It should be sufficiently clear from what has been said that the traditional way of looking at the matter is but little in harmony with the peculiarities of fiduciary media. To regard notes and current accounts, whether they are covered by money or not, as constituting the same phenomenon, is to bar the way to an adequate conception of the nature of these peculiarities. To regard noteholders or owners of current accounts as granters of credit is to fail to recognize the meaning of a credit transaction.

Etatism, as a theory, is the doctrine of the omnipotence of the Estate, and, as a policy, the attempt to regulate all mundane affairs by authoritative commandment and prohibition. The ideal society of etatism is a particular sort of socialistic community; it is usual in discussions involving this ideal society to speak of state socialism, or, in some connections, of Christian socialism. Superficially regarded, the etatistic ideal society does not differ very greatly from the outward form assumed by the capitalistic organization of society.

For the etatist, money is a creature of the state, and the esteem in which money is held is the economic expression of the respect or prestige enjoyed by the state. The more powerful and the richer the state, the better its money. Thus, during the war, it was asserted that “the monetary standard of the victors” would ultimately be the best money. Yet victory and defeat on the battlefield can exercise only an indirect influence on the value of money.

The oldest and most popular instrument of etatistic monetary policy is the official fixing of maximum prices. High prices, thinks the etatist, are not a consequence of an increase in the quantity of money but a consequence of reprehensible activity on the part of “bulls” and “profiteers”; it will suffice to suppress their machinations in order to ensure the cessation of the rise of prices. Thus it is made a punishable offense to demand, or even to pay; “excessive” prices.

According to the current view, the maintenance of sound monetary conditions is only possible with a “credit balance of payments.” A country with a “debit balance of payments” is supposed to be unable permanently to stabilize the value of its money; the depreciation of the currency is supposed to have an organic basis and to be irremediable except by the removal of the organic defects.

It is not easy to determine whether there are any who still adhere in good faith to the doctrine that traces back the depreciation of money to the activity of speculators. The doctrine is an indispensable instrument of the lowest form of demagogy; it is the resource of governments in search of a scapegoat. There are scarcely any independent writers nowadays who defend it; those who support it are paid to do so. Nevertheless, a-few words must be devoted to it, for the monetary policy of the present day is based largely upon it.

1. Monetary Policy Defined1

The principal instrument of monetary policy at the disposal of the state is the exploitation of its influence on the choice of the kind of money. It has been shown above that the position of the state as controller of the mint and as issuer of money substitutes has allowed it in modern times to exert a decisive influence over individuals in their choice of the common medium of exchange.

Inflationism is that monetary policy that seeks to increase the quantity of money.

That policy which aims at raising the objective exchange value of money is called, after the most important means at its disposal, restrictionism or deflationism. This nomenclature does not really embrace all the policies that aim at an increase in the value of money. The aim of restrictionism may also be attained by not increasing the quantity of money when the demand for it increases, or by not increasing it enough.