Against the Tide

XII

The Fight Against Inflationism*

Was it Disraeli or Gladstone who once said that apart from love, nothing turned men’s heads so much as thinking about money? Be that as it may, there is hardly another field in all the institutions of organized society that is, like this one, both extremely difficult and decisively important for the health or sickness not only of the economy but of society as a whole. It is well to remember to what extent our epoch is one of crises and revolutions because it is one of inflations (occasionally interrupted by a deflation), and it is equally well to reflect on the baneful part played therein by the fact that when men— and especially responsible men—think about any question relating to money, their thought has come adrift from the anchor of clear principles. Nor should it be forgotten that the gold standard had one merit that outshines its weaknesses, and that was to be just such an anchor that saved money from becoming the plaything of every conceivable theoretical speculation and, in practice, preserved it from the attentions of an aimless monetary policy that has done mischief after mischief to the economy and society of our time.

MISES’S MONETARY THEORY: 1911, 1924, and 1953

Anyone who, such as the author of this review, belongs to a generation of economists who lived through the shattering experience of witnessing the unexampled failure of monetary theory and the simultaneous collapse of monetary policy in the inflations after World War I, and especially the most pernicious of all, the German inflation, will always think back with undying gratitude to one book that at that time, thirty years ago, became a vertible beacon for us. However much we may have differed later from its author’s views on other matters, or indeed from his whole social philosophy, we shall never forget that book of his, nor the services it rendered us and continues to render us, even though we may not always be aware of them. I mean Ludwig von Mises and his book Theorie des Geldes und der Umlaufsmittel, which was first published in 1911 and which I got to know in its second, 1924, edition. Nothing could be more welcome to me than to have a topical opportunity to talk about it again, not only in gratitude to its aged author, who today, in his apartment in New York, carries on his intellectual work with undiminished vigor, but also in loyal remembrance and with an emphatic reaffirmation of the significance that this book still possesses for us today—indeed, perhaps quite especially today, when the end is at hand for yet another epoch of confusion in monetary theory and error in monetary policy in the wake of, though not unquestionably caused by, Keynes and his doctrine, and when no further delay must be brooked in returning to theoretical clarity and practical reason in all matters concerning money and credit.

Such an opportunity presents itself today. It is afforded by the recent publication of a new English edition of our—now American—friend’s standard work under the title The Theory of Money and Credit.1 This new edition not only makes the book accessible once more, but it is also enriched by up-to-date additions. Once more we can enjoy the logical sequence of clear ideas limpidly stated, spiced in the author’s characteristic fashion with the salt of irony and the pepper of indignation about the errors and aberrations that have worked such mischief. Once more we draw pleasure from the courage and keenness with which he goes to war against these errors and aberrations with weapons drawn equally from the armory of the classical theory of money and the modern theory of value. Once more we follow him through these classical chapters, from the “functions of money” to the “problems of credit policy,” and once more we wish that many others may confide themselves to his guidance. Once more we recall what it meant for ourselves at the time to read his pioneering analysis of credit creation, the functions of interest, forced saving, and the monetary causes of cyclical fluctuations, and once more we enjoin as many others as possible to do likewise. Even those who have absorbed all these things to such an extent that, as often happens, they forget the pioneer will suffer no harm if they take advantage of this very readable new English edition to refresh their notions at the source.

“MONETARY RECONSTRUCTION”

It is rare for a book of this kind still to be fresh enough almost half a century after its first publication to be so well worth a new edition. This is a great distinction. But inevitably the book has, in the interval, acquired the patina of a work written at a time in which the problems, experiences, and issues, while still interesting, are largely not ours and have been replaced by others. It is one of the species of books whose honorable but slightly melancholy destiny it is to diminish their own topical interest by helping to create a new communis opinio. Their glory is to eclipse themselves rather than to endure the much less glorious fate of being overtaken and eclipsed by others; for us, on the other hand, it is a duty not to forget this.

The author of this book possesses enough worldly wisdom not to mind about this, and it is to be hoped that he will not despise the implied compliment just because of its honesty. In our turn, we have to thank him all the more warmly for the freshness, free from any sign of patina, with which he has built a bridge from the classical parts of his book to the present; I mean his addition of a long, final part under the title “ Monetary Reconstruction,” in which he tells us what conclusions he draws from his theory in regard to the major problems of contemporary monetary and credit policy. All those who know him—and who doesn’t among economists and economic policy makers?—will have a pretty shrewd idea of what these conclusions are likely to be. Anyone who agrees with them will be gratified at the force and decisiveness with which they are expressed. And anyone who rejects them will, it is to be hoped, not read them without pausing a little to reflect on the words of a man whose hair has turned to silver in a lifelong, honorable fight for freedom and reason, who has more experience than most and an unusually keen intelligence, nor without asking himself seriously whether Mises is all that wrong when he exposes the inflation of our time as “the true opium of the people administered to them by anti-capitalist governments and parties” and closes the volume with these sentences, which may here be quoted as characteristic of the book and its spirit: “The present unsatisfactory state of monetary affairs is an outcome of the social ideology to which our contemporaries are committed and of the economic policies which this ideology begets. People lament over inflation, but they enthusiastically support policies that could not go on without inflation. While they grumble about the inevitable consequences of inflation, they stubbornly oppose any attempt to stop or to restrict deficit spending.… There cannot be any question of the gold standard as long as waste, capital decumulation, and corruption are the foremost characteristics of the conduct of public affairs. Cynics dispose of the advocacy of a restitution of the gold standard by calling it Utopian. Yet we have only the choice between two Utopias: the Utopia of a market economy, not paralysed by government sabotage, on the one hand, and the Utopia of totalitarian all-around planning on the other hand. The choice of the first alternative implies the decision in favor of the gold standard.”

NOT “DEFLATION-BLIND”

These passages are characteristic of the thrust of the whole book. It seeks out inflationism in all its intellectual and political hideouts and challenges it to combat. It is not that the author is blind to the possibility of deflation and its economic ravages. On the contrary, one of the most interesting and topical passages of the book is the part where he recalls the destructive consequences of the deflation that occurred both after the Napoleonic Wars and after World War I because the gold price was not adjusted to the price level lifted by inflation— a mistake that is being repeated today as long as the American buying price for gold is not appropriately raised from its present thirty-five dollars per ounce. But since the worst aftereffect of such illusionist policies invariably is that the consequences of deflation brought about in this way merely furnish inflationism with new arguments, the only result is a reinforcement of the secular trend toward inflation—a distressing trend that beyond doubt is with us for good, that draws sustenance from everything, including the mechanism of modern democracy, the prevailing ideologies, mass psychology, the tissue of interests, and the structure of modern society, and that is the creeping poison of our civilization.

The resistance of economics against this secular inflationary trend has become dangerously weak. The oversubtle theories of our time—and here again Keynes has to be named as the starting point—have eroded this resistance by arguments that have proved too much for the mental constitution of many and that, therefore, make one wish the author had taken issue with them in detail. But this is not to belittle the merit of a book in which resistance against inflationism has gained the strength to be derived only from a clear mind and incorruptible judgment.

* Zeitschrift fur das gesamte Kreditwesen, February 1, 1954.

1 Yale University Press, New Haven, Conn., 1953.