There are also some important differences in our present conditions. The monetary inflation is not confined to nations who lost a World War. Today, there is no major nation that has a redeemable currency. There is no nation with a sound gold-backed currency that can bail us out as we did Germany, with our Dawes (1924) and Young (1929) Plans. The inflation disease is widespread and the officialdom of every advanced government is searching for a solution and a workable international monetary system. Given these circumstances, these previously untranslated contributions of Mises assume an enhanced value. If their significance is grasped, they can guide us to the least costly solution to the problems created by the financial follies of our century.

As Mises then warned Germany, this volume can now warn the United States that if we continue present practices, ?The [p. xxvi] day will come without fail, sooner or later,? when our monetary system ?will break down completely.? Mises turns the corner for us and gives us a peek at what lies ahead if our government does not stop its continual multiplication of dollars. The period for which new monetary contracts can easily be made will become shorter and shorter as future interest rates mount and fewer and fewer persons accept the perpetual political promises that the ?rate of inflation? will subside within the next six months.

The precipice we are now approaching at an ever faster rate is hidden in the mirage of a murky understanding of economics that has engulfed our generation. Although the political multiplication of our legal tender dollars is a public record, few Americans are aware of it or the legal processes by which new dollars are created. Still fewer have any realization of their effect in misdirecting the economy in a manner that must ultimately and painfully be corrected. In fact, when the reality of our present monetary situation is presented, most people are either bored or disbelieving. They do not like the higher prices and higher interest rates, but the great majority hopefully continue to accept the political promise that these phenomena will subside in the next six months.

7. Dollar Obligations

Most people credit the officers of banks and other financial institutions with special knowledge of monetary affairs. Like the post World War I Germans who trusted the officials of their banks and insurance companies, many Americans believe that such officials will alert the public and take steps to divert any catastrophe they see looming in the future. Our financial institutions continue to make mortgage loans for 25 and 30 years, as well as auto loans for four and five years. Most people believe that no such loans would be made if those who make them had any fear of an impending monetary collapse. The general public as well as bankers, politicians and mass media have come to accept the political sedative that no modern government will ever again permit a depression.

Perhaps there is some justification for bankers and other [p. xxvii] mortgage lenders to feel secure. Their obligations to their depositors and insured persons are all in dollars. Knowledge of our banking laws and recent experience have convinced bankers that if they become overextended, the Federal Reserve System can and will supply them with enough dollars to tide them over any ?emergency.? Likewise, depositors feel secure in the knowledge that the Federal Deposit Insurance Corporation will protect them from any dollar losses. In 1922, German bank depositors had no difficulty in making withdrawals. Their difficulty was that the mark was fast losing its purchasing power.

Given the general acceptance of the idea that the inflationist trend is only a temporary phenomenon that will soon subside, few Americans seriously consider the possibility that the dollar could lose a large part of its purchasing power. For more than 30 years, the general public has been buying the govern ment?s ?baby bonds.? In all that time, no one who has held such a bond to maturity has received back the purchasing power originally invested. Yet, such bond sales still exceed redemptions and the number of dollars deposited in savings banks goes on growing.

This confidence in the future purchasing power of the dollar is also strengthened by the fact that so many foreigners are grasping for dollars and dollar obligations. The greater inflations of their native currencies make the holding of dollars appear relatively safer than holding their own currencies. Such holdings of dollars all over the world have undoubtedly been a major factor in preventing American prices from reflecting the full effect of our government?s ever-increasing creation of dollars.

8. Sixty Years of Intensifying Inflation

The now popular policy of currying public favor, with government spending programs not covered by taxes or securities sold to the public, was initiated to make American participation in World War I more palatable. The inflationary policies were resumed in the late 1920's, leading to the great depression [p. xxviii] that broke in 1929.⁽²⁾ At that time, the dollar was still redeemable in gold. That safety check brought the inflation to an end and necessitated a contraction of the prior credit expansion.

The only way the inflationary policy could be resumed was to end the ability of Americans to redeem their paper dollars in gold. This the New Deal did, thus permitting a plethora of spending programs and unleashing a half century of unbalanced budgets. Confidence in the dollar was maintained by (1) promises of a dollar that would maintain a ?stable value? in the future; (2) continuing certain legal limitations on the creation of dollars and (3) permitting dollars to flow to foreign nations and their central banks that still could obtain an ounce of gold for every thirty-five dollars presented to our government?s financial agencies.

As the quantity of dollars, new and old, approached the legal limitations, such safeguards were gradually reduced or eliminated over the years. The last gold requirement was repealed on March 18, 1968. As the quantity of dollars kept increasing, foreign governments and their central banks started to ask for gold for their paper dollars. When a run became evident, the President, on August 15, 1971, closed the gold window to foreign governments and their central banks, while diverting public attention by invoking price controls which he had said he would never do. Since then, the only restraint on the political manufacture of more dollars has been the gullibility not only of the general public, but also that of the leaders of academia, the mass media and the two major political parties. As Mises wrote in January 1923, ?No one can know when economic reality will break through the prevailing haze and present us with a ?dreadful catastrophe?.?

9. Temporizing Safeguards

For the most part, organized labor has striven to protect its members with contracts providing for automatic increases as the cost of living rises, i.e., as the purchasing power of the [p. xxix] dollar falls. Those on the government payrolls, including Social Security recipients, also receive automatic increases. Such ?indexing? serves to remove these large groups from those desperately seeking to end the inflation. Blind to any eventual ?dreadful catastrophe? and believing they have the political power to protect themselves, they seek only further political privileges.

