The Theory of Money and Credit

Ludwig von Mises.
Mises, Ludwig von
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H. E. Batson, trans.
First Pub. Date
Indianapolis, IN: Liberty Fund, Inc.
Pub. Date
Foreword by Murray Rothbard and Introduction by Lionel Robbins not available online


By Murray N. Rothbard

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Forty years have passed since the first German-language edition of this volume was published. In the course of these four decades the world has gone through many disasters and catastrophes. The policies that brought about these unfortunate events have also affected the nations' currency systems. Sound money gave way to progressively depreciating fiat money. All countries are today vexed by inflation and threatened by the gloomy prospect of a complete breakdown of their currencies.


There is need to realize the fact that the present state of the world and especially the present state of monetary affairs are the necessary consequences of the application of the doctrines that have got hold of the minds of our contemporaries. The great inflations of our age are not acts of God. They are man-made or, to say it bluntly, government-made. They are the offshoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and of making people happy by raising the "national income."


One of the main tasks of economics is to explode the basic inflationary fallacy that confused the thinking of authors and statesmen from the days of John Law down to those of Lord Keynes. There cannot be any question of monetary reconstruction and economic recovery as long as such fables as that of the blessing of "expansionism" form an integral part of official doctrine and guide the economic policies of the nations.


None of the arguments that economics advances against the inflationist and expansionist doctrine is likely to impress demagogues. For the demagogue does not bother about the remoter consequences of his policies. He chooses inflation and credit expansion although he knows that the boom they create is short-lived and must inevitably end in a slump. He may even boast of his neglect of the long-run effects. In the long run, he repeats, we are all dead; it is only the short run that counts.


But the question is, how long will the short run last? It seems that statesmen and politicians have considerably overrated the duration of the short run. The correct diagnosis of the present state of affairs is this: We have outlived the short run and have now to face the long-run consequences that political parties have refused to take into account. Events turned out precisely as sound economics, decried as orthodox by the neo-inflationist school, had prognosticated.


In this situation an optimist may hope that the nations will be prepared to learn what they blithely disregarded only a short time ago. It is this optimistic expectation that prompted the publishers to republish this book and the author to add to it as an epilogue an essay on monetary reconstruction (part four).

New York
June 1952


By Lionel Robbins

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The outward guise assumed by the questions with which banking and currency policy is concerned changes from month to month and from year to year. Amid this flux, the theoretical apparatus which enables us to deal with these questions remains unaltered. In fact, the value of economics lies in its enabling us to recognize the true significance of problems, divested of their accidental trimmings. No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.


Ten years have elapsed since the second German edition of the present book was published. During this period the external appearance of the currency and banking problems of the world has completely altered. But closer examination reveals that the same fundamental issues are being contested now as then. Then, England was on the way to raising the gold value of the pound once more to its prewar level. It was overlooked that prices and wages had adapted themselves to the lower value and that the reestablishment of the pound at the prewar parity was bound to lead to a fall in prices which would make the position of the entrepreneur more difficult and so increase the disproportion between actual wages and the wages that would have been paid in a free market. Of course, there were some reasons for attempting to reestablish the old parity, even despite the indubitable drawbacks of such a proceeding. The decision should have been made after due consideration of the pros and cons of such a policy. The fact that the step was taken without the public having been sufficiently informed beforehand of its inevitable drawbacks, extraordinarily strengthened the opposition to the gold standard. And yet the evils that were complained of were not due to the resumption of the gold standard, as such, but solely to the gold value of the pound having been stabilized at a higher level than corresponded to the level of prices and wages in the United Kingdom.


From 1926 to 1929 the attention of the world was chiefly focused upon the question of American prosperity. As in all previous booms brought about by expansion of credit, it was then believed that the prosperity would last forever, and the warnings of the economists were disregarded. The turn of the tide in 1929 and the subsequent severe economic crisis were not a surprise for economists; they had foreseen them, even if they had not been able to predict the exact date of their occurrence.


The remarkable thing in the present situation is not the fact that we have just passed through a period of credit expansion that has been followed by a period of depression, but the way in which governments have been and are reacting to these circumstances. The universal endeavor has been made, in the midst of the general fall of prices, to ward off the fall in money wages, and to employ public resources on the one hand to bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes. This has had the consequence of eliminating just those forces which in previous times of depression have eventually effected the adjustment of prices and wages to the existing circumstances and so paved the way for recovery. The unwelcome truth has been ignored that stabilization of wages must mean increasing unemployment and the perpetuation of the disproportion between prices and costs and between outputs and sales which is the symptom of a crisis.


