The Theory of Money and Credit. Людвиг фон Мизес

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.

      LUDWIG VON MISES

       Vienna June 1934

PREFACE TO THE SECOND GERMAN EDITION

      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