In Germany in 1923, as in all other previous disastrous paper money inflations, when the value of the paper currency collapsed, gold and silver coins, as well as the redeemable moneys of other countries, soon appeared and market activities could quickly be resumed. In his last years, Mises often expressed his apprehension that this could not happen in this country, if the inflation of dollars followed the path of the German mark in 1923. There were no foreign currencies redeemable in gold and it was then illegal for Americans to own or accumulate gold coins. He strongly urged that Americans be allowed to own monetary gold. This valuable legal right was regained shortly after his death, yet few Americans seem to appreciate it. Unfortunately, most monetary gold is still in the possession of governments eager to demonetize it. Consequently, whenever the market value of gold has risen, the agencies of these governments unload enough gold to discourage most private investors. Like the inflation itself, such policies must sooner or later come to an end.

10. On Gold and the Return Thereto

In this January 1923 contribution, Mises punctured the then popular fallacy that there is not enough gold available to serve as a sound medium of exchange. Unfortunately, this fallacy is still widely held, even among those who should know better. This timely piece also exposes the fallacy in the still popular balance of payments theory that forms the basis of much of the nonsense related to our current energy crisis, which is actually the consequence of prior political interventions that restrained free market production of the needed energy.

Mises always used the term ?inflation? in its historic and only meaningful sense?an increase in the quantity of [p. xxx] money?rather than the now popular idea that inflation is one of the inevitable results of an increase in the quantity of money?higher prices. This change in the generally accepted definition of inflation is not without serious consequences, as has been mentioned. See above, pages xviii-xx.

This shift in the popular definition of inflation diverts attention from the real cause of our troubles, the political increase in the quantity of money, which not only raises prices above what they would otherwise be but redirects the economy in a manner which cannot be maintained indefinitely. This change in the popular meaning of ?inflation? also deprives us of a handy term that clarifies both the problem and the solution.

This Mises contribution of more than fifty years ago points out the necessary first step for ending inflation, ?halt the printing presses? and halt the granting of credit beyond the amounts saved and available for lending. This work contains the valuable seeds for solving our present day dilemma, which he developed more fully in his essay on Monetary Reconstruction which was added to the 1953 edition of his The Theory of Money and Credit. The price that has been paid for ignoring the teachings of this great man has been beyond calculation. However, it is not yet too late to profit from the wise words he left behind.

11. Mises? 1928 Foresight

The second contribution, Monetary Stabilization and Cyclical Policy, is probably Mises? longest and most explicit piece on misguided attempts to stabilize the purchasing power of money and eliminate the undesired consequences of the ?trade cycle.? He goes into more detail and explains more of the important points on which the monetary theory of the trade cycle is based than he does anywhere else. It appeared in 1928 and must have been completed early that year. Yet, with his usual exceptional foresight, he foresaw the futile policies that the Federal Reserve System was to follow from the 1928 fall election in the United States until the stock market crashed the following fall. [p. xxxi]

For reasons given in this editor?s Understanding the Dollar Crisis, the Federal Reserve System had stimulated the boom by holding interest rates below those of the free market. More and more of the resulting credit expansion found its way into boosting security prices. After the 1928 presidential election, the ?Fed? sought to direct the credit expansion away from ?security speculation? and toward the ?needs? of business and agriculture. The banking authorities found themselves unable to do this, as more and more newly created funds were used to push security prices still higher. In the end, the Federal Reserve System was forced to precipitate the end of the boom by raising interest rates and bringing both the business world and security markets back to reality.

Way back in 1928, Mises pointed out that if it ever became the task of governments to influence the value of money by manipulating the quantity of its monetary units, the result would be a continual struggle of politically powerful groups for favors at the expense of others. Such struggles can only produce continual disturbances with results far less ?stable? than the rules of the gold standard. We have now arrived at such a situation, as has England, where there is a constant struggle of various factions for political favors at the expense of the general welfare. The economic disorganization of our times is primarily the result of the vain attempts to satisfy the essentially unlimited demands of political pressure groups by the continuing creation of more and more monetary units.

12. The Stable Money Fallacy

In the first section, Mises demonstrates the inevitable failure of all attempts to attain a money with a ?stable? purchasing power by manipulating the quantity. As he expresses it, ?There is no such thing as ?stable? purchasing power, and never can be. The concept of ?stable value? is vague and indistinct. Strictly speaking, only an economy in the final state of rest?where all prices remain unchanged?can have a money with fixed purchasing power.?

Mises shows conclusively that purchasing power cannot be measured. Consequently, there is no scientific basis for establishing [p. xxxii] a starting point for such an unattainable idea. The very concept of ?stable value? denies flexibility to the myriads of market prices which actually reflect the ever-changing subjective values of all participants.

Mises shows that all index numbers are the result of subjective judgments as to what means or averages are used, what items are included or omitted and the weight given to each individual item. As a result, all such price indexes are a ?preposterous? fiction which cannot serve as scientific objective guideposts for determining an ?ideal? quantity of money. As he states it:

Truth is not the halfway point between two untruths.

He thus exposes the very foundation on which the so-called Monetarist School has built its house of cards.

13. The Market Weighs the Future

No one knows the future, but so far as market participants can foresee the future, the anticipated future purchasing power of any monetary unit will be reflected in the ?price premium? factor in market interest rates. If prices are expected to rise continually, the longer the period of a loan, the higher the interest rate will be. Before the German mark crashed in 1923, interest rates of ninety percent or more were considered low.

