The Theory of Money and Credit

The naive conception of money as stable in value or as a measure of value is also responsible for economic calculation being carried out in terms of money.

Even in other respects, accountancy is not perfect. The precision of its statements is only illusory. The valuations of goods and rights with which it deals are always based on estimates depending on more or less uncertain and unknown factors. So far as this uncertainty arises from the commodity side of the valuations, commercial practice, sanctioned by the law, attempts to get over the difficulty by the exercise of the greatest possible caution. With this purpose it demands conservative estimates of assets and liberal estimates of liabilities, so that the merchant may be preserved from self-deceit about the success of his enterprises and his creditors protected.

But there are also shortcomings in accountancy that are due to the uncertainty in its valuations that results from the liability to variation of the value of money itself. Of this, the merchant, the accountant, and the commercial court are alike unsuspicious. They hold money to be a measure of price and value, and they reckon as freely in monetary units as in units of length, area, capacity, and weight. And if an economist happens to draw their attention to the dubious nature of this procedure, they do not even understand the point of his remarks.9

This disregard of variations in the value of money in economic calculation falsities accounts of profit and loss. If the value of money falls, ordinary bookkeeping, which does not take account of monetary depreciation, shows apparent profits, because it balances against the sums of money received for sales a cost of production calculated in money of a higher value, and because it writes off from book values originally estimated in money of a higher value items of money of a smaller value. What is thus improperly regarded as profit, instead of as part of capital, is consumed by the entrepreneur or passed on either to the consumer in the form of price reductions that would not otherwise have been made or to the laborer in the form of higher wages, and the government proceeds to tax it as income or profits. In any case, consumption of capital results from the fact that monetary depreciation falsities capital accounting. Under certain conditions the consequent destruction of capital and increase of consumption may be partly counteracted by the fact that the depreciation also gives rise to genuine profits, those of debtors, for example, which are not consumed but put into reserves. But this can never more than partly balance the destruction of capital induced by the depreciation.10

The consumers of the commodities that are sold too cheaply as a result of the false reckoning induced by the depreciation need not be inhabitants of the territory in which the depreciating money is used as the national currency. The price reductions brought about by currency depreciation encourage export to countries the value of whose money is either not falling at all or at least falling less rapidly. The entrepreneur who is reckoning in terms of a currency with a stable value is unable to compete with the entrepreneur who is prepared to make a quasi-gift of part of his capital to his customers. In 1920 and 1921, Dutch traders who had sold commodities to Austria could buy them back again after a while much more cheaply than they had originally sold them, because the Austrian traders completely failed to see that they were selling them for less than they had cost.

So long as the true state of the case is not recognized, it is customary to rejoice in a naive Mercantilistic fashion over the increase of exports and to see in the depreciation of money a welcome “export premium.” But once it is discovered that the source whence this premium flows is the capital of the community, then the “selling off” procedure is usually regarded less favorably. Again, in importing countries the public attitude wavers between indignation against “dumping” and satisfaction with the favorable conditions of purchase.

Where the currency depreciation is a result of government inflation carried out by the issue of notes, it is possible to avert its disastrous effect on economic calculation by conducting all bookkeeping in a stable money instead. But so far as the depreciation is a depreciation of gold, the world money, there is no such easy way out.11

• 9At Vienna in March 1892 at the sessions of the Currency Inquiry Commission, which was appointed in preparation for the regulation of the Austrian currency, Carl Menger remarked: “I should like to add that not only legislators, but all of us in our everyday life, are in the habit of disregarding the fluctuations in the purchasing power of money. Even such distinguished bankers as yourselves, gentlemen, draw up your balance sheet at the end of the year without inquiring whether by any chance the sum of money representing the share capital has gained or lost in purchasing power.” These remarks of Menger’s were not understood by the director of the Bodenkreditanstalt, Theodor von Taussig, the most outstanding of all Austrian bankers. He replied: “A balance sheet is a balancing of the property or assets of a company or individual against its liabilities, both expressed in terms of the accepted measure of value or monetary standard, that is, for Austria in gulden. Now I cannot see how, when we are thus expressing property and indebtedness in terms of the standard (which we have assumed to be homogeneous), we are to take account of variations in the standard of measurement instead of taking account of variations in the object to be measured, as is customary.” Taussig completely failed to see that the point at issue concerned the estimation of the value of goods and the amount of depreciation to be written off, and not the balancing of monetary claims and monetary obligations, or that a profit and loss account, if it is not to be hopelessly inexact, must take account of variations in the value of money. Menger had no occasion to raise this point in his reply, since he was rather concerned to show that his remarks were not to be interpreted, as Taussig was inclined to interpret them, as an accusation of dishonest practice on the part of the bank directors. Menger added: “What I said was merely that all of us, not only the directors of the banks (I said even such men as are at the head of the banks), make the mistake of not taking account in everyday life of changes in the value of money” (Stenographische Protokolle über die vom 8. bis 17. März 1892 abgehaltenen Sitzungen der nach Wien einberufenen Währungs-Enquete- Kommission [Vienna, 2892], pp. 221, 257, 270).
• 10See my book, Nation, Staat und Wirtschaft (Vienna, 1919), pp. 129 ff. A whole series of writings dealing with these questions has since appeared in Germany and Austria.
• 11Cf. further pp. 401 ff. below.