This attitude was dictated by purely political considerations. Gov ernments did not want to cause unrest among the masses of their wage-earning subjects. They did not dare to oppose the doctrine that regards high wages as the most important economic ideal and believes that trade-union policy and government intervention can maintain the level of wages during a period of falling prices. And governments have therefore done everything to lessen or remove entirely the pressure exerted by circumstances upon the level of wages. In order to prevent the underbidding of trade-union wages, they have given unemployment benefits to the growing masses of those out of work and they have prevented the central banks from raising the rate of interest and restricting credit and so giving free play to the purging process of the crisis.


When governments do not feel strong enough to procure by taxation or borrowing the resources to meet what they regard as irreducible expenditure, or, alternatively, so to restrict their expenditure that they are able to make do with the revenue that they have, recourse on their part to the issue of inconvertible notes and a consequent fall in the value of money are something that has occurred more than once in European and American history. But the motive for recent experiments in depreciation has been by no means fiscal. The gold content of the monetary unit has been reduced in order to maintain the domestic wage level and price level, and in order to secure advantages for home industry against its competitors in international trade. Demands for such action are no new thing either in Europe or in America. But in all previous cases, with a few significant exceptions, those who have made these demands have not had the power to secure their fulfillment. In this case, however, Great Britain began by abandoning the old gold content of the pound. Instead of preserving its gold value by employing the customary and never-failing remedy of raising the bank rate, the government and parliament of the United Kingdom, with bank rate at four and one-half percent, preferred to stop the redemption of notes at the old legal parity and so to cause a considerable fall in the value of sterling. The object was to prevent a further fall of prices in England and above all, apparently, to avoid a situation in which reductions of wages would be necessary.


The example of Great Britain was followed by other countries, notably by the United States. President Roosevelt reduced the gold content of the dollar because he wished to prevent a fall in wages and to restore the price level of the prosperous period between 1926 and 1929.


In central Europe, the first country to follow Great Britain's example was the Republic of Czechoslovakia. In the years immediately after the war, Czechoslovakia, for reasons of prestige, had heedlessly followed a policy which aimed at raising the value of the krone, and she did not come to a halt until she was forced to recognize that increasing the value of her currency meant hindering the exportation of her products, facilitating the importation of foreign products, and seriously imperiling the solvency of all those enterprises that had procured a more or less considerable portion of their working capital by way of bank credit. During the first few weeks of the present year, however, the gold parity of the krone was reduced in order to lighten the burden of the debtor enterprises, and in order to prevent a fall of wages and prices and so to encourage exportation and restrict importation. Today, in every country in the world, no question is so eagerly debated as that of whether the purchasing power of the monetary unit shall be maintained or reduced.


It is true that the universal assertion is that all that is wanted is the reduction of purchasing power to its previous level, or even the prevention of a rise above its present level. But if this is all that is wanted, it is very difficult to see why the 1926-29 level should always be aimed at, and not, say, that of 1913.


If it should be thought that index numbers offer us an instrument for providing currency policy with a solid foundation and making it independent of the changing economic programs of governments and political parties, perhaps I may be permitted to refer to what I have said in the present work on the impossibility of singling out any particular method of calculating index numbers as the sole scientifically correct one and calling all the others scientifically wrong. There are many ways of calculating purchasing power by means of index numbers, and every single one of them is right, from certain tenable points of view; but every single one of them is also wrong, from just as many equally tenable points of view. Since each method of calculation will yield results that are different from those of every other method, and since each result, if it is made the basis of prac tical measures, will further certain interests and injure others, it is obvious that each group of persons will declare for those methods that will best serve its own interests. At the very moment when the manipulation of purchasing power is declared to be a legitimate concern of currency policy, the question of the level at which this purchasing power is to be fixed will attain the highest political significance. Under the gold standard, the determination of the value of money is dependent upon the profitability of gold production. To some, this may appear a disadvantage; and it is certain that it introduces an incalculable factor into economic activity. Nevertheless, it does not lay the prices of commodities open to violent and sudden changes from the monetary side. The biggest variations in the value of money that we have experienced during the last century have originated not in the circumstances of gold production, but in the policies of governments and banks-of-issue. Dependence of the value of money on the production of gold does at least mean its independence of the politics of the hour The dissociation of the currencies from a definitive and unchangeable gold parity has made the value of money a plaything of politics. Today we see considerations of the value of money driving all other considerations into the background in both domestic and international economic policy. We are not very far now from a state of affairs in which "economic policy" is primarily understood to mean the question of influencing the purchasing power of money. Are we to maintain the present gold content of the currency unit, or are we to go over to a lower gold content? That is the question that forms the principal issue nowadays in the economic policies of all European and American countries. Perhaps we are already in the midst of a race to reduce the gold content of the currency unit with the object of obtaining transitory advantages (which, moreover, are based on self-deception) in the commercial war which the nations of the civilized world have been waging for decades with increasing acrimony, and with disastrous effects upon the welfare of their subjects.