Mises also points out that those who save and lend their savings to productive efforts play a major role in raising production and living standards. It would seem that they are entitled to the free market fruits of their contributions. As just mentioned, unmanipulated interest rates would reflect market expectations of changes in the purchasing power of the monetary unit. However, if the principal of loans could be, and always were, repaid with sums representing the purchasing power originally borrowed, the lending savers would be prevented from sharing in the general progress and resulting lower prices their savings helped make possible. Then everybody but the lending saver would benefit from his savings.

This would, of course, reduce the incentive for people to [p. xxxiii] lend their savings to those who can make a more productive use of them. With less production, the living standards of all consumers would fall. So the ?stable money? goal, even if it were achievable, would be a stumbling block to progress. All progress is the result of free market incentives which lead enterprisers to attempt to improve on the ?stable? patterns of the past.

14. Deflation Also Harmful

Mises also refers to the fact that deflation can never repair the damage of a prior inflation. In his seminar, he often likened such a process to an auto driver who had run over a person and then tried to remedy the situation by backing over the victim in reverse. Inflation so scrambles the changes in wealth and income that it becomes impossible to undo the effects. Then too, deflationary manipulations of the quantity of money are just as destructive of market processes, guided by unhampered market prices, wage rates and interest rates, as are such inflationary manipulations of the quantity of money.

15. How the Cycle Starts

The second part of the 1928 work is a masterpiece in which Mises shows how the artificial lowering of interest rates intensifies the demand for credit that can only be met by a credit expansion. This addition to the quantity of money that can be spent in the market place must lead to a step-by-step redirection of the economy by raising certain prices and wage rates before others are affected, as the recipients of this newly created credit bid for available supplies of what they want but could not buy without having obtained the newly created credit.

Mises was then writing at a time when such credit expansion was primarily in the form of discounting short term (not longer than 90 days) bills of exchange. Consequently, such loans were always business loans. The first consequence was always a bidding up of the prices of certain raw materials, capital goods and wage rates, for which the borrowers spent their newly acquired credit. This has led some writers on the [p. xxxiv] subject to believe that all such loans went into the lengthening of the production period. Some did, of course, but Mises recognized that the lower interest rates attracted all producers who could use borrowed funds. Consequently all the resulting malinvestment does not result in longer processes. The effects depend on just who the borrowers are and how they spend their new credit in the market.

Since 1928, banks have extended credit expansion not only to business but also to consumers, and not only for short term loans but also for long term loans, so that the specific effects of credit expansion today are somewhat different than they were in the 1920's. However, the results are still, as Mises pointed out, a step-by-step misdirection in the use and production of available goods and services. As Mises wrote in 1928, as well as in Human Action, the result is not overinvestment, as some have thought, but malinvestment. Investment is always limited by what is available.

16. The Search for Answers

Although later and better statistics are now available and the Harvard ?barometers? have been superseded by computer models, what Mises said then about the Harvard ?barometers? also applies to the statistics gathered and rearranged by the more sophisticated computer techniques of today. Such re search materials may support Mises? theory, but they provide little help in furnishing an answer to the problem of finding the cause of recessions and depressions so that the cause may be eliminated.

The answer, as Mises attests, is a return to free market interest rates which restrain loans to available savings, i.e., the elimination of credit expansion, a system whereby banks lend more funds than they have available for lending by the artificial creation of monetary units in the form of bank accounts subject to withdrawal by checks. Mises saw the answer in free banking, with banks subject only to the commercial and bankruptcy laws that apply to all other forms of business.

In 1928, Mises also foresaw the attempts now being made to [p. xxxv] remove the brakes on credit expansion by international agreements. He recognized that if all major governments could ever be persuaded to expand credit at the same rate, it might then become more difficult for the residents of individual countries to detect the expansion or to check the expansion by sending their funds to countries where there was less credit expansion.

17. The Mises Theory Remains Intact

While Mises refined his presentation, particularly his scientific terminology, by the time he wrote Human Action, this 1928 contribution establishes him as the unquestioned originator of the irrefutable monetary ?Austrian? theory of the trade cycle. Others have since written on the subject. None has substantially added to, or subtracted from, his presentation. This basic explanation is very late in appearing in English. It is to be hoped that it will correct some of the misunderstandings resulting from the writings of others that have preceded its English appearance. This great contribution to human knowledge should be read by all those interested in saving our capitalistic civilization and capable of spreading a better understanding of the inherent dangers to our society in the political manipulation of money and credit.

18. Mises Anticipated Keynes? Faux Pas

The third Mises? contribution, The Causes of the Economic Crisis, is a translation of a speech he gave at the depth of the great depression on February 28, 1931, before a group of German industrialists. After a clear but simple presentation of consumer sovereignty in an unhampered market society, Mises described how the lowered interest rates produced the then current crisis. He goes on to explain the duration of the crisis as the result of other interventional hamperings of market processes. He shows that continued mass unemployment is due to interference with free market wage rates. He also shows how political interventions affecting prices, as well as heavy taxes on capital and its yield, had hindered recovery.

In this speech, five years before the appearance in 1936 of [p. xxxvi] Keynes? The General Theory of Employment, Interest and Money, Mises made a devastating criticism of the basic Keynesian tenet that has since become so popular. It is the idea that inflation can bring the higher than free market wage rates extorted by labor unions into a viable relationship with other costs. Accepting the idea that it was politically impossible to reduce the higher than free market union wage rates that had produced mass unemployment, Keynes proposed to lower the real wages of all workers by lowering the value of the monetary unit, i.e., inflation. Unfortunately, England?s inflation only lowered the real wages of the privileged union members temporarily, while disorganizing the nation?s whole market economy. This, in turn, created a clamor for more political interventions that sponsors hoped would correct the undesired results of the inflation.

