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.1 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 I, 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.

1. Monetary Depreciation2

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.”3 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 recent months, the German Reich has provided a rough picture of what must happen, once the people come to believe that the course of monetary depreciation is not going to be halted. If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency.

In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity. If “m” represents the actual number of monetary units on hand before the inflation began in a country, “P” represents the value then of the monetary unit in gold, “M” the actual number of monetary units which existed at a particular point in time during the inflation, and “p” the gold value of the monetary unit at that particular moment, then (as has been borne out many times by simple statistical studies):

mP > Mp.

On the basis of this formula, some have tried to conclude that the devaluation had proceeded too rapidly and that the actual rate of exchange was not justified. From this, others have concluded that the monetary depreciation is not caused by the increase in the quantity of money, and that obviously the Quantity Theory could not be correct. Still others, accepting the primitive version of the Quantity Theory, have argued that a further increase in the quantity of money was permissible, even necessary. The increase in the quantity of money should continue, they maintain, until the total gold value of the quantity of money in the country was once more raised to the height at which it was before the inflation began. Thus:

Mp = mP.

The error in all this is not difficult to recognize. For the moment, let us disregard the fact—which will be analyzed more fully below—that at the start of the inflation the rate of exchange on the Bourse,4 as well as the agio [premium] against metals, races ahead of the purchasing power of the monetary unit expressed in commodity prices. Thus, it is not the gold value of the monetary units, but their temporarily higher purchasing power vis-à-vis commodities which should be considered. Such a calculation, with “P” and “p” referring to the monetary unit’s purchasing power in commodities rather than to its value in gold, would also lead, as a rule, to this result:

mP > Mp.

However, as the monetary depreciation progresses, it is evident that the demand for money, that is for the monetary units already in existence, begins to decline. If the loss a person suffers becomes greater the longer he holds on to money, he will try to keep his cash holding as low as possible. The desire of every individual for cash no longer remains as strong as it was before the start of the inflation, even if his situation may not have otherwise changed. As a result, the demand for money throughout the entire economy, which can be nothing more than the sum of the demands for money on the part of all individuals in the economy, goes down.

To the extent to which trade gradually shifts to using foreign money and actual gold instead of domestic notes, individuals no longer invest in domestic notes but begin to put a part of their reserves in foreign money and gold. In examining the situation in Germany, it is of particular interest to note that the area in which Reichsmarks circulate is smaller today than in 1914,5 and that now, because they have become poorer, the Germans have substantially less use for money. These circumstances, which reduce the demand for money, would exert much more influence if they were not counteracted by two factors which increase the demand for money:

1. The demand from abroad for paper marks, which continues to some extent today, among speculators in foreign exchange (Valuta); and
2. The fact that the impairment of [credit] techniques for making payments, due to the general economic deterioration, may have increased the demand for money [cash holdings] above what it would have otherwise been.

2. Undesired Consequences

If the future prospects for a money are considered poor, its value in speculations, which anticipate its future purchasing power, will be lower than the actual demand and supply situation at the moment would indicate. Prices will be asked and paid which more nearly correspond to anticipated future conditions than to the present demand for, and quantity of, money in circulation.

The frenzied purchases of customers who push and shove in the shops to get something, anything, race on ahead of this development; and so does the course of the panic on the Bourse where stock prices, which do not represent claims in fixed sums of money, and foreign exchange quotations are forced fitfully upward. The monetary units available at the moment are not sufficient to pay the prices which correspond to the anticipated future demand for, and quantity of, monetary units. So trade suffers from a shortage of notes. There are not enough monetary units [or notes] on hand to complete the business transactions agreed upon. The processes of the market, which bring total demand and supply into balance by shifting exchange ratios [prices], no longer function so as to bring about the exchange ratios which actually exist at the time between the available monetary units and other economic goods. This phenomenon could be clearly seen in Austria in the late fall of 1921.6 The settling of business transactions suffered seriously from the shortage of notes.

Once conditions reach this stage, there is no possible way to avoid the undesired consequences. If the issue of notes is further increased, as many recommend, then things would only be made still worse. Since the panic would keep on developing, the disproportionality between the depreciation of the monetary unit and the quantity in circulation would become still more exaggerated. The shortage of notes for the completion of transactions is a phenomenon of advanced inflation. It is the other side of the frenzied purchases and prices; it is the other side of the “crack-up boom.”

3. Effect on Interest Rates

Obviously, this shortage of monetary units should not be confused with what the businessman usually understands by a scarcity of money, accompanied by an increase in the interest rate for short term investments. An inflation, whose end is not in sight, brings that about also. The old fallacy—long since refuted by David Hume and Adam Smith—to the effect that a scarcity of money, as defined in the businessman’s terminology, may be alleviated by increasing the quantity of money in circulation, is still shared by many people. Thus, one continues to hear astonishment expressed at the fact that a scarcity of money prevails in spite of the uninterrupted increase in the number of notes in circulation. However, the interest rate is then rising, not in spite of, but precisely on account of, the inflation.

If a halt to the inflation is not anticipated, the money lender must take into consideration the fact that, when the borrower ultimately repays the sum of money borrowed, it will then represent less purchasing power than originally lent out. If the money lender had not granted credit but instead had used his money himself to buy commodities, stocks, or foreign exchange, he would have fared better. In that case, he would have either avoided loss altogether or suffered a lower loss. If he lends his money, it is the borrower who comes out well. If the borrower buys commodities with the borrowed money and sells them later, he has a surplus after repaying the borrowed sum. The credit transaction yields him a profit, a real profit, not an illusory, inflationary profit. Thus, it is easy to understand that, as long as the continuation of monetary depreciation is expected, the money lender demands, and the borrower is ready to pay, higher interest rates. Where trade or legal practices are antagonistic to an increase in the interest rate, the making of credit transactions is severely hampered. This explains the decline in savings among those groups of people for whom capital accumulation is possible only in the form of money deposits at banking institutions or through the purchase of securities at fixed interest rates.

4. The Run From Money

The divorce of a money, which is proving increasingly useless, from trade begins when it starts coming out of hoarding. If people want marketable goods available to meet unanticipated future needs, they start to accumulate other moneys—for instance, metallic (gold and silver) moneys, foreign notes, and occasionally also domestic notes which are valued more highly because their quantity cannot be increased by the government, such as the Romanov ruble of Russia or the “blue” money of Communist Hungary.7 Then too, for the same purpose, people begin to acquire metal bars, precious stones and pearls, even pictures, other art objects and postage stamps. An additional step in displacing a no-longer-useful money is the shift to making credit transactions in foreign currencies or metallic commodity money which, for all practical purposes, means only gold. Finally, if the use of domestic money comes to a halt even in commodity transactions, wages too must be paid in some other way than with pieces of paper with which transactions are no longer being made.