It is an unsatisfactory designation of this state of affairs to call it an emancipation from gold. None of the countries that have "abandoned the gold standard" during the last few years has been able to affect the significance of gold as a medium of exchange either at home or in the world at large. What has occurred has not been a departure from gold, but a departure from the old legal gold parity of the currency unit and, above all, a reduction of the burden of the debtor at the cost of the creditor, even though the principal aim of the measures may have been to secure the greatest possible stability of nominal wages, and sometimes of prices also.


Besides the countries that have debased the gold value of their currencies for the reasons described, there is another group of countries that refuse to acknowledge the depreciation of their money in terms of gold that has followed upon an excessive expansion of the domestic note circulation, and maintain the fiction that their currency units still possess their legal gold value, or at least a gold value in excess of its real level. In order to support this fiction they have issued foreign-exchange regulations which usually require exporters to sell foreign exchange at its legal gold value, that is, at a considerable loss. The fact that the amount of foreign money that is sold to the central banks in such circumstances is greatly diminished can hardly require further elucidation. In this way a "shortage of foreign exchange" (Devisennot) arises in these countries. Foreign exchange is in fact unobtainable at the prescribed price, and the central bank is debarred from recourse to the illicit market in which foreign exchange is dealt in at its proper price because it refuses to pay this price. This "shortage" is then made the excuse for talk about transfer difficulties and for prohibitions of interest and amortization payments to foreign countries. And this has practically brought international credit to a standstill. Interest and amortization are paid on old debts either very unsatisfactorily or not at all, and, as might be expected, new international credit transactions hardly continue to be a subject of serious consideration. We are no longer far removed from a situation in which it will be impossible to lend money abroad because the principle has gradually become accepted that any government is justified in forbidding debt payments to foreign countries at any time on grounds of "foreign-exchange policy." The real meaning of this foreign-exchange policy is exhaustively discussed in the present book. Here let it merely be pointed out that this policy has much more seriously injured international economic relations during the last three years than protectionism did during the whole of the preceding fifty or sixty years, the measures that were taken during the world war included. This throttling of international credit can hardly be remedied otherwise than by setting aside the principle that it lies within the discretion of every government, by invoking the shortage of foreign exchange that has been caused by its own actions, to stop paying interest to foreign countries and also to prohibit interest and amortization payments on the part of its subjects. The only way in which this can be achieved will be by removing international credit transactions from the influence of national legislatures and creating a special international code for it, guaranteed and really enforced by the League of Nations. Unless these conditions are created, the granting of new international credit will hardly be possible. Since all nations have an equal interest in the restoration of international credit, it may probably be expected that attempts will be made in this direction during the next few years, provided that Europe does not sink any lower through war and revolution. But the monetary system that will constitute the foundation of such future agreements must necessarily be one that is based upon gold. Gold is not an ideal basis for a monetary system. Like all human creations, the gold standard is not free from shortcomings; but in the existing circumstances there is no other way of emancipating the monetary system from the changing influences of party politics and government interference, either in the present or, so far as can be foreseen, in the future. And no monetary system that is not free from these influences will be able to form the basis of credit transactions. Those who blame the gold standard should not forget that it was the gold standard that enabled the civilization of the nineteenth century to spread beyond the old capitalistic countries of Western Europe, and made the wealth of these countries available for the development of the rest of the world. The savings of the few advanced capitalistic countries of a small part of Europe have called into being the modern productive equipment of the whole world. If the debtor countries refuse to pay their existing debts, they certainly ameliorate their immediate situation. But it is very questionable whether they do not at the same time greatly damage their future prospects. It consequently seems misleading in discussions of the currency question to talk of an opposition between the interests of creditor and debtor nations, of those which are well supplied with capital and those which are ill supplied. It is the interests of the poorer countries, who are dependent upon the importation of foreign capital for developing their productive resources, that make the throttling of international credit seem so extremely dangerous.