Mises correctly foresaw that the politically feared labor unions would, sooner or later, insist on higher money wages. The eventual solution, as Mises has maintained, must be a return to free market wage rates. He was certainly many years before his time. There is still a popular feeling that inflation is a means of offsetting unemployment, with little recognition that such inflations must inevitably lead to the undesired recessionary consequences that every responsible person wants to prevent.

19. The Mania for Low Interest Rates

The first Mises ?Postscript? is a translation of a 1933 contribution he made to Arthur Spiethoff?s Festschrift devoted to the status and prospects of business cycle research. Mises used to say that all a good economist needed was some sound ideas, writing materials, an armchair and a waste basket. He, of course, recommended wide reading but he insisted that it was the ideas that were important and that without ideas all statistics were meaningless.

In this piece Mises comments on the clamor for cheap credit. Throughout history there have been governments that have sponsored high prices and governments that have sponsored low prices, but all governments have been advocates of [p. xxxvii] low interest rates. Politicians never seem to learn that the best way to attain low interest rates is to stop inflating the quantity of money and remove all obstacles to the greater accumulation of capital. Mises also explodes the naive inflationist theory that prosperity requires ever-rising prices.

20. The Beneficiaries of Low Interest Rates

The second ?Postscript? is not a translation. It was prepared in early 1946 for an American business association for which Mises served as a consultant. He discusses his cycle theory in the American milieu and points out that low interest rates actually hurt the American masses who, as savings bank depositors, life insurance policy holders and beneficiaries of pension funds, are the creditors of large corporations and governmental bodies which are today the major borrowers of savings. He also gives a clear explanation of the important difference between ?commodity credit? and ?circulation credit.? It is the latter which is so disastrous in disorganizing free market guidelines. Our real problem is not a shortage of money, but a shortage of the factors of production needed to produce more of the things that consumers want.

21. Editor?s Epilogue

This volume?s ?Epilogue? contains four articles by this editor which appeared during the period from June 1954 to December 1974 on the subject matter of this collection. The theory and understanding presented are in the Misesian tradition. The first three articles appeared during Mises? lifetime. In accordance with his late wishes and teachings, the term ?money supply? which appeared in the original versions has been changed to his preferred more neutral term ?quantity of money.? The fourth and final one appeared after his death. It deals with a subject dear to him, the ever popular clamor for lower interest rates. If those in positions of influence and responsibility could grasp what is involved in such political manipulations of money and credit, they could and would greatly reduce future human sufferings.

1.       This was his Preface for this editor?s Understanding the Dollar Crisis (Western Islands, 1973).

2.       See the editor?s Understanding the Dollar Crisis, Chapter VI. [p. xxxviii]

II
Some Misconceptions Of The Mises Cycle Theory

1. Mises? Lifetime Interest

Mises first presented his monetary theory of the trade cycle in 1912, in the German language first edition of his The Theory of Money and Credit, a second edition of which appeared in 1924. He expanded on it in more detail in his 1928 work, now being made available in English for the first time. Mises, a true scholar, had read widely. He built his theory on the contributions of many great scholars who preceded him and a few who were his contemporaries.

As a young man, Mises realized that the problems of money and credit were those that most threatened our civilization and he devoted most of his life to trying to expose the dangers of the policies being followed. After he came to the United States in 1940, he devoted much of his time to trying to improve his presentation and to refining the terms and expressions he used to explain it. Consequently, his presentation in Human Action is much more lucid and expressed in more precise terms than any of his prior presentations.

The Theory of Money and Credit did not appear in English until 1934, after other versions of the monetary theory of the trade cycle had already appeared in English. Since then, there have been a number of other books and articles on versions of what has become known as the Austrian theory of the trade cycle. Most of them are well worth reading, but unfortunately many of the authors have missed some of the fine, very [p. xxxix] important points that are part of the Misesian theory. Some of the more common differences or misunderstandings follow.

2. Overinvestment vs. Malinvestment

This theory is often referred to as an ?overinvestment theory.? As previously mentioned, Mises never considered his theory to be an overinvestment theory. It is a malinvestment theory. It is impossible to invest more factors of production than there are available. Of course, businessmen often use the newly obtained credit to start operations for which the labor and capital can only be obtained by withdrawing them from other operations into which an unhampered market would have guided them. Every overinvestment thus must result in an underinvestment elsewhere. Mises tried to correct this misdesignation of his theory on pages 556-559 of Human Action.

Mises also understood that all increases in investment did not necessarily mean decreases in consumption, or vice versa. He held that in a progressive economy, where there is an ever-increasing production of wealth, the increased product can be so divided that there can be both an increase in investment and an increase in consumption at the same time.

3. Effect on the Length of the Production Process

Some writers on the Austrian theory of the trade cycle have contended that credit expansion always results in increased loans to business and that all such loans result in lengthening the production processes. Two reasons have been offered for this: (1) the shorter production processes are presently operating at capacity, so an expansion must take the form of a longer and more productive process, and (2) the credit expansion will flow to the longer processes because they need loans for a longer time and thus benefit most from lower interest rates.

