The Theory of Money and Credit. Людвиг фон Мизес
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with micro theory, of building monetary theory upon the individualistic foundations of general economic analysis.
Eugen von Böhm-Bawerk died soon after the publication of The Theory of Money and Credit, and the orthodox Böhm-Bawerkians, locked in their old paradigm, refused to accept Mises’ new breakthrough in the theory of money and business cycles. Mises therefore had to set about the arduous task of founding his own neo-Austrian, or Misesian, school of thought. He was handicapped by the fact that his post at the University of Vienna was not salaried; yet, all during the 1920s, many brilliant students flocked to his Privatseminar.
In the English-speaking world, acceptance of Misesian ideas was gravely hampered by the simple but significant fact that few economists read any language other than English. Mises’ The Theory of Money and Credit was not translated into English until 1934, and the result was two decades of neglect of the Misesian insights. Cash balance analysis was developed in the late 1920s in England by Sir Dennis H. Robertson, but his approach was holistic and aggregative, and not built out of individual action. The purchasing power parity theory came to England and the United States only through the flawed and diluted form propounded by the Swedish economist Gustav Cassel. And neglect of the Čuhel-Mises theory of ordinal marginal utility allowed Western economists, led by Hicks and Allen in the mid-1930s, to throw out marginal utility altogether in favor of the fallacious “indifference curve” approach, now familiar in micro textbooks.
Mises’ integration of micro and macro theory, his developed theory of money and the regression theorem, as well as his sophisticated analysis of inflation, were all totally neglected by later economists. The idea of integrating macro theory on micro foundations is further away from current economic practice than ever before.
Only Mises’ business cycle theory penetrated the English-speaking world, and this feat was accomplished by personal rather than literary means. Mises’ outstanding follower, Friedrich A. von Hayek, immigrated to London in 1931 to assume a teaching post at the London School of Economics. Hayek, who had concentrated on developing Mises’ insights into a systematic business cycle theory, managed quickly to convert the best of the younger generation of English economists, and one of the brightest of the group, Lionel Robbins, was responsible for the English translation of The Theory of Money and Credit. For a few glorious years in the early 1930s, such youthful luminaries of English economics as Robbins, Nicholas Kaldor, John R. Hicks, Abba P. Lerner, and Frederic Benham fell under the strong influence of Hayek. In the meanwhile, Austrian followers of Mises’ business cycle theory-notably Fritz Machlup and Gottfried von Haberler-began to be translated or published in the United States. Also in the United States, young Alvin H. Hansen was becoming the leading proponent of the Mises-Hayek cycle theory.
Mises’ business cycle theory was being adopted precisely as a cogent explanation of the Great Depression, a depression which Mises anticipated in the late 1920s. But just as it was being spread through England and the United States, the Keynesian revolution swept the economic world, converting even those who knew better. The conversion process won, not by patiently rebutting Misesian or other views, but simply by ignoring them, and leading the economic world into old and unsound inflationist views dressed up in superficially impressive new jargon. By the end of the 1930s only Hayek, and none of the other students of himself or Mises, had remained true to the Misesian view of business cycles. Mises’ The Theory of Money and Credit, in its English version, barely had time to be read before the Keynesian revolution of 1936 rendered pre-Keynesian thought, particularly on business cycles, psychologically inaccessible to the next generation of economists.
Mises added part four to the 1953 English-language edition of The Theory of Money and Credit. But Keynesian economics was riding high, and the world of economics was scarcely ready to resume attention to the Misesian insights. Now, however, and particularly since his death in 1973, Misesian economics has experienced a remarkable resurgence, especially in the United States. There are conferences, symposia, books, articles, and dissertations abounding in Austrian and Misesian economics. With the Keynesian system in total disarray, reeling from chronic and accelerating inflation punctuated by periods of inflationary recession, economists are more receptive to Misesian cycle theory than they have been in four decades. Let us hope that this new edition will stimulate economists to reexamine the other sparkling insights in this grievously neglected masterpiece, and that Mises’ integration of money and banking with micro theory will serve as the basis for future advances in monetary thought.
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).
LUDWIG VON MISES
New York June 1952
Of all branches of economic science, that part which relates to money and credit has probably the longest history and the most extensive literature. The elementary truths of the Quantity Theory were established at a time when speculation on other types of economic problems had hardly yet begun. By the middle of the nineteenth century when, in the general theory of value, a satisfactory statical system had not yet been established, the pamphlet literature of money and banking was tackling, often with marked success, many of the subtler problems of economic dynamics. At the present day, with all our differences, there is no part of economic theory which we feel to be more efficient to lend practical aid to the statesman and to the man of affairs, than the theory of money and credit.
Yet for all this there is no part of the subject where the established results of analysis and experience have been so little systematized and brought into relation with the main categories of theoretical