The dislocation of the monetary and credit system that is nowadays going on everywhere is not due—the fact cannot be repeated too often—to any inadequacy of the gold standard. The thing for which the monetary system of our time is chiefly blamed, the fall in prices during the last five years, is not the fault of the gold standard, but the inevitable and ineluctable consequence of the expansion of credit, which was bound to lead eventually to a collapse. And the thing which is chiefly advocated as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis.


The difficulties of the monetary and credit system are only a part of the great economic difficulties under which the world is at present suffering. It is not only the monetary and credit system that is out of gear, but the whole economic system. For years past, the economic policy of all countries has been in conflict with the principles on which the nineteenth century built up the welfare of the nations. International division of labor is now regarded as an evil, and there is a demand for a return to the autarky of remote antiquity. Every importation of foreign goods is heralded as a misfortune, to be averted at all costs. With prodigious ardour, mighty political parties proclaim the gospel that peace on earth is undesirable and that war alone means progress. They do not content themselves with describing war as a reasonable form of international intercourse, but recommend the employment of force of arms for the suppression of opponents even in the solution of questions of domestic politics. Whereas liberal economic policy took pains to avoid putting obstacles in the way of developments that allotted every branch of production to the locality in which it secured the greatest productivity to labor, nowadays the endeavor to establish enterprises in places where the conditions of production are unfavorable is regarded as a patriotic action that deserves government support. To demand of the monetary and credit system that it should do away with the consequences of such perverse economic policy, is to demand something that is a little unfair.


All proposals that aim to do away with the consequences of perverse economic and financial policy, merely by reforming the monetary and banking system, are fundamentally misconceived. Money is nothing but a medium of exchange and it completely fulfills its function when the exchange of goods and services is carried on more easily with its help than would be possible by means of barter. Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit.


This point of view is sometimes called the "orthodox" because it is related to the doctrines of the Classical economists who are Great Britain's imperishable glory; and it is contrasted with the "modern" point of view which is expressed in doctrines that correspond to the ideas of the Mercantilists of the sixteenth and seventeenth centuries. I cannot believe that there is really anything to be ashamed of in orthodoxy. The important thing is not whether a doctrine is orthodox or the latest fashion, but whether it is true or false. And although the conclusion to which my investigations lead, that expansion of credit cannot form a substitute for capital, may well be a conclusion that some may find uncomfortable, yet I do not believe that any logical disproof of it can be brought forward.

June 1934



When the first edition of this book was published twelve years ago, the nations and their governments were just preparing for the tragic enterprise of the Great War. They were preparing, not merely by piling up arms and munitions in their arsenals, but much more by the proclamation and zealous propagation of the ideology of war. The most important economic element in this war ideology was inflationism.


My book also dealt with the problem of inflationism and attempted to demonstrate the inadequacy of its doctrines; and it referred to the changes that threatened our monetary system in the immediate future. This drew upon it passionate attacks from those who were preparing the way for the monetary catastrophe to come. Some of those who attacked it soon attained great political influence; they were able to put their doctrines into practice and to experiment with inflationism upon their own countries.


Nothing is more perverse than the common assertion that economics broke down when faced with the problems of the war and postwar periods. To make such an assertion is to be ignorant of the literature of economic theory and to mistake for economics the doctrines based on excerpts from archives that are to be found in the writings of the adherents of the historico-empirico-realistic school. Nobody is more conscious of the shortcomings of economics than economists themselves, and nobody regrets its gaps and failings more. But all the theoretical guidance that the politician of the last ten years needed could have been learned from existing doctrine. Those who have derided and carelessly rejected as "bloodless abstraction" the assured and accepted results of scientific labor should blame themselves, not economics.