As Mises pointed out on page 556 of Human Action, such credit expansion may or may not lengthen the period of production. He recognized that lower interest rates were attractive to all users of capital. Therefore, credit expansion led to an expansion of activities by those engaged in production of all different [p. xl] time periods. In the theory, as he originated it, credit expansion arose primarily from the discounting of bills of exchange with usances of 90 days or less. He recognized that such loans were often renewed, but such short term loans did not always flow into processes requiring a lengthening of the period of production.

In later years, he also recognized that all credit expansion loans were not to business alone. In more recent years, banks have been granting circulation credit not only to governments, but also to consumers. The effects on the economy differ in each case, according to how the new monetary units make their step-by-step appearances on the market. When the expansion is to underwrite current government deficits, the effects depend upon how the government spends the newly created monetary units. When the expansion arises from the monetization of previously privately held government debt, the effects depend on how the previous holders spend the newly created funds. Likewise, the effects are different when banks expand credit for loans to consumers for the purchase of automobiles and real estate.

4. Interest Rate Reduction vs. Monetary Expansion

Many of the writers speak of the Austrian theory of the trade cycle as one that is started by an increase in the quantity? of money which they say lowers the rate of interest. The Mises theory is the very opposite. The first step is always the lowering of the rate of interest, that is, an offer or willingness to lend at interest rates below those of the unhampered market rates. This increases the demand for bank loans. This increased demand for loans is then met by credit expansion, the creation of credit extended to the borrowers in the form of additions to their bank accounts.

This artificial spur to the demand for bank loans, which is met by lending funds that no one has saved, forces other lenders who are offering real savings to reduce their interest rates also. So the process, usually started by a central bank, which stands ready to discount the loans of commercial banks, [p. xli] tends to bring all interest rates down below those that would prevail in an unhampered market where lenders could only lend what savers had made available for lending. As the boom progresses, interest rates may rise; but, to keep the boom going, interest rates must be kept below those that would prevail in an unhampered market. Otherwise, there would be a contraction of credit and the activities stimulated by the prior credit expansion. In the Mises theory, it is not the increase of circulating media that starts the cycle. It is the original artificial lowering of the rate of interest.

5. On Countering Inflation with Deflation

There are some who write on the Austrian theory of the trade cycle who believe that the effects of an inflation or credit expansion can be offset or corrected by a deflation. Mises has shown that such artificial increases in the monetary unit result in a misdirection of the economy by malinvestments which lead, over time, to malproduction. This process alters the relative wealth and incomes of all the market participants. There is just no way that any method of deflation, over any selected period of time, could reverse the inflation produced changes and bring the many participants back to the relative economic positions they occupied at the time the inflation or credit expansion was initiated. Actually, people die and others are born in the interim. Deflation, as well as inflation, produces malinvestments and malproduction, although of another sort. Deflation likewise takes place over a time period, increases uncertainty about future political manipulations and leads to dislocations which in turn would require a recession to repair. As Mises has also stated, deflation is never a politically popular policy.

If we wish to avoid, so far as possible, the shifts in wealth and income brought about by malinvestment and malproduction, the scientific solution is to permit the quantity of money to be determined by free market processes. In the Mises theory, banks should be subject to the same laws that apply to all other corporations. If they are unable to meet their obligations when due, they should be subject to the general laws of [p. xlii] bankruptcy. This in time would make people cautious about the banks in which they deposited or invested their funds.

6. On the Use of Mathematics

As Mises has carefully explained, human valuations and market values are ever fluctuating. Consequently, there can be no unit for the measurement of economic values. Accordingly, Mises never resorted to either simple or higher mathematics to explain the theories of human action, which are always the result of human valuations. Since all human actions are those of individuals, he considered the use of such terms as ?averages, . . . . totals? and other such ?macro? terms inappropriate and without meaning for presenting economic theory. Since human demands and the supplies of diverse goods and services cannot be measured or totalled, he never attempted to do so. Since graphs, charts and diagrams usually imply fixed or measurable relationships which are imprecise and often misleading, Mises, a scientist, never used them to illustrate economic theories of human action for which all components are variables, with nary a constant. Consequently, he never used or referred to such nebulous and unscientific terms as ?national income? and ?gross national product,? except perhaps to point out the basic fallacies their use implies.

7. On the Use of Commodity Price Indexes

In his first major monetary book (1912), as well as in the 1928 translation which follows, Mises adequately exposed the fallacies behind all forms of a commodity dollar, both those of the simple market basket variety as well as those of the more sophisticated commodity reserve type. All such proposals are based on the erroneous idea that their implied or stated goal of a so-called ?stable price level? is attainable by manipulating the quantity of money and the corollary fallacy that increased production requires an increased quantity of money. The sum and substance of Mises? contributions in the field of money show this to be a sophistry.

As Mises has shown, any quantity of money can do for a society all that any other quantity of money can do. Money is [p. xliii] merely a medium of exchange that facilitates voluntary market transactions that are undertaken because each participant expects to improve his position or satisfaction as a result. The use of money permits the expression of all market values in terms of one commodity. As a result, market participants can more easily choose those transactions which they consider most likely to bring them the greatest possible satisfaction. Market participants, both buyers and sellers, are not particularly concerned with whether all prices are high, low, ?stable,? or ?unstable.?? They are primarily concerned with the relative differences in the prices of various goods and services at the moment and the anticipated changes in their relative differences at various times in the future. These differences are easiest to compare and calculate when expressed in terms of a single commodity money, the quantity of which can only be changed by market processes and not by the printing presses of banks or political agencies.