Only the hopelessly confirmed statist can cherish the hope that a money, continually declining in value, may be maintained in use as money over the long run. That the German mark is still used as money today [January 1923] is due simply to the fact that the belief generally prevails that its progressive depreciation will soon stop, or perhaps even that its value per unit will once more improve. The moment that this opinion is recognized as untenable, the process of ousting paper notes from their position as money will begin. If the process can still be delayed somewhat, it can only denote another sudden shift of opinion as to the state of the mark’s future value. The phenomena described as frenzied purchases have given us some advance warning as to how the process will begin. It may be that we shall see it run its full course.

Obviously the notes cannot be forced out of their position as the legal media of exchange, except by an act of law. Even if they become completely worthless, even if nothing at all could be purchased for a billion marks, obligations payable in marks could still be legally satisfied by the delivery of mark notes. This means simply that creditors, to whom marks are owed, are precisely those who will be hurt most by the collapse of the paper standard. As a result, it will become impossible to save the purchasing power of the mark from destruction.

5. Effect of Speculation

Speculators actually provide the strongest support for the position of the notes as money. Yet, the current statist explanation maintains exactly the opposite. According to this doctrine, the unfavorable configuration of the quotation for German money since 1914 is attributed primarily, or at least in large part, to the destructive effect of speculation in anticipation of its decline in value. In fact, conditions were such that during the war, and later, considerable quantities of marks were absorbed abroad precisely because a future rally of the mark’s exchange rate was expected. If these sums had not been attracted abroad, they would necessarily have led to an even steeper rise in prices on the domestic market. It is apparent everywhere, or at least it was until recently, that even residents within the country anticipated a further reduction of prices. One hears again and again, or used to hear, that everything is so expensive now that all purchases, except those which cannot possibly be postponed, should be put off until later. Then again, on the other hand, it is said that the state of prices at the moment is especially favorable for selling. However, it cannot be disputed that this point of view is already on the verge of undergoing an abrupt change.

Placing obstacles in the way of foreign exchange speculation, and making transactions in foreign exchange futures especially difficult, was detrimental to the formation of the exchange rate for notes. Still, not even speculative activity can help at the time when the opinion becomes general that no hope remains for stopping the progressive depreciation of the money. Then, even the optimists will retreat from German marks and Austrian crowns, part company with those who anticipate a rise and join with those who expect a decline. Once only one view prevails on the market, there can be no more exchanges based on differences of opinion.

6. Final Phases

The process of driving notes out of service as money can take place either relatively slowly or abruptly in a panic, perhaps in days or even hours. If the change takes place slowly that means trade is shifting, step-by-step, to the general use of another medium of exchange in place of the notes. This practice of making and settling domestic transactions in foreign money or in gold, which has already reached substantial proportions in many branches of business, is being increasingly adopted. As a result, to the extent that individuals shift more and more of their cash holdings from German marks to foreign money, still more foreign exchange enters the country. As a result of the growing demand for foreign money, various kinds of foreign exchange, equivalent to a part of the value of the goods shipped abroad, are imported instead of commodities. Gradually, there is accumulated within the country a supply of foreign moneys. This substantially softens the effects of the final breakdown of the domestic paper standard. Then, if foreign exchange is demanded even in small transactions, if, as a result, even wages must be paid in foreign exchange, at first in part and then in full, if finally even the government recognizes that it must do the same when levying taxes and paying its officials, then the sums of foreign money needed for these purposes are, for the most part, already available within the country. The situation, which emerges then from the collapse of the government’s currency, does not necessitate barter, the cumbersome direct exchange of commodities against commodities. Foreign money from various sources then performs the service of money, even if somewhat unsatisfactorily.

Not only do incontrovertible theoretical considerations lead to this hypothesis. So does the experience of history with currency breakdowns. With reference to the collapse of the “Continental Currency” in the rebellious American colonies (1781), Horace White says: “As soon as paper was dead, hard money sprang to life, and was abundant for all purposes. Much had been hoarded and much more had been brought in by the French and English armies and navies. It was so plentiful that foreign exchange fell to a discount.”8

In 1796, the value of French territorial mandats fell to zero. Louis Adolphe Thiers commented on the situation as follows:

Nobody traded except for metallic money. The specie, which people had believed hoarded or exported abroad, found its way back into circulation. That which had been hidden appeared. That which had left France returned. The southern provinces were full of piasters, which came from Spain, drawn across the border by the need for them. Gold and silver, like all commodities, go wherever demand calls them. An increased demand raises what is offered for them to the point that attracts a sufficient quantity to satisfy the need. People were still being swindled by being paid in mandats, because the laws, giving legal tender value to paper money, permitted people to use it for the satisfaction of written obligations. But few dared to do this and all new agreements were made in metallic money. In all markets, one saw only gold or silver. The workers were also paid in this manner. One would have said there was no longer any paper in France. The mandats were then found only in the hands of speculators, who received them from the government and resold them to the buyers of national lands. In this way, the financial crisis, although still existing for the state, had almost ended for private persons.9

7. Greater Importance of Money to a Modern Economy

Of course, one must be careful not to draw a parallel between the effects of the catastrophe, toward which our money is racing headlong on a collision course, with the consequences of the two events described above. In 1781, the United States was a predominantly agricultural country. In 1796, France was also at a much lower stage in the economic development 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.

