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1. Stabilization of the Monetary Unit — From the Viewpoint of Theory (1923)

II. The Emancipation of Monetary Value From the Influence of Government

1. Stop Presses and Credit Expansion

The first condition of any monetary reform is to halt the printing presses. Germany must refrain from financing government deficits by issuing notes, directly or indirectly. The Reichsbank [Germany's central bank from 1875 until shortly after World War II] must not further expand its notes in circulation. Reichsbank deposits should be opened and increased, only upon the transfer of already existing Reichsbank accounts, or in exchange for payment in notes, or other domestic or foreign money. The Reichsbank should grant credits only to the extent that funds are available—from its own reserves and from other resources put at its disposal by creditors. It should not create credit to increase the amount of its notes, not covered by gold or foreign money, or to raise the sum of its outstanding liabilities. Should it release any gold or foreign money from its reserves, then it must reduce to that same extent the circulation of its notes or the use of its obligations in transfers.10

Absolutely no evasions of these conditions should be tolerated. However, it might be possible to permit a limited increase—for two or three weeks at a time—only to facilitate clearings at the end of quarters, especially at the close of September and December. This additional circulation credit introduced into the economy, above the otherwise strictly-adhered to limits, should be statistically moderate and generally precisely prescribed by law.11

There can be no doubt but what this would bring the continuing depreciation of the monetary unit to an immediate and effective halt. An increase in the purchasing power of the German monetary unit would even appear then—to the extent that the previous purchasing power of the German monetary unit, relative to that of commodities and foreign exchange, already reflected the view that the inflation would continue. This increase in purchasing power would rise to the point which corresponded to the actual situation.

2. Relationship of Monetary Unit to World Money — Gold

However, stopping the inflation by no means signifies stabilization of the value of the German monetary unit in terms of foreign money. Once strict limits are placed on any further inflation, the quantity of German money will no longer be changing. Still, with changes in the demand for money, changes will also be taking place in the exchange ratios between German and foreign moneys. The German economy will no longer have to endure the disadvantages that come from inflation and continual monetary depreciation; but it will still have to face the consequences of the fact that foreign exchange rates remain subject to continual, even if not severe, fluctuations.

If, with the suspension of printing press operations, the monetary policy reforms are declared at an end, then obviously the value of the German monetary unit in relation to the world money, gold, would rise, slowly but steadily. For the supply of gold, used as money, grows steadily due to the output of mines while the quantity of the German money [not backed by gold or foreign money] would be limited once and for all. Thus, it should be considered quite likely that the repercussions of changes in the relationship between the quantity of, and demand for, money in Germany and in gold standard countries would cause the German monetary unit to rise on the foreign exchange market. An illustration of this is furnished by the developments of the Austrian money on the foreign exchange market in the years 1888–1891.

To stabilize the relative value of the monetary unit beyond a nation's borders, it is not enough simply to free the formation of monetary value from the influence of government. An effort should also be made to establish a connection between the world money and the German monetary unit, firmly binding the value of the Reichsmark to the value of gold.

It should be emphasized again and again that stabilization of the gold value of a monetary unit can only be attained if the printing presses are silenced. Every attempt to accomplish this by other means is futile. It is useless to interfere on the foreign exchange market. If the German government acquires dollars, perhaps through a loan, and sells the loan for paper marks, it is exerting pressure, in the process, on the dollar exchange rate. However, if the printing presses continue to run, the monetary depreciation will only be slowed down, not brought to a standstill as a result. Once the impetus of the intervention is exhausted, then the depreciation resumes again, even more rapidly. However, if the increase in notes has actually stopped, no intervention is needed to stabilize the mark in terms of gold.


In this connection, it is pointed out that the increase in notes and the depreciation of the monetary unit do not exactly coincide chronologically. The value of the monetary unit often remains almost stable for weeks and even months, while the supply of notes increases continually. Then again, commodity prices and foreign exchange quotations climb sharply upward, in spite of the fact that the current increase in notes is not proceeding any faster or may even be slowing down. The explanation for this lies in the processes of market operations. The tendency to exaggerate every change is inherent in speculation. Should the conduct inaugurated by the few, who rely on their own independent judgment, be exaggerated and carried too far by those who follow their lead, then a reaction, or at least a standstill, must take place. So ignorance of the principles underlying the formation of monetary value leads to a reaction on the market.

In the course of speculation in stocks and securities, the speculator has developed the procedure which is his tool in trade. What he learned there he now tries to apply in the field of foreign exchange speculations. His experience has been that stocks which have dropped sharply on the market usually offer favorable investment opportunities and so he believes the situation to be similar with respect to the monetary unit. He looks on the monetary unit as if it were a share of stock in the government. When the German mark was quoted in Zurich at 10 francs, one banker said: “Now is the time to buy marks. The German economy is surely poorer today than before the war so that a lower evaluation for the mark is justified. Yet the wealth of the German people has certainly not fallen to a twelfth of their prewar assets. Thus, the mark must rise in value.” And when the Polish mark had fallen to 5 francs in Zurich, another banker said: “To me this low price is incomprehensible! Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher.”

Similarly, in the spring of 1919, a leading official of the Hungarian Soviet Republic12 told me: “Actually, the paper money issued by the Hungarian Soviet Republic should have the highest rate of exchange, except for that of Russia. Next to the Russian government, the Hungarian government, by socializing private property throughout Hungary, has become the richest and thus the most credit-worthy in the world.”

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. Nevertheless, even though the theory of these bankers is false, and must eventually lead to losses for all who use it as a guide for action, it can temporarily slow down and even put a stop to the decline in the foreign exchange value of the monetary unit.

  • 10. Foreign currencies and similar legal claims could possibly be classed as foreign money. However, foreign money here obviously means only the money of countries with at least fairly sound monetary conditions.
  • 11. [Mises later developed his position on these matters more fully. He withdrew his endorsement of even such a carefully prescribed legal exemption as this to his general thesis that money and banking should be free of legislative interference. Even clearing arrangements among the banks should be left to the vicissitudes of the market. See his plea for free banking in Monetary Stabilization and Cyclical Policy (1928) in this volume especially pp. 124–25 below. Also in Human Action, chapter XVII, section 12 on “Indirect Exchange” and the essay on “Monetary Reconstruction” written for publication as the Epilogue to the 1953 (and later) editions of The Theory of Money and Credit.—Ed.]In power from March 21, to August 1, 1919, only.
  • 12. In power from March 21, to August 1, 1919, only.