8. On the Emergency Use of Credit Expansion

Mises? theory holds that credit expansion, as he defines it, always disrupts the optimum operations of the market processes. Conditions may seem desperate with millions unemployed and much idle equipment, but such conditions never justify credit expansion. Credit expansion, even when workers and other resources are ?idle,? will only disorient entrepreneurs and lead to the malemployment and malinvestment of available factors. Such credit expansion will always necessitate a later correction, generally known as a ?recession.?

Mass unemployment is always the result of institutional interferences with free market processes, such as subsidies for the unemployed and unsuccessful attempts to raise and hold some wage rates above those that would prevail in the unhampered market the so-called ?pro-labor? laws which interfere with consumer sovereignty. When prior malinvestment has provided specific capital equipment, the operation of which would be more costly than the market value of its products, it would be a further waste of capital to operate such equipment. [p. xliv]

We could never improve living standards if both labor and capital were not flexible and capable of shifting with changing consumer wishes. Changing consumer demands are constantly turning some earlier profitable investments into unprofitable ones. One of the most popular fallacies underlying political attempts to stimulate prosperity is the idea that employment and production must be revived in precisely the previously existing pattern. It is thought that idle factories should all be reopened and workers should return to their previous jobs. Producing goods and services that can no longer be sold at prices that cover free market costs is as stupid as maintaining candle factories when the consumers demand electricity. The same applies to subsidizing ever-increasing agricultural production, when market prices indicate consumers would prefer more manufactured goods rather than more farm goods. Credit expansion always results in thwarting consumer sovereignty and in misdirecting the economy in a manner which sooner or later must be corrected at a painful cost in terms of human suffering that could have been avoided if the credit expansion had not been undertaken.

It should also be mentioned that once a credit expansion has stimulated certain economic activities, it can never be computed just how much more credit expansion will be needed to maintain that activity. As prices rise, it will tend to take a greater expansion of credit, but just how much more will depend on the ever-changing understanding and reactions of all those affected. Market processes are never mechanical or measurable. They are always the result of the changing human ideas and values which inspire each human action and interaction.

9. The ?Price Level? Fallacy

More than a century has passed since Menger founded the Austrian School, based on the cornerstone of subjective value judgments of marginal utility. Some 65 years have passed since Mises applied this theory to money. Yet, there are still those who consider themselves members of the Austrian School who use the misleading unscientific term, ?price [p. xlv] level.? Some have even written that the banking system could manipulate the quantity of money so as to maintain ?stable prices.? This certainly indicates an incomplete comprehension of subjective value theory and the flexibility of market prices. The earliest writings of Mises have demonstrated that there is nothing that can happen in the market economy which would affect all prices to the same degree at the same time. This would mean that all human beings would have to have rigid value scales that would shift at the same time, in the same manner and to the same degree with every change in existing conditions.

The quantity of money cannot ever be increased without some persons getting the new money first. This necessarily changes their valuations of the monetary unit and the relative choices they make in spending their available money. This in turn first affects the prices of those items for which the new money is first spent. Some, who recognize this, say that although all prices will not be raised evenly in the short run, ?average? prices will rise evenly in the long run. They indicate that more money poured into an economy will not raise the ?price level? as quickly as more water poured into a vessel will raise the water level. They seem to think that money poured into an economy acts more like honey. It is sticky, and slow to level out, but given time, they maintain the ?price level? will rise evenly.

This is just not so. Mises has often shown that the very concept of ?price level? is ?untenable.?⁽¹⁾ The increase in the quantity of money is a step-by-step process. Some will profit and some will lose, all in different degrees at different points in time. There will be changes in many prices, at different times and to different degrees in a manner which cannot be foreseen or reversed. The shifts in real wealth, incomes and market prices are so complex over time that neither the cessation of inflation nor any attempt to offset it with deflation can ever restore any prior wealth distribution, price ratios or any imaginary but incalculable ?price level.? [p. xlvi]

As Mises has long shown, the myriads of price relationships at any instant in the past can never be duplicated. Even if they could be duplicated, there would be no way to prove it. As the Austrian subjective theory holds, values are in the minds of men and they are as ever-shifting as are the ideas that occupy the minds of men and guide their actions.

10. On Definitions of Money

It has been written, ?Mises did not develop fully, of(sic) the proper definition of the crucial concept of the money supply.? In his last years, Mises disapproved of the term ?money supply,? because as he explained, the term ?supply? suggests the more the better.⁽²⁾ More money, as has been explained, does not help society. It only helps some, those who can spend it first, at the expense of others, those who face higher prices with no increase in funds. Mises recognized money as the most marketable commodity in a market society. Under modern conditions, money has been gold despite all political attempts to demonetize it.

No one has been more careful or more specific in the use and definition of the various kinds of money. Mises divided all money into two major groups, ?money in the broader sense? and ?money in the narrower sense.? He further divided and defined money into ?commodity money, . . . . credit money,? ?bullion,? ?standard coins,? ?fiat money,? ?money certificates,? ?banknotes,? ?token money, ?fiduciary media,? ?money substitutes,? ?deposit currency,? ?bills of exchange,? ?medium of exchange,? ?commodity credit? and ?foreign exchange,? as well as such terms as ?numeraire,? ?cash holding,? ?hot money,? ?circulation credit? and ?neutral money.? For specific definitions of these terms see Mises Made Easier. As regards ?neutral money,? which some think possible, he stated it was both ?unrealizable and inconceivable? (Human Action, p. 249).