• *Die geldtheoretische Seite des Stabilisierungsproblems (Schriften des Vereins für Sozialpolitik 164, part 2 [Munich and Leipzig: Duncker and Humblot, 1923]). The original manuscript for this essay was completed and submitted by the author to the printer in January 1923, more than eight months before the final breakdown of the German mark.
• 1[Following the terminology of Carl Menger, Mises wrote here of changes in the “internal objective exchange value” of the monetary unit. However, in this translation, the more familiar English term, later adopted by Mises, will be used—i.e, changes in the value of the monetary unit arising on the money side or, simply, “cash-induced changes.” Menger’s term for changes in the monetary unit’s “external exchange value” will be rendered as “changes from the goods side” or “goods-induced changes.” See below p. 76, note 17. Also Mises’s Human Action (1949; 1963 , p. 419; Scholar’s Edition [Auburn, Ala.: Ludwig von Mises Institute, 1998], p. 416).—Ed.]
• 2[Mises uses the term “inflation” in its historical and scientific sense as an increase in the quantity of money.—Ed.]
• 3[Here in the German text Mises used, without special comment, the English term “standard of deferred payments.” For his reasons, see below, p. 58, note 3.—Ed.]
• 4Bourse (French). A continental European stock exchange, on which trades are also made in commodities and foreign exchange.
• 5The Treaty of Versailles at the end of World War I (1914–1918) reduced German controlled territory considerably, restored Alsace-Lorraine to France, ceded large parts of West Prussia and Posen to Poland, ceded small areas to Belgium and stripped Germany of her former colonies in Africa and Asia.
• 6[The post World War I inflation in Austria is not as well known as the German inflation of 1923. The Austrian crown depreciated disastrously at that time, although not to the same extent as the German mark. The leader of the Christian-Social Party and Chancellor of Austria (1922–1924 and 1926–1929), Dr. Ignaz Seipel (1876–1932), acting on the advice of Professor Mises and some of his associates, succeeded in stopping the Austrian inflation in 1922.—Ed.]
• 7Moneys issued by no longer existing governments. The Romanovs were thrown out of power in Russia by the Communist Revolution in 1917; Hungary’s post World War I Communist government lasted only from March 21, to August 1, 1919.
• 8Horace White, Money and Banking: Illustrated by American History (Boston, 1895), p. 142.
• 9Louis Adolphe Thiers, Histoire de la Revolution Française, 7th ed., vol. V (Brussels, 1838), p. 171. The interpretation placed on these events by the “School” of G.F. Knapp is especially fantastic. See H. Illig’s Das Geldwesen Frankreichs zur Zeit der ersten Revolution bis zum Ende der Papiergeldwährung [The French monetary system at the time of the first revolution to the end of the paper currency] (Strassburg, 1914), p. 56. After mentioning attempts by the state to “manipulate the exchange rate of silver,” he points out: “Attempts to reintroduce the desired cash situation began to succeed in 1796.” Thus, even the collapse of the paper money standard was a “success” for the State Theory of Money.

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.10

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.11

There can be no doubt but what 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 the market.

In the course of speculation in stocks and securities, the speculator has developed the procedure which is his tool in trade. What he learned there he now tries to apply in the field of foreign exchange speculations. His experience has been that stocks which have dropped sharply on the market usually offer favorable investment opportunities and so he believes the situation to be similar with respect to the monetary unit. He looks on the monetary unit as if it were a share of stock in the government. When the German mark was quoted in Zurich at 10 francs, one banker said: “Now is the time to buy marks. The German economy is surely poorer today than before the war so that a lower evaluation for the mark is justified. Yet the wealth of the German people has certainly not fallen to a twelfth of their prewar assets. Thus, the mark must rise in value.” And when the Polish mark had fallen to 5 francs in Zurich, another banker said: “To me this low price is incomprehensible! Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher.”

Similarly, in the spring of 1919, a leading official of the Hungarian Soviet Republic12 told me: “Actually, the paper money issued by the Hungarian Soviet Republic should have the highest rate of exchange, except for that of Russia. Next to the Russian government, the Hungarian government, by socializing private property throughout Hungary, has become the richest and thus the most credit-worthy in the world.”

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. Nevertheless, even though the theory of these bankers is false, and must eventually lead to losses for all who use it as a guide for action, it can temporarily slow down and even put a stop to the decline in the foreign exchange value of the monetary unit.

• 10Foreign currencies and similar legal claims could possibly be classed as foreign money. However, foreign money here obviously means only the money of countries with at least fairly sound monetary conditions.
• 11[Mises later developed his position on these matters more fully. He withdrew his endorsement of even such a carefully prescribed legal exemption as this to his general thesis that money and banking should be free of legislative interference. Even clearing arrangements among the banks should be left to the vicissitudes of the market. See his plea for free banking in Monetary Stabilization and Cyclical Policy (1928) in this volume especially pp. 124–25 below. Also in Human Action, chapter XVII, section 12 on “Indirect Exchange” and the essay on “Monetary Reconstruction” written for publication as the Epilogue to the 1953 (and later) editions of The Theory of Money and Credit.—Ed.]In power from March 21, to August 1, 1919, only.
• 12In power from March 21, to August 1, 1919, only.

1. Eminence of Gold

In the years preceding and during the war, the authors who prepared the way for the present monetary chaos were eager to sever the connection between the monetary standard and gold. So, in place of a standard based directly on gold, it was proposed to develop a standard which would promise no more than a constant exchange ratio in foreign money. These proposals, insofar as they aimed at transferring control over the formulation of monetary value to government, need not be discussed any further. The reason for using a commodity money is precisely to prevent political influence from affecting directly the value of the monetary unit. Gold is not the standard money solely on account of its brilliance or its physical and chemical characteristics. Gold is the standard money primarily because an increase or decrease in the available quantity is independent of the orders issued by political authorities. The distinctive feature of the gold standard is that it makes changes in the quantity of money dependent on the profitability of gold production.

Instead of the gold standard, a monetary standard based on a foreign currency could be introduced. The value of the mark would then be related, not to gold, but to the value of a specific foreign money, at a definite exchange ratio. The Reichsbank would be ready at all times to buy or sell marks, in unlimited quantities at a fixed exchange rate, against the specified foreign money. If the monetary unit chosen as the basis for such a system is not on a sound gold standard, the conditions created would be absolutely untenable. The purchasing power of the German money would then hinge on fluctuations in the purchasing power of that foreign money. German policy would have renounced its influence on the creation of monetary value for the benefit of the policy of a foreign government. Then too, even if the foreign money, chosen as the basis for the German monetary unit, were on an absolutely sound gold standard at the moment, the possibility would remain that its tie to gold might be cut at some later time. So there is no basis for choosing this roundabout route in order to attain a sound monetary system. It is not true that adopting the gold standard leads to economic dependence on England, gold producers, or some other power. Quite the contrary! As a matter of fact, it is the monetary standard which relies on the money of a foreign government that deserves the name of a “subsidiary [dependent] or vassal standard.”13

2. Sufficiency of Available Gold

There are no grounds for saying that there is not enough gold available to enable all the countries in the world to have the gold standard. There can never be too much, nor too little, gold to serve the purpose of money. Supply and demand are brought into balance by the formation of prices. Nor is there reason to fear that prices generally would be depressed too severely by a return to the gold standard on the part of countries with depreciated currencies. The world’s gold supplies have not decreased since 1914. They have increased. In view of the decline in trade and the increase in poverty, the demand for gold should be lower than it was before 1914, even after a complete return to the gold standard. After all, a return to the gold standard would not mean a return to the actual use of gold money within the country to pay for small- and medium-sized transactions. For even the gold exchange standard [Goldkernwährung] developed by Ricardo in his work, Proposals for an Economical and Secure Currency (1816), is a legitimate and adequate gold standard,14 as the history of money in recent decades clearly shows.

