The Theory of Money and Credit. Людвиг фон Мизес
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economics. Special monographs exist by the hundred. The pamphlet literature is so extensive as to surpass the power of any one man completely to assimilate it. Yet in English, at any rate, there has been so little attempt at synthesis of this kind that, when Keynes came to write his Treatise on Money, he was compelled to lament the absence, not only of an established tradition of arrangement, but even of a single example of a systematic treatment of the subject on a scale and of a quality comparable with that of the standard discussions of the central problems of pure equilibrium theory.
In these circumstances it is hoped that the present publication will meet a very real need among English-speaking students. For the work of which it is a translation, the Theorie des Geldes und der Umlaufsmittel of Professor von Mises of Vienna, does meet just this deficiency. It deals systematically with the chief propositions of the theory of money and credit, and it brings them into relation both with the main body of analytical economics and with the chief problems of contemporary policy to which they are relevant. Commencing with a rigid analysis of the nature and function of money, it leads by a highly ingenious series of approximations, from a discussion of the value of money under simple conditions in which there is only one kind of money and no banking system, through an analysis of the phenomena of parallel currency and foreign exchanges, to an extensive treatment of the problems of modern banking and the effects of credit creation on the capital structure and the stability of business. In continental circles it has long been regarded as the standard textbook on the subject. It is hoped that it will fill a similar role in English-speaking countries. I know few works which convey a more profound impression of the logical unity and the power of modern economic analysis.
It would be a great mistake, however, to suppose that systematization of the subject constituted the only, or indeed the chief, merit of this work. So many of the propositions which it first introduced have now found their way into the common currency of modern monetary theory that the English reader, coming to it for the first time more than twenty years after its first publication, may be inclined to overlook its merits as an original contribution to knowledge—a contribution from which much of what is most important and vital in contemporary discussions takes its rise. Who in 1912 had heard of forced saving, of disparities between the equilibrium and the money rates of interest and of the cycle of fluctuations in the relations between the prices of producers’ goods and consumers’ goods which is the result of the instability of credit? They are all here, not as obiter dicta on what are essentially side issues, as is occasionally the case in the earlier literature, but as central parts of a fully articulated theoretical system—a system which the author has had the somewhat melancholy satisfaction of seeing abundantly verified by the march of subsequent events, first in the great inflations of the immediately postwar period and later in the events which gave rise to the depression from which the world is now suffering. Nor should we overlook its contributions to the more abstract parts of the theory of the value of money. Professor von Mises shares with Marshall and one or two others the merit of having assimilated the treatment of this theory to the general categories of the pure theory of value: and his emphasis in the course of this assimilation on the relation between uncertainty and the size of the cash holding and the dependence of certain monetary phenomena on the absence of foresight, anticipates much that has proved most fruitful in more recent speculation in these matters. In spite of a tendency observable in some quarters to revert to more mechanical forms of the quantity theory, in particular to proceed by way of a multiplication of purely tautological formulae, it seems fairly clear that further progress in the explanation of the more elusive monetary phenomena is likely to take place along this path.
The present translation is based upon the text of the second German edition, published in 1924. Certain passages of no great interest to English readers have been omitted and a chapter dealing with more or less purely German controversies has been placed in an appendix. The comments on policy, however, in part three, chapter twenty, have been left as they appeared in 1924.1 But the author, who has most generously lent asistance at every stage of the translation, has written a special introduction in which he outlines his views on the problems which have emerged since that date. A note in the appendix gives the German equivalents to the technical terms which have been employed to designate the different kinds of money, and discusses in detail the translation of one term for which no exact English equivalent existed.
LIONEL ROBBINS
London School of EconomicsSeptember 1934
PREFACE TO THE ENGLISH EDITION
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. Governments 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