Soon after Mises had earned his doctorate from the University of Vienna, he determined to write a book on money. To do a thorough job, he thought he should start with direct exchange, but he didn’t believe he would have time, as he saw war looming in Europe. Although he had completed the compulsory military service required of all young men in the Austria-Hungary of his day, he would be subject to recall if war came. So he didn’t begin with direct exchange but with indirect (nonbarter) exchange, building on the subjective marginal utility theory of value developed by his Austrian predecessors Carl Menger and Eugen von Böhm-Bawerk. His explanation was in direct opposition to the then-popular “state theory of money,” which defined money as whatever the government decreed to be money.
That book, titled in German Theorie des Geldes und der Umlaufsmittel, appeared in 1912.1 Mises explained there that money was a market phenomenon, which developed out of barter as individuals traded with one another in the attempt to discover something they could use as a medium of exchange. After dealing with money, Mises discussed banking. In this 1912 book he first raised the possibility that the banks might lower interest rates below market rates by increasing their issue of fiduciary media. Mises even considered that a bank might increase the quantity of money so much that its purchasing power might go down to 1/100th of its previous value, or even less if the monetary increases were continued. In that case, he then posited its purchasing power might decline until businesses would avoid it altogether and find something else to use as a medium of exchange. His contemporaries dismissed and discounted this possibility.
Mises described how the inflation (monetary expansion) fostered by the banks would lead to widespread price increases and economic malinvestment; however, if and when the banks stopped inflating, businesses would crash, the economy would stagnate, and all prices of goods and services would be readjusted. Thus, in 1912 Mises laid the groundwork for explaining the causes of the economic crises which afflicted capitalistic economies periodically and how to prevent them. But the world paid little attention; Mises’s book was practically ignored, even ridiculed.
Mises’s work in economics was interrupted by World War I, when he was called back into military service and served on the Eastern front. After the war, however, he continued to write on money. During the 1920s and 1930s, he built on and expanded the general monetary theory first set forth in The Theory of Money and Credit, and subsequently elaborated upon it in his later major works on economics, the German-language Nationalökonomie (1940) and its English language version, Human Action (1949).2 The several monographs included in this present collection, written between the two World Wars, are devoted specifically to the theory of the trade cycle and include some of Mises’s most important contributions to monetary theory.
My economist and historian husband, Percy L. Greaves, Jr.—like me, a longtime student of Mises—selected the papers included in this anthology as Mises’s most important papers on money which had not previously appeared in English. The 1978 edition and 2006 reprint included an epilogue with articles on monetary theory by my husband. The epilogue has been omitted from this Liberty Fund edition in order to focus solely on the ideas of Mises.
In reading these works, keep in mind that Mises used the term “liberal” in the classical sense to refer to a free society and the term “inflation” to mean an increase in the quantity of money and credit, rather than one of the inevitable consequences of that increase, higher prices.
Bettina Bien Greaves
May 2008
Attempts to stabilize the value of the monetary unit strongly influence the monetary policy of almost every nation today. They must not be confused with earlier endeavors to create a monetary unit whose exchange value would not be affected by changes from the money side. In those olden and happier times, the concern was with how to bring the quantity of money into balance with the demand, without changing the purchasing power of the monetary unit. Thus, attempts were made to develop a monetary system under which no changes would emerge from the side of money to alter the ratios between the generally used medium of exchange (money) and other economic goods. The economic consequences of the widely deplored changes in the value of money were to be completely avoided.
There is no point nowadays in discussing why this goal could not then, and in fact cannot, be attained. Today we are motivated by other concerns. We should be happy just to return again to the monetary situation we once enjoyed. If only we had the gold standard back again, its shortcomings would no longer disturb us; we would just have to make the best of the fact that even the value of gold undergoes certain fluctuations.
Today’s monetary problem is a very different one. During and after the war [World War 1, 1914–1918], many countries put into circulation vast quantities of credit money, which were endowed with legal tender quality. In the course of events described by Gresham’s Law, gold disappeared from monetary circulation in these countries. These countries now have paper money, the purchasing power of which is subject to sudden changes. The monetary economy is so highly developed today that the disadvantages of such a monetary system, with sudden changes brought about by the creation of vast quantities of credit money, cannot be tolerated for long. Thus the clamor to eliminate the deficiencies in the field of money has become universal. People have become convinced that the restoration of domestic peace within nations and the revival of international economic relations are impossible without a sound monetary system.
If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. It would still continue to be possible to exchange notes for commodities. Finally, the situation would reach such a state that people would be operating with billions and trillions and then even higher sums for small transactions. The monetary system would still continue to function. However, this prospect scarcely resembles reality.
In the long run, trade is not helped by a monetary unit which continually deteriorates in value. Such a monetary unit cannot be used as a “standard of deferred payments.” Another intermediary must be found for all transactions in which money and goods or services are not exchanged simultaneously. Nor is a monetary unit which continually depreciates in value serviceable for cash transactions either. Everyone becomes anxious to keep his cash holding, on which he continually suffers losses, as low as possible. All incoming money will be quickly spent. When purchases are made merely to get rid of money, which is shrinking in value, by exchanging it for goods of more enduring worth, higher prices will be paid than are otherwise indicated by other current market relationships.
In