Basing the German monetary system on some foreign money instead of the metal gold would have only one significance: By obscuring the true nature of reform, it would make a reversal easier for inflationist writers and politicians. The first condition of any real monetary reform is still to rout completely all populist doctrines advocating Chartism,15 the creation of money, the dethronement of gold and free money. Any imperfection and lack of clarity here is prejudicial. Inflationists of every variety must be completely demolished. We should not be satisfied to settle for compromises with them. The slogan, “Down with gold,” must be ousted. The solution rests on substituting in its place: “No governmental interference with the value of the monetary unit!”

• 13Carl A. Schaefer, Klassische Valutastabilisierungen (Hamburg, 1922), p. 65.
• 14[By 1928, when Mises wrote “Monetary Stabilization and Cyclical Policy,” the second essay in this volume, he had rejected the flexible (gold exchange) standard (see below, pp. 60ff.) pointing out that the only hope of curbing the powerful political incentives to inflate lay in having a “pure” gold coin standard. He “confessed” this shift in views in Human Action (1st ed., 1949, p. 780; 2nd and 3rd eds., 1963 and 1966, p. 786; Scholar’s Edition 1998, p. 780).—Ed.]
• 15Chartism, an English working class movement, arose as a revolt against the Poor Law of 1835 which forced those able to work to enter workhouses before receiving public support. The movement was endorsed by both Marx and Engels and accepted the labor theory of value. Its members included those seeking inconvertible paper money and all sorts of political interventions and welfare measures. The advocates of various schemes were unified only in the advocacy of a charter providing for universal adult male suffrage, which each faction thought would lead to the adoption of its particular nostrums. Chartists’s attempts to obtain popular support failed conspicuously and after 1848 the movement faded away.

1. Victory and Inflation

No one can any longer maintain seriously that the rate of exchange for the German paper mark could be reestablished [in 1923] at its old gold value—as specified by the legislation of December 4, 1871, and by the coinage law of July 9, 1873. Yet many still resist the proposal to stabilize the gold value of the mark at the currently low rate. Rather vague considerations of national pride are often marshaled against it. Deluded by false ideas as to the causes of monetary depreciation, people have been in the habit of looking on a country’s currency as if it were the capital stock of the fatherland and of the government. People believe that a low exchange rate for the mark is a reflection of an unfavorable judgment as to the political and economic situation in Germany. They do not understand that monetary value is affected only by changes in the relation between the demand for, and quantity of, money and the prevailing opinion with respect to expected changes in that relationship, including those produced by governmental monetary policies.

During the course of the war, it was said that “the currency of the victor” would turn out to be the best. But war and defeat on the field of battle can only influence the formation of monetary value indirectly. It is generally expected that a victorious government will be able to stop the use of the printing press sooner. The victorious government will find it easier both to restrict its expenditures and to obtain credit. This same interpretation would also argue that the rate of exchange of the defeated country would become more favorable as the prospects for peace improved. The values of both the German mark and the Austrian crown rose in October 1918. It was thought that a halt to the inflation could be expected even in Germany and Austria, but obviously this expectation was not fulfilled.

History shows that the foreign exchange value of the “victor’s money” may also be very low. Seldom has there been a more brilliant victory than that finally won by the American rebels under Washington’s leadership over the British forces. Yet the American money did not benefit as a result. The more proudly the Star Spangled Banner was raised, the lower the exchange rate fell for the “Continentals,” as the paper notes issued by the rebellious states were called. Then, just as the rebels’ victory was finally won, these “Continentals” became completely worthless. A short time later, a similar situation arose in France. In spite of the victory achieved by the Revolutionists, the agio [premium] for the metal rose higher and higher until finally, in 1796, the value of the paper monetary unit went to zero. In each case, the victorious government pursued inflation to the end.

2. Establishing Gold “Ratio”

It is completely wrong to look on “devaluation” as governmental bankruptcy. Stabilization of the present depressed monetary value, even if considered only with respect to its effect on the existing debts, is something very different from governmental bankruptcy. It is both more and, at the same time, less than governmental bankruptcy. It is more than governmental bankruptcy to the extent that it affects not only public debts, but also all private debts. It is less than governmental bankruptcy to the extent that it affects only the government’s outstanding debts payable in paper money, while leaving undisturbed its obligations payable in hard money or foreign currency. Then too, monetary stabilization brings with it no change in the relationships among contracting parties, with respect to paper money debts already contracted without any assurance of an increase in the value of the money.

To compensate the owners of claims to marks for the losses suffered, between 1914 and 1923, calls for something other than raising the mark’s exchange rate. Debts originating during this period would have to be converted by law into obligations payable in old gold marks according to the mark’s value at the time each obligation was contracted. It is extremely doubtful if the desired goal could be attained even by this means. The present title-holders to claims are not always the same ones who have borne the loss. The bulk of claims outstanding are represented by securities payable to the bearer and a considerable portion of all other claims have changed hands in the course of the years. When it comes to determining the currency profits and losses over the years, accounting methods are presented with tremendous obstacles by the technology of trade and the legal structure of business.

The effects of changes in general economic conditions on commerce, especially those of every cash-induced change in monetary value, and every increase in its purchasing power, militate against trying to raise the value of the monetary unit before [redefining and] stabilizing it in terms of gold. The value of the monetary unit should be [legally defined and] stabilized in terms of gold at the rate (ratio) which prevails at the moment.

As long as monetary depreciation is still going on, it is obviously impossible to speak of a specific “rate” for the value of money. For changes in the value of the monetary unit do not affect all goods and services throughout the whole economy at the same time and to the same extent. These changes in monetary value necessarily work themselves out irregularly and step-by-step. It is generally recognized that in the short, or even the longer run, a discrepancy may exist between the value of the monetary unit, as expressed in the quotation for various foreign currencies, and its purchasing power in goods and services on the domestic market.