Deposits in savings banks and in savings and loan associations and the cash surrender values of life insurance policies [p. xlvii] are not funds that depositors and policy holders can obtain and spend without reducing the cash of others. These funds are in large part invested and thus not held in a monetary form. That part which is in banks or in cash is, of course, included in the quantity of money which is either in or out of banks and should not be counted a second time. Under present laws, such institutions cannot extend credit beyond sums received. If they need to raise more cash than they have on hand to meet customer withdrawals, they must sell some of their investments and reduce the bank accounts or cash holdings of those who buy them. Accordingly, they are in no position to expand credit or increase the nation?s quantity of money as can commercial and central banks, all of which operate on a fractional reserve basis and can lend more money than is entrusted to them.

11. Capitalism and Fractional Reserves

Mises did not consider fractional reserve banking either a weakness or a ?natural? part of capitalism. He considered it a deviation from capitalism which free banking would have eliminated, if governments had not intervened to support banks when, as a result of their expansion of circulation credit, a crisis threatened or developed. Mises understood human nature and the pressures placed on banks to expand credit beyond available savings and on politicians to approve more spending measures than taxpayers can or would support. Consequently, Mises never endorsed the issue of irredeemable paper money by either private banks, central banks or governmental agencies.

12. The Ricardo Effect

Mises also recognized the fallacy that labor unions and others sometimes promote in their references to the so-called ?Ricardo effect.? Ricardo held that a rise in wage rates will encourage the increased use of capital to replace labor by machines and likewise that a drop in wage rates would discourage capital investment leading to a replacement of machines by workers. Entrepreneurs will naturally attempt to [p. xlviii] balance their use of labor and machinery in accordance with the relative marginal productivity of each. However, increased capital can never replace workers unless the capital has been saved and is available.

If the higher wage rates of a firm or an industry are the result of political or labor union pressure, legal or illegal, rather than market processes, such replacement of workers by machines must withdraw capital from other uses where the unhampered market would consider it more productive and at the same time release workers for tasks which the unhampered market considers less productive. Consequently, such shifts that result from interferences with free market processes must reduce the efficiency and contributions of both the available capital and available workers. Thus, labor unions that raise wage rates above those that would prevail in an unhampered market must necessarily reduce consumer sovereignty and living standards. Such wage hikes are an infringement on consumer sovereignty and never increase the efficiency of total production. The result is always malproduction.

13. The Importance of Accurate Terminology

Mises, as a scientist, was most precise in his choice and use of terms. As he became older, he became even more so, and replaced those he used in his earlier works with ones he considered more specific and less open to misinterpretation. In his later years, he used only those terms that meant exactly what he wanted to say and avoided all use of indefinite, meaningless and unscientific terms which might have ambiguous or double meanings which could convey misleading inferences.

He made a distinction between ?profits? and ?interest? and never confused the two. As he defined profits, their emergence and their tendency to disappear, there is no such thing as a ?rate of profit.? As he wrote in Human Action (p. 297), ?It is absurd to speak of a ?rate of profit?.?

He considered ?price? to be a quantity of money and as there could not be a ?price of money? he frowned, in his later years, on the use of the term ?price of gold,? as he considered [p. xlix] gold to be money. He considered such usage an unacceptable euphemism for disguising the falling purchasing power of the monetary unit as a result of inflation and/or credit expansion.

Holding that individually held ideas and values guided and determined all market actions and processes, Mises likewise frowned on all use of mathematical and physical science terms in discussions of economic theory. Thus in his later years he sought to avoid all confusing and scientifically misleading terms such as ?velocity,? ?equilibrium,? ?automatic,? ?mechanism,? et cetera. Since a nation?s so-called ?economic growth? cannot be measured or calculated, the term ?rate of growth? was an anathema to him. Those who use such terms have failed to grasp the subjective nature of human actions and the processes of the market economy as Mises has explained them.

While Mises improved his economic understanding over the years, he was very careful not to rush into print until he had thought his premises through to what seemed an irrefutable conclusion. As his understanding improved, he did change his conclusions in a few instances. He shifted his position on the gold exchange standard between 1923 and 1924. After considerable study of interest, he dropped some of his earlier thoughts as he developed his interest theory more thoroughly. However, his greatest changes were in his terminology which he constantly strove to perfect by dropping old terms which he considered unscientific or open to meanings other than the precise one he sought to express. He was constantly searching for more accurate ways to present his ideas so that they could be more easily understood.

His substitution of an ?evenly rotating economy? for a ?static economy? was a vast improvement. His concepts of ?final price? and ?final state of rest,? as states toward which the economy tended if no new data emerged, replaced the awkward and inaccurate idea of market ?equilibrium,? a state or condition where opposing forces or offsetting influences are exactly equal and thus in balance, i.e., a state of rest or inaction. As new data are constantly arising and shifting final prices and final states of rest, the market is constantly in [p. l] disequilibrium. These and other distinctive terms which he used accurately describe the ever-changing tendencies of the market processes. For him, socialism and all forms of statism were diametrical opposites of capitalism which he defined as a society in which the means of production were privately owned. Consequently, he looked upon such terms as ?state capitalism? as contradictio in adjecto and therefore worse than meaningless.

