The Theory of Money and Credit

If the government practices restraint in the issuance of additional amounts of its credit or fiat money and if public opinion assumes that the inflationary policy will be stopped altogether in a not too distant future, an inflationary currency system can prevail for a series of years. The country experiences all the effects resulting from a currency the unit of which vacillates in exchange value as against the international gold standard. With regard to these effects the freely vacillating currency may be called a bad currency. But it can last and is not inevitably headed for a breakdown.

The characteristic mark of this freely vacillating currency is that the owner of any amount of it has no claim whatever against the Treasury, a bank, or any other agency. There is no redemption either de jure or de facto. The pieces are not money substitutes but money proper in themselves.

It sometimes happened, especially in the European inflations of the 1920s, that the government, frightened by a speedy decline in its currency’s price in terms of gold or foreign exchange, tried to counteract the decline by selling on the market a certain amount of gold and foreign exchange against domestic currency. It was a rather nonsensical operation. It would have been much simpler and much more effective if the government had never issued those amounts which it later bought back on the market. Such ventures did not affect the course of events. The only reason they must be mentioned is that governments and their agents sometimes falsely referred to them as pegging.

The outstanding instance of a freely vacillating currency today is the United States dollar, the New Deal dollar. It is not redeemable in gold or any foreign exchange. The administration is committed to an inflationary policy, increasing more and more the amount of notes in circulation and of bank deposits subject to check. If the Treasury had been permitted to act according to the designs of its advisers, the dollar would have long since gone the way of the German mark of 1923. But lively protests on the part of a few economists alarmed the nation and enjoined restraint on the Treasury. The speed of the inflation was slowed down. Yet the future of the dollar is precarious, dependent on the vicissitudes of the continuing struggle between a small minority of economists on the one hand and hosts of ignorant demagogues and their “unorthodox” allies on the other hand.