The quotations on the Bourse for foreign exchange always reflect speculative rates in the light of the currently evolving, but not yet consummated, change in the purchasing power of the monetary unit. However, the monetary depreciation, at an early stage of its gradual evolution, has already had its full impact on foreign exchange rates before it is fully expressed in the prices of all domestic goods and services. This lag in commodity prices, behind the rise of the foreign exchange rates, is of limited duration. In the last analysis, the foreign exchange rates are determined by nothing more than the anticipated future purchasing power attributed to a unit of each currency. The foreign exchange rates must be established at such heights that the purchasing power of the monetary unit remains the same, whether it is used to buy commodities directly, or whether it is first used to acquire another currency with which to buy the commodities. In the long run the rate cannot deviate from the ratio determined by its purchasing power. This ratio is known as the “natural” or “static” rate.16

In order to stabilize the value of a monetary unit at its present value, the decline in monetary value must first be brought to a stop. The value of the monetary unit in terms of gold must first attain some stability. Only then can the relationship of the monetary unit to gold be given any lasting status. First of all, as pointed out above, the progress of inflation must be blocked by halting any further increase in the issue of notes. Then one must wait a while until after foreign exchange quotations and commodity prices, which will fluctuate for a time, have become adjusted. As has already been explained, this adjustment would come about not only through an increase in commodity prices but also, to some extent, with a drop in the foreign exchange rate.17

• 16[Mises later came to prefer the term “final rate” or the rate that would prevail if a “final state of rest,” reflecting the final effects of all changes already initiated, were actually reached. See Human Action, chapter XIV, section 5.—Ed.]
• 17[For a later elaboration of this position, see Mises’s “Monetary Reconstruction,” epilogue to the 1953 (and later) editions of The Theory of Money and Credit.—Ed.]

1. Refined Quantity Theory of Money

The generally accepted doctrine maintains that the establishment of sound relationships among currencies is possible only with a “favorable balance of payments.” According to this view, a country with an “unfavorable balance of payments” cannot maintain the stability of its monetary value. In this case, the deterioration in the rate of exchange is considered structural and it is thought it may be effectively counteracted only by eliminating the structural defects.

The answer to this and to similar arguments is inherent in the Quantity Theory and in Gresham’s Law.

The Quantity Theory demonstrated that in a country which uses only commodity money, the “purely metallic currency” standard of the Currency Theory, money can never flow abroad continuously for any length of time. The outflow of a part of the gold supply brings about a contraction in the quantity of money available in the domestic market. This reduces commodity prices, promotes exports and restricts imports, until the quantity of money in the domestic economy is replenished from abroad. The precious metals being used as money are dispersed among the various individual enterprises and thus among the several national economies, according to the extent and intensity of their respective demands for money. Governmental interventions, which seek to regulate international monetary movements in order to assure the economy a “needed” quantity of money, are superfluous.

The undesirable outflow of money must always be simply the result of a governmental intervention which has endowed differently valued moneys with the same legal purchasing power. All that the government need do to avoid disrupting the monetary situation, and all it can do, is to abandon such interventions. That is the essence of the monetary theory of Classical economics and of those who follow in its footsteps, the theoreticians of the Currency School.18

With the help of modern subjective theory, this theory can be more thoroughly developed and refined. Still it cannot be demolished. And no other theory can be put in its place. Those who can ignore this theory only demonstrate that they are not economists.

2. Purchasing Power Parity

One frequently hears, when commodity money is being replaced in one country by credit or token money—because the legally-decreed equality between the over-issued paper and the metallic money has prompted the sequence of events described by Gresham’s Law—that it is the balance of payments that determines the rates of foreign exchange. That is completely wrong. Exchange rates are determined by the relative purchasing power per unit of each kind of money. As pointed out above, exchange rates must eventually be established at a height at which it makes no difference whether one uses a piece of money directly to buy a commodity, or whether one first exchanges this money for units of a foreign currency and then spends that foreign currency for the desired commodity. Should the rate deviate from that determined by the purchasing power parity, which is known as the “natural” or “static” rate, an opportunity would emerge for undertaking profit-making ventures.

It would then be profitable to buy commodities with the money which is legally undervalued on the exchange, as compared with its purchasing power parity, and to sell those commodities for that money which is legally overvalued on the exchange, as compared with its actual purchasing power. Whenever such opportunities for profit exist, buyers would appear on the foreign exchange market with a demand for the undervalued money. This demand drives the exchange up until it reaches its “final rate.”19 Foreign exchange rates rise because the quantity of the [domestic] money has increased and commodity prices have risen. As has already been explained, it is only because of market technicalities that this cause and effect relationship is not revealed in the early course of events as well. Under the influence of speculation, the configuration of foreign exchange rates on the Bourse forecasts anticipated future changes in commodity prices.

The balance of payments doctrine overlooks the fact that the extent of foreign trade depends entirely on prices. It disregards the fact that nothing can be imported or exported if price differences, which make the trade profitable, do not exist. The balance of payments doctrine derives from superficialities. Anyone who simply looks at what is taking place on the Bourse every day and every hour sees, to be sure, only that the momentary state of the balance of payments is decisive for supply and demand on the foreign exchange market. Yet this diagnosis is merely the start of the inquiry into the factors determining foreign exchange rates. The next question is: What determines the momentary state of the balance of payments? This must lead only to the conclusion that the balance of payments is determined by the structure of prices and by the sales and purchases inspired by differences in prices.

3. Foreign Exchange Rates

With rising foreign exchange quotations, foreign commodities can be imported only if they find buyers at their higher prices. One version of the balance of payments doctrine seeks to distinguish between the importation of necessities of life and articles which are considered less vital or necessary. It is thought that the necessities of life must be obtained at any price, because it is absolutely impossible to get along without them. As a result, it is held that a country’s foreign exchange must deteriorate continuously if it must import vitally-needed commodities while it can export only less-necessary items. This reasoning ignores the fact that the greater or lesser need for certain goods, the size and intensity of the demand for them, or the ability to get along without them, is already fully expressed by the relative height of the prices assigned to the various goods on the market.

No matter how strong a desire the Austrians may have for foreign bread, meat, coal or sugar, they can satisfy this desire only if they can pay for them. If they want to import more, they must export more. If they cannot export more manufactured, or semimanufactured, goods, they must export shares of stock, bonds, and titles to property of various kinds.