14. The Route to Sound Money

From time to time those associated with the Austrian School have proffered various plans and steps to be taken to end the present monetary morass and replace it with a sound monetary system. In the judgment of the editor of this volume, no one has yet improved on what Mises wrote in 1952 in his ?Mone tary Reconstruction? epilogue for the 1953 edition, and all later printings, of The Theory of Money and Credit. Mises, as an economic scientist, never analyzed a problem from the viewpoint of what was popular or politically feasible. He sought and proposed the actions that would produce the desired results. In this case, the desired result being a sound monetary system, he proposed the necessary steps and the order in which they must be taken to obtain that desired result with the least loss of time, capital and human effort, while holding human suffering to a minimum. Those who wish to make proposals for a return to a sound monetary system would do well to read, or re-read, the proposal Mises wrote back in 1952.

1.       See particularly Human Action, pp. 222 & 399.

2.       See the editor?s Understanding the Dollar Crisis, p. xxiii. [p. li]

III
Conclusion

1. The Importance of Understanding Mises Correctly

Fortunately, Mises? great contributions still live. However, it is extremely urgent, not only for the present generation but for future generations, that his contributions be better understood. Unfortunately, many now interested in his ideas are reading about them in secondary sources written by those who espouse some of the shortcomings and differences mentioned above.

This author recently attended a symposium on ?Austrian Economics? at which few of the academic participants understood either the basic fine points of Misesian contributions or the value of his carefully selected terms and definitions. Many of the papers were filled with imprecise terms, popular fallacies, positivist ideas and even so-called ?mathematical economics.? Many present considered Mises a great man of the past who has since been superseded. Some, unaware of the basic contributions of Mises, were eager to pass him by and use the terms, ideas and methodologies popular in our academic world to promote what they considered ?Austrian? economics. Finding the teachings of Mises so poorly understood and appreciated, this editor was moved to exclaim, ?You have to come up to Mises, before you can go beyond him.? A few applauded, but the majority paid little heed. As our economic problems deepen, there is a growing interest in ?Austrian? economics, but unfortunately few appreciate the heights to which Mises? contributions have raised it. [p. lii]

Mises kept writing all his life on the problems of money, credit expansion and the trade cycle. From the time he started on the first edition of his 1912 money book, he was conscious of the fact that current monetary fallacies were destroying the civilization that 19th century free market ideas had built. While personally cheerful in his last years, he was extremely pessimistic about the future. He did maintain that trends can and do change, but he saw no signs or evidence of a favorable change as he passed from the scene.

This book is being published with the hope that it will lead to a better appreciation of the great contributions and later refinements that Mises made to the theory of money, credit expansion and the trade cycle. This is an era in which general understanding will have to improve rapidly if our civilization is to be saved from the cataclysm toward which it is now racing at an ever faster tempo. As this Mises student said some twenty years ago, you cannot keep going to hell without sooner or later getting there. We are still on that road and rapidly approaching the point of no return. The price that must be paid for the economic follies of the last half century will have to be paid, but a better understanding of the contributions of Mises, if learned in time, would cut the costs to a humanly bearable point.

2. On Translations

While Mises? most valuable contributions were not always easy reading, he did not lapse into abstruse or convoluted esoterics. He wrote what he had to say simply and directly, perhaps on some occasions too simply and too concisely for many readers to grasp the full implications which he did not always spell out. He had a dislike for translations. He maintained that each language group had some ideas, customs and traditions which were impossible to translate accurately into the languages of another language group with different ideas, customs and traditions. He would ask, how could such thoroughly American traditions as college fraternities and football extravaganzas be translated into the German language, which had no precise terms for expressing such alien ideas. [p. liii]

My wife, Bettina Bien Greaves, started these translations a few years after she became a student of Mises. In the years that have intervened, she has become one of his most careful students. She prepared a bibliography of his works, catalogued his library, completed eighteen years of seminar attendance and assisted him in many ways. In 1971, Mises gave his approval to the translations when he was assured that they would be edited by the undersigned, a student he considered well schooled in his ideas. Mrs. Greaves may not have been a thorough Misesian when she started these translations, but she certainly was by the time they were completed. Few others could have performed the task as thoroughly and as faithfully to the little understood, but highly important ideas of Mises as she has done. We all owe our thanks to her.

The completion of this Mises? assignment has taken longer than expected. However, we have spared no effort in our attempt to present Mises? ideas in a form we feel he would approve. We hope this volume will lead to a better understanding of Mises? contributions to man?s knowledge of money, credit and the trade cycle.

PERCY L. GREAVES, JR., Editor

July 4, 1977

P. S. After this manuscript was in the hands of the printers, The Wall Street Journal published an article on August 19, 1977, ?Toward Free Market Money,? by Professor Friedrich A. Hayek. In this article Professor Hayek offered ?an effective remedy to our monetary troubles . . . a radical cure?i.e., taking from government the monopoly of issuing money, and handing the task to private industry.? His suggested scheme is similar to that in his recent Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies (London: Institute of Economic Affairs, 1976). He would have competing private banks ?issue certificates and open checking accounts in terms of some new monetary unit.? These units would be redeemable in national currencies and the quantities outstanding regulated in an attempt to tie their value to a ?guide number? of ?an appropriately weighted average of the [p. liv] monetary prices.? He believes that ?eventually a common commodity standard would develop, represented by a number of different specified currencies.?

The editor and translator of this volume answered this proposal in a letter of August 23, 1977 to The Wall Street Journal. We consider our reply pertinent to the contents of this volume. Accordingly, we have added it as a postscript to the EDITOR?S EPILOGUE under the title ?On Private Paper Money.?

P.L.G., Jr.

September 30, 1977. [p. 1] [p. 2] [p. 3]