VIII. The Ideological Meaning of Reform
1. The Ideological Conflict
The purely materialistic doctrine now used to explain every event looks on monetary depreciation as a phenomenon brought about by certain “material” causes. Attempts are made to counteract these imagined causes by various monetary techniques. People ignore, perhaps knowingly, that the roots of monetary depreciation are ideological in nature. It is always an inflationist policy, not “economic conditions,” which brings about the monetary depreciation. The evil is philosophical in character.
Appendix: Balance of Payments and Foreign Exchange Rates
The printing press played an important role in creating the means for carrying on the war.29 Every belligerent nation and many neutral ones used it. With the cessation of hostilities, however, no halt was called to the money-creating activities of the banks of issue. Previously, notes were printed to finance the war.
III. The Return to Gold
1. Eminence of Gold
In the years preceding and during the war, the authors who prepared the way for the present monetary chaos were eager to sever the connection between the monetary standard and gold. So, in place of a standard based directly on gold, it was proposed to develop a standard which would promise no more than a constant exchange ratio in foreign money. These proposals, insofar as they aimed at transferring control over the formulation of monetary value to government, need not be discussed any further.
IV. The Money Relation
1. Victory and Inflation
No one can any longer maintain seriously that the rate of exchange for the German paper mark could be reestablished [in 1923] at its old gold value—as specified by the legislation of December 4, 1871, and by the coinage law of July 9, 1873. Yet many still resist the proposal to stabilize the gold value of the mark at the currently low rate. Rather vague considerations of national pride are often marshaled against it.
V. Comments on the “Balance of Payments” Doctrine
1. Refined Quantity Theory of Money
The generally accepted doctrine maintains that the establishment of sound relationships among currencies is possible only with a “favorable balance of payments.” According to this view, a country with an “unfavorable balance of payments” cannot maintain the stability of its monetary value. In this case, the deterioration in the rate of exchange is considered structural and it is thought it may be effectively counteracted only by eliminating the structural defects.
1. Stabilization of the Monetary Unit — From the Viewpoint of Theory (1923)
In recent years the problems of monetary and banking policy have been approached more and more with a view to both stabilizing the value of the monetary unit and eliminating fluctuations in the economy. Thanks to serious attempts at explaining and publicizing these most difficult economic problems, they have become familiar to almost everyone. It may perhaps be appropriate to speak of fashions in economics, and it is undoubtedly the “fashion” today to establish institutions for the study of business trends.
I. The Outcome of Inflation
Attempts to stabilize the value of the monetary unit strongly influence the monetary policy of almost every nation today.* They must not be confused with earlier endeavors to create a monetary unit whose exchange value would not be affected by changes from the money side.
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.
Foreword by Frank Shostak
This collection of articles on the business cycle, money, and exchange rates by Ludwig von Mises appeared between 1919 and 1946. Here we have the evidence that the master economist foresaw and warned against the breakdown of the German mark, as well as the market crash of 1929 and the depression that followed. He presents his business cycle theory in its most elaborate form, applies it to the prevailing conditions, and discusses the policies that governments undertake that make recessions worse.
Introduction by Percy L. Greaves, Jr.
“Every boom must one day come to an end.” —Ludwig von Mises (1928)
“The crisis from which we are now suffering is also the outcome of a credit expansion.” —Ludwig von Mises (1931)