If the quantity of notes were not increased, then the prices of the items for sale would be lower. If they then demand more imported goods, the prices of these imported items must rise. Or else the rise in the prices of vital necessities must be offset by a decline in the prices of less vital articles, the purchase of which is restricted to permit the purchase of more necessities. Thus a general rise in prices is out of the question [without an increase in the quantity of notes]. The international payments would come into balance either with an increase in the export of dispensable goods or with the export of securities and similar items. It is only because the quantity of notes has been increased that they can maintain their imports at the higher exchange rates without increasing their exports. This is the only reason that the increase in the rate of exchange does not completely choke off imports and encourage exports until the “balance of payments” is once again “favorable.”20

Certainly no proof is needed to demonstrate that speculation is not responsible for the deterioration of the foreign exchange situation. The foreign exchange speculator tries to anticipate prospective fluctuations in rates. He may perhaps blunder. In that case he must pay for his mistakes. However, speculators can never maintain for any length of time a quotation which is not in accord with market ratios. Governments and politicians, who blame the deterioration of the currency on speculation, know this very well. If they thought differently with respect to future foreign exchange rates, they could speculate for the government’s account, against a rise and in anticipation of a decline. By this single act they could not only improve the foreign exchange rate, but also reap a handsome profit for the Treasury.

4. Foreign Exchange Regulations

The ancient Mercantilist fallacies paint a specter which we have no cause to fear. No people, not even the poorest, need abandon sound monetary policy. It is neither the poverty of the individual nor of the group, it is neither foreign indebtedness nor unfavorable conditions of production, that drives foreign exchange rates way up. Only inflation does this.

Consequently, every other means employed in the struggle against the rise in foreign exchange rates is useless. If the inflation continues, they will be ineffective. If there is no inflation, they are superfluous. The most significant of these other means is the prohibition or, at least, the restriction of the importation of certain goods which are considered dispensable, or at least not vitally necessary. The sums of money within the country which would have been spent for the purchase of these goods are now used for other purchases. Obviously, the only goods involved are those which would otherwise have been sold abroad. These goods are now bought by residents within the country at prices higher than those bid for them by foreigners. As a result, on the one side there is a decline in imports and thus in the demand for foreign exchange, while on the other side there is an equally large reduction in exports and thus also a decline in the supply of foreign exchange. Imports are paid for by exports, not with money as the superficial Neo-mercantilist doctrine still maintains.

If one really wants to check the demand for foreign exchange, then, to the extent that one wants to reduce imports, money must actually be taken away from the people—perhaps through taxes. This sum should be completely withdrawn from circulation, not even given out for government purposes, but rather destroyed. This means adopting a policy of deflation. Instead of restricting the importation of chocolate, wine and cigarettes, the sums people would have spent for these commodities must be taken away from them. The people would then either have to reduce their consumption of these or of some other commodities. In the former case [i.e., if the consumption of imported goods is reduced] less foreign exchange is sought. In the latter case [i.e., if the consumption of domestic articles declines] more goods are exported and thus more foreign exchange becomes available.

It is equally impossible to influence the foreign exchange market by prohibiting the hoarding of foreign moneys. If the people mistrust the reliability of the value of the notes, they will seek to invest a portion of their cash holdings in foreign money. If this is made impossible, then the people will either sell fewer commodities and stocks or they will buy more commodities, stocks, and the like. However, they will certainly not hold more domestic currency in place of foreign exchange. In any case, this behavior reduces total exports. The demand for foreign exchange for hoarding disappears and, at the same time, the supply of foreign exchange coming into the country in payment of exports declines. Incidentally, it may be mentioned that making it more difficult to amass foreign exchange hampers the accumulation of a reserve fund that could help the economy weather the critical time which immediately follows the collapse of a paper monetary standard. As a matter of fact, this policy could eventually lead to even more serious trouble.

It is entirely incomprehensible how the idea originates that making the export of one’s own notes more difficult is an appropriate method for reducing the foreign exchange rate. If fewer notes leave the country, then more commodities must be exported or fewer imported. The quotation for notes on exchange markets abroad does not depend on the greater or lesser supplies of notes available there. Rather, it depends on commodity prices. The fact that foreign speculators buy up notes and hoard them, leading to a speculative boom, is only likely to raise their quoted price. If the sums held by foreign speculators had remained within the country, the domestic commodity prices and, as a result, the “final rate” of foreign exchange would have been driven up still higher.

If inflation continues, neither foreign exchange regulations nor control of foreign exchange clearings can stop the depreciation of the monetary unit abroad.

• 18[See Mises’s The Theory of Money and Credit, pp. 180–86; 1980, pp. 207–13.—Ed.]
• 19See my paper “Zahlungsbilanz und Valutenkurse,” Mitteilungen des Verbandes österreichischer Banken und Bankiers II (1919): 39ff.
• 20From the tremendous literature on the subject, I will mention here only T.E. Gregory’s Foreign Exchange Before, During and After the War (London, 1921).

1. Substitute for Taxes

Nowadays, the thesis is maintained that sound monetary relationships may certainly be worth striving for, but public policy is said to have other higher and more important goals. As serious an evil as inflation is, it is not considered the most serious. If it is a choice of protecting the homeland from enemies, feeding the starving and keeping the country from destruction, then let the currency go to rack and ruin. And if the German people must pay off a tremendous war debt, then the only way they can help themselves is through inflation.

This line of reasoning in favor of inflationism must be sharply distinguished from the old inflationist argument which actually approved of the economic consequences of continual monetary depreciation and considered inflationism a worthwhile political goal. According to the later doctrine, inflationism is still considered an evil although, under certain circumstances, a lesser evil. In its eyes, monetary depreciation is not considered the inevitable outcome of a certain pattern of economic conditions, as it is by adherents of the “balance of payments” doctrine discussed in the preceding section. Advocates of limited inflationism tacitly, if not openly, admit in their argumentation that paper money inflation, as well as the resulting monetary depreciation, is always a product of inflationist policy. However, they believe that a government may get into a situation in which it would be more advantageous to counter a greater evil with the lesser evil of inflationism.

The argument for limited inflationism is often stated so as to represent inflationism as a kind of a tax which is called for under certain conditions. In some situations it is considered more advantageous to cover government expenditures by issuing new notes, than by increasing the burden of taxes or borrowing money. This was the argument during the war, when it was a question of defraying the expenses of the army and navy. The same argument is now advanced when it comes to supplying some of the population with cheap foodstuffs, covering the operating deficits of public enterprises (the railroads, etc.) and arranging for reparations payments. The truth is that inflationism is resorted to when raising taxes is considered disagreeable and when borrowing is considered impossible. The question now is to explore the reasons why it is considered disagreeable or impossible to employ these two normally routine ways of obtaining money for government expenditures.

2. Financing Unpopular Expenditures

High taxes can be imposed only if the general public is in agreement with the purposes for which the funds collected will be used. In this connection, it is worth noting that the higher the general burden of taxes, the more difficult it becomes to deceive public opinion as to the fact that the taxes cannot be borne by the more affluent minority of the population alone. Even taxes levied on property owners and the more affluent affect the entire economy. Their indirect effects on the less well-to-do are often felt more intensely than would be those from direct proportional taxation. It may not be easy to detect these relationships when tax rates are relatively low, but they can hardly be overlooked when taxes are higher. However, there is no doubt that the present system of taxing “property” can hardly be carried any farther than it already has been in the countries where inflationism now prevails. Thus the decision will have to be made to rely more directly on the masses for providing funds. For policy makers who enjoy the confidence of the masses only if they impose no obvious sacrifice, this is something they dare not risk.

Can anyone doubt that the warring peoples of Europe would have tired of the conflict much sooner, if their governments had clearly, candidly, and promptly, presented them with the bill for military expenses? No war party in any European country would have dared to levy any considerable taxes on the masses to pay the costs of the war. Even in England, the printing presses were set in motion. Inflation had the great advantage of creating an appearance of economic well-being, of an increase of wealth. It also concealed capital consumption by falsifying monetary calculations. The inflation led to illusory entrepreneurial and capitalistic profits, which could be taxed as income at especially high rates. This could be done without the masses, and frequently even without the taxpayers themselves, noticing that a portion of capital itself was being taxed away. Inflation made it possible to turn the anger of the people against “war profiteers, speculators and smugglers.” Thus, inflation proved itself an excellent psychological aid to the pro-war policy, leading to destruction and annihilation.

What the war began, the revolution continues. A socialistic or semi-socialistic government needs money to operate unprofitable enterprises, to subsidize the unemployed and to provide the people with cheap food supplies. Yet, it cannot raise the funds through taxes. It dares not tell the people the truth. The pro-statist, pro-socialist doctrine calling for government operation of the railroads would lose its popularity very quickly if a special tax were levied to cover the operating losses of the government railroads. If the Austrian masses themselves had been asked to pay a special bread tax, they would very soon have realized from whence came the funds to make the bread cheaper.

3. War Reparations

The decisive factor for the German economy is obviously the payment of the reparations burden imposed by the Treaty of Versailles and its supplementary agreements. According to Karl Helfferich,21 these payments imposed on the German people an annual obligation estimated at two-thirds of their national income. This figure is undoubtedly much too high. No doubt, other estimates, especially those pronounced by French observers, considerably underestimate the actual ratio. In any event, the fact remains that a very sizeable portion of Germany’s current income is consumed by the levy imposed on the nation, and that, if the specified sum is to be withdrawn every year from income, the living standard of the German people must be substantially reduced.

Even though somewhat hampered by the remnants of feudalism, an authoritarian constitution and the rise of statism and socialism, capitalism was able to develop to a considerable extent on German soil. In recent generations, the capitalistic economic system has multiplied German wealth many times over. In 1914, the German economy could support three times as many people as a hundred years earlier and still offer them incomparably more. The war and its immediate consequences have drastically reduced the living standards of the German people. Socialistic destruction has continued this process of impoverishment. Even if the German people did not have to fulfill any reparations payments, they would still be much, much poorer than they were before the war. The burden of these obligations must inevitably reduce their living standard still further—to that of the thirties and forties of the last century. It may be hoped that this impoverishment will lead to a reexamination of the socialist ideology which dominates the German spirit today, that this will succeed in removing the obstacles now preventing an increase in productivity, and that the unlimited opening up of possibilities for development, which exist under capitalism and only under capitalism, will increase many times over the output of German labor. Still the fact remains that if the obligation assumed is to be paid for out of income, the only way is to produce more and consume less.

A part of the burden, or even all of it, could of course be paid off by the export of capital goods. Shares of stock, bonds,22 business assets, land, buildings, would have to be transferred from German to foreign ownership. This would also reduce the total income of the people in the future, if not right away.

4. The Alternatives

These various means, however, are the only ways by which the reparations obligations can be met. Goods or capital, which would otherwise have been consumed within the country, can be exported. To discuss which is more practical is not the task of this essay. The only question which concerns us is how the government can proceed in order to shift to the individual citizens the burden of payments, which devolves first of all on the German treasury. Three ways are possible: raising taxes; borrowing within the country; and issuing paper money. Whichever one of the three methods may be chosen, the nature of its effect abroad remains unaltered. These three ways differ only in their distribution of the burden among citizens.

If the funds are collected by raising a domestic loan, then subscribers to the loan must either reduce their consumption or dispose of a part of their capital. If taxes are imposed, then the taxpayers must do the same. The funds which flow from taxes or loans into the government treasury and which it uses to buy gold, foreign bills of exchange and foreign currencies to fulfill its foreign liabilities, are supplied by the lenders and the taxpayers through the sale abroad of commodities and capital goods. The government can only purchase available foreign exchange which comes into the country from these sales. So long as the government has the power to distribute only those funds which it receives from tax payments and the floating of loans, its purchases of foreign exchange cannot push up the price of gold and foreign currencies. At any one time, the government can buy only so much gold and foreign exchange as the citizens have acquired through export sales. In fact, the world prices of goods and services cannot rise on this account. Rather their prices will decline as a consequence of the larger quantities offered for sale.

However, if and as the government follows the third route, issuing new notes in order to buy gold and foreign exchange instead of raising taxes and floating loans, then its demand for gold and foreign exchange, which is obviously not counterbalanced by a proportionate supply, drives up the prices of various kinds of foreign money. It then becomes advantageous for foreigners to acquire more marks so as to buy capital goods and commodities within Germany at prices which do not yet reflect the new ratios. These purchases drive prices up in Germany right away and bring them once again into adjustment with the world market. This is the actual situation. The foreign exchange, with which reparations obligations are paid, comes from sales abroad of German capital and commodities. The only difference consists in how the government obtains the foreign exchange. In this case, the government first buys the foreign exchange abroad with marks, which the foreigners then use to make purchases in Germany, rather than the German government’s acquiring the foreign exchange from those within Germany who have received payment for previous sales abroad.

From this one learns that the continuing depreciation of the German mark cannot be the consequence of reparations payments. The depreciation of the mark is simply a result of the fact that the government supplies the funds needed for the payments through new issues of notes. Even those who wish to attribute the decline in the rate of exchange on the market to the payment of reparations, rather than to inflation, point out that the quotation for marks is inevitably disturbed by the government’s offering of marks for the purchase of foreign exchange.23 Still, if the government had available for these foreign exchange purchases only the number of marks which it received from taxes or loans, then its demand would not exceed the supply. It is only because it is offering newly created notes, that it drives the foreign exchange rates up.

5. The Government’s Dilemma

Nevertheless, this is the only method available for the German government to defray the reparations debt. Should it try to raise the sums demanded through loans or taxes, it would fail. As conditions with the German people are now, if the economic consequences of compliance were clearly understood and there was no deception as to the costs of that policy, the government could not count on majority support for it. Public opinion would turn with tremendous force against any government that tried to carry out in full the obligations to the Allied Powers. It is not our task to explore whether or not that might be a wise policy.

However, saying that the decline of the value of the German mark is not the direct consequence of making reparations payments but is due rather to the methods the German government uses to collect the funds for the payments, by no means has the significance attached to it by the French and other foreign politicians. They maintain that it is justifiable, from the point of view of world policy, to burden the German people with this heavy load. This explanation of the German monetary depreciation has absolutely nothing to do with whether, in view of the terms of the Armistice, the Allied demand, in general, and its height, in particular, are founded on justice.

The only significant thing for us, however, since it explains the political role of the inflationist procedure, is yet another insight. We have seen that if a government is not in a position to negotiate loans and does not dare levy additional taxation for fear that the financial and general economic effects will be revealed too clearly too soon, so that it will lose support for its program, it always considers it necessary to undertake inflationary measures. Thus inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects. In this sense, it may be described as a tool of antidemocratic policy. By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them.

Inflationist policy is never the necessary consequence of a specific economic situation. It is always the product of human action—of man-made policy. For whatever the reason, the quantity of money in circulation is increased. It may be that the people are influenced by incorrect theoretical doctrines as to the way the value of money develops and are not aware of the consequences of this action. It may be that, in full knowledge of the effects of inflation, they are purposely aiming, for some reason, at a reduction in the value of the monetary unit. So no apology can ever be given for inflationist policy. If it rests on theoretically incorrect monetary doctrines, then it is inexcusable, for there should never, never be any forgiveness for wrong theories. If it rests on a definite judgment as to the effects of monetary depreciation, then to want to “excuse it” is inconsistent. If monetary depreciation has been knowingly engineered, its advocates would not want to excuse it but rather to try to demonstrate that it was a good policy. They would want to show that, under the circumstances, it was even better to depreciate the money than to raise taxes further or to permit the deficit-ridden, nationalized railroads to be transferred from government control to private hands.

Even governments must learn once more to adjust their outgo to income. Once the end results to which inflation must lead are recognized, the thesis, that a government is justified in issuing notes to make up for its lack of funds, will disappear from the handbooks of political strategy.

• 21Karl Helfferich, Die Politik der Erfüllung (Munich, 1922), p. 22.
• 22Thus, raising a foreign loan falls within this category too.
• 23See Walter Rathenau’s addresses—January 12, 1922, before the Senate of the Allied Powers at Cannes, and March 29, 1922, to the Reichstag (Cannes und Genua, Vier Reden zum Reparationsproblem [Berlin 1922], pp. 11ff. and 34ff.).

1. First Steps

The bedrock and cornerstone of the provisional new monetary system must be the absolute prohibition of the issue of any additional notes not completely covered by gold. The maximum limit for German notes in circulation [not completely covered by gold] will be the sum of the banknotes, Loan Bureau Notes (Darlehenskassenscheinen), emergency currency (Notgeld) of every kind, and small coins, actually in circulation at the instant of the monetary reform, less the gold stock and supply of foreign bills held in the reserves of the Reichsbank and the private banks of issue. There must be absolutely no expansion above this maximum under any circumstances, except for the relaxation mentioned above at the end of each quarter. [See above pp. 29–30.] Notes of any kind over and above this amount must be fully covered by deposits of gold or foreign exchange in the Reichsbank. As may be seen, this constitutes acceptance of the leading principle of Peel’s Bank Act, with all its shortcomings. However, these flaws have little significance at the moment. Our first concern is only to get rid of the inflation by stopping the printing presses. This goal, the only immediate one, will be most effectively served by a strict prohibition of the issue of additional notes not backed by metal.

Once adjustments have been made to the new situation, then it will be time enough to consider:

1. On the one hand, whether it might not perhaps be expedient to tolerate the issue, within very narrow limits, of notes not covered by metal.
2. On the other hand, whether it might not also be necessary to limit similarly the issue of other fiduciary media by establishing regulations over the banks’ cash balances and their check and draft transactions.

The question of banking freedom must then be discussed, again and again, on basic principles. Still, all this can wait until later. What is needed now is only to prohibit the issue of additional notes not covered by metal. This is all that can be done at present. Ideally, the limitation on the issue of currency could also be extended, even now, to the Reichsbank’s transfer balances (deposits).24 However, this is not of as critical importance, for the present currency inflation has been and can be brought about only by the issue of notes.

Simultaneously with the enactment of the prohibition against the issue of additional notes not covered by metal, the Reichsbank should be required to purchase all supplies of gold offered them in exchange for notes at prices precisely corresponding to the new ratio. At the same time, the Reichsbank should be obliged to supply any amount of gold requested at that ratio, to anyone able to offer German notes in payment. With this reform, the German standard would become a gold exchange standard (Goldkernwährung). Later will be time enough to examine whether or not to renounce permanently the actual circulation of gold within the country. Careful consideration should be given to whether or not the higher costs needed to maintain the actual circulation of gold within the country might not be amply repaid by the fact that this would permit the people to discontinue using notes. Weaning the people away from paper money could perhaps forestall future efforts aimed at the over-issue of notes endowed with legal tender status. Nevertheless, the gold exchange standard is undoubtedly sufficient for the time being.25 The legal rate for notes in making payments can be temporarily maintained without risk.

It should also be specifically pointed out that the obligation of the Reichsbank to redeem its notes must be interpreted in the strictest possible manner. Every subterfuge, by which European central banks sought to follow some form of “gold premium policy”26 during the decades preceding the World War, must be discontinued.

2. Market Interest Rates

If the Reichsbank were operating under these principles, it would obviously not be in a position to supply the money market with funds obtained by increasing the circulation of notes not covered by metal. Except for the possibilities of such transfers as may not have been previously limited, the Bank will be able to lend out only its own resources and funds furnished by its creditors. Inflationary increases in the note circulation for the benefit of private, as well as public, credit demands will thus be ruled out. The Bank will not then be in a position to follow the policy—which it has attempted again and again—of lowering artificially the market rate of