On the Manipulation of Money and Credit. Людвиг фон Мизес

of the division of labor and use of money and, thus, in cash and credit transactions. In an industrial country, such as Germany, the consequences of a monetary collapse must be entirely different from those in lands where a large part of the population remains submerged in primitive economic conditions.

      Things will necessarily be much worse if the breakdown of the paper money does not take place step by step, but comes, as now seems likely, all of a sudden in panic. The supplies within the country of gold and silver money and of foreign notes are insignificant. The practice, pursued so eagerly during the war, of concentrating domestic stocks of gold in the central banks and the restrictions, for many years placed on trade in foreign moneys, have operated so that the total supplies of hoarded good money have long been insufficient to permit a smooth development of monetary circulation during the early days and weeks after the collapse of the paper note standard. Some time must elapse before the amount of foreign money needed in domestic trade is obtained by the sale of stocks and commodities, by raising credit, and by withdrawing balances from abroad. In the meantime, people will have to make out with various kinds of emergency money tokens.

      Precisely at the moment when all savers and pensioners are most severely affected by the complete depreciation of the notes, and when the government’s entire financial and economic policy must undergo a radical transformation, as a result of being denied access to the printing press, technical difficulties will emerge in conducting trade and making payments. It will become immediately obvious that these difficulties must seriously aggravate the unrest of the people. Still, there is no point in describing the specific details of such a catastrophe. They should only be referred to in order to show that inflation is not a policy that can be carried on forever. The printing presses must be shut down in time, because a dreadful catastrophe awaits if their operations go on to the end. No one can say how far we still are from such a finish.

      It is immaterial whether the continuation of inflation is considered desirable or merely not harmful. It is immaterial whether inflation is looked on as an evil, although perhaps a lesser evil in view of other possibilities. Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.

II

       The Emancipation of Monetary Value from the Influence of Government

       1. Stop Presses and Credit Expansion

      The first condition of any monetary reform is to halt the printing presses. Germany must refrain from financing government deficits by issuing notes, directly or indirectly. The Reichsbank [Germany’s central bank from 1875 until shortly after World War II] must not further expand its notes in circulation. Reichsbank deposits should be opened and increased, only upon the transfer of already existing Reichsbank accounts, or in exchange for payment in notes, or other domestic or foreign money. The Reichsbank should grant credits only to the extent that funds are available—from its own reserves and from other resources put at its disposal by creditors. It should not create credit to increase the amount of its notes, not covered by gold or foreign money, or to raise the sum of its outstanding liabilities. Should it release any gold or foreign money from its reserves, then it must reduce to that same extent the circulation of its notes or the use of its obligations in transfers.¹

      Absolutely no evasions of these conditions should be tolerated. However, it might be possible to permit a limited increase—for two or three weeks at a time—only to facilitate clearings at the end of quarters, especially at the close of September and December. This additional circulation credit introduced into the economy, above the otherwise strictly-adhered-to limits, should be statistically moderate and generally precisely prescribed by law.

      There can be no doubt but that this would bring the continuing depreciation of the monetary unit to an immediate and effective halt. An increase in the purchasing power of the German monetary unit would even appear then—to the extent that the previous purchasing power of the German monetary unit, relative to that of commodities and foreign exchange, already reflected the view that the inflation would continue. This increase in purchasing power would rise to the point which corresponded to the actual situation.

2. Relationship of Monetary Unit to World Money—Gold

      However, stopping the inflation by no means signifies stabilization of the value of the German monetary unit in terms of foreign money. Once strict limits are placed on any further inflation, the quantity of German money will no longer be changing. Still, with changes in the demand for money, changes will also be taking place in the exchange ratios between German and foreign moneys. The German economy will no longer have to endure the disadvantages that come from inflation and continual monetary depreciation; but it will still have to face the consequences of the fact that foreign exchange rates remain subject to continual, even if not severe, fluctuations.

      If, with the suspension of printing press operations, the monetary policy reforms are declared at an end, then obviously the value of the German monetary unit in relation to the world money, gold, would rise, slowly but steadily. For the supply of gold, used as money, grows steadily due to the output of mines while the quantity of the German money [not backed by gold or foreign money] would be limited once and for all. Thus, it should be considered quite likely that the repercussions of changes in the relationship between the quantity of, and demand for, money in Germany and in gold standard countries would cause the German monetary unit to rise on the foreign exchange market. An illustration of this is furnished by the developments of the Austrian money on the foreign exchange market in the years 1888–1891.

      To stabilize the relative value of the monetary unit beyond a nation’s borders, it is not enough simply to free the formation of monetary value from the influence of government. An effort should also be made to establish a connection between the world money and the German monetary unit, firmly binding the value of the Reichsmark to the value of gold.

      It should be emphasized again and again that stabilization of the gold value of a monetary unit can only be attained if the printing presses are silenced. Every attempt to accomplish this by other means is futile. It is useless to interfere on the foreign exchange market. If the German government acquires dollars, perhaps through a loan, and sells the loan for paper marks, it is exerting pressure, in the process, on the dollar exchange rate. However, if the printing presses continue to run, the monetary depreciation will only be slowed down, not brought to a standstill as a result. Once the impetus of the intervention is exhausted, then the depreciation resumes again, even more rapidly. However, if the increase in notes has actually stopped, no intervention is needed to stabilize the mark in terms of gold.

3. Trend of Depreciation

      In this connection, it is pointed out that the increase in notes and the depreciation of the monetary unit do not exactly coincide chronologically. The value of the monetary unit often remains almost stable for weeks and even months, while the supply of notes increases continually. Then again, commodity prices and foreign exchange quotations climb sharply upward, in spite of the fact that the current increase in notes is not proceeding any faster or may even be slowing down. The explanation for this lies in the processes of market operations. The tendency to exaggerate every change is inherent in speculation. Should the conduct inaugurated by the few, who rely on their own independent judgment, be exaggerated and carried too far by those who follow their lead, then a reaction, or at least a standstill, must take place. So ignorance of the principles underlying the formation of monetary value leads to a reaction on