It is equally hard to understand how the assertion could have been made that the experience of recent years has necessitated a revision of economics. The tremendous and sudden changes in the value of money that we have experienced have been nothing new to anybody acquainted with currency history; neither the variations in the value of money, nor their social consequences, nor the way in which the politicians reacted to either, were new to economists. It is true that these experiences were new to many etatists, and this is perhaps the best proof that the profound knowledge of history professed by these gentlemen was not genuine but only a cloak for their mercantilistic propaganda.


The fact that the present work, although unaltered in essentials, is now published in a rather different form from that of the first edition is not due to any such reason as the impossibility of explaining new facts by old doctrines. It is true that, during the twelve years that have passed since the first edition was published, economics has made strides that it would be impossible to ignore. And my own occupation with the problems of catallactics has led me in many respects to conclusions that differ from those of the first edition. My attitude toward the theory of interest is different today from what it was in 1911; and although, in preparing this as in preparing the first edition, I have been obliged to postpone any treatment of the problem of interest (which lies outside the theory of indirect exchange), in certain parts of the book it has nevertheless been necessary to refer to the problem. Again, on the question of crises my opinions have altered in one respect: I have come to the conclusion that the theory which I put forward as an elaboration and continuation of the doctrines of the Currency School is in itself a sufficient explanation of crises and not merely a supplement to an explanation in terms of the theory of direct exchange, as I supposed in the first edition.


Further I have become convinced that the distinction between statics and dynamics cannot be dispensed with even in expounding the theory of money. In writing the first edition, I imagined that I should have to do without it, in order not to give rise to any misunderstandings on the part of the German reader. For in an article that had appeared shortly before in a widely read symposium, Altmann had used the concepts "static" and "dynamic," applying them to monetary theory in a sense that diverged from the terminology of the modern American school.*4 Meanwhile, however, the significance of the distinction between statics and dynamics in modern theory has probably become familiar to everybody who, even if not very closely, has followed the development of economics. It is safe to employ the terms nowadays without fear of their being confused with Altmann's terminology. I have in part revised the chapter on the social consequences of variations in the value of money in order to clarify the argument. In the first edition the chapter on monetary policy contains long historical discussions; the experiences of recent years afford sufficient illustrations of the fundamental argument to allow these discussions now to be dispensed with.


A section on problems of banking policy of today has been added, and one in which the monetary theory and policy of the etatists are briefly examined. In compliance with a desire of several colleagues I have also included a revised and expanded version of a short essay on the classification of theories of money, which was published some years ago in volume 44 of the Archiv für Sozialwissenschaft und Sozialpolitik.


For the rest, it has been far from my intention to deal critically with the flood of new publications devoted to the problems of money and credit. In science, as Spinoza says, "the truth bears witness both to its own nature and to that of error." My book contains critical arguments only where they are necessary to establish my own views and to explain or prepare the ground for them. This omission can be the more easily justified in that this task of criticism is skillfully performed in two admirable works that have recently appeared.*5


The concluding chapter of part three, which deals with problems of credit policy, is reprinted as it stood in the first edition. Its arguments refer to the position of banking in 1911, but the significance of its theoretical conclusions does not appear to have altered. They are supplemented by the above-mentioned discussion of the problems of present-day banking policy that concludes the present edition. But even in this additional discussion, proposals with any claim to absolute validity should not be sought for. Its intention is merely to show the nature of the problem at issue. The choice among all the possible solutions in any individual case depends upon the evaluation of pros and cons; decision between them is the function not of economics but of politics.

March 1924

Notes for this chapter

See Altmann, "Zur deutschen Geldlehre des 19. Jahrhunderts," in Die Entwicklung der deutschen Volkswirtschaftslehre im 19. Jahrhundert, Schmoller Festschrift (Leipzig, 1908).
See Döring, Die Geldtheorien seit Knapp, 1st ed. (Greifswald, 1921; 2d ed. Greifswald, 1922); Palyi, Der Streit um die Staatliche Theorie des Geldes (Munich and Leipzig, 1922) (also in Schmoller's Jahrbuch, 45. Jahrgang). Also see the acute investigations of G. M. Verrijn Stuart, Inleiding tot de Leer der Waardevastheid van het Geld ('s Gravenhage, 1919).

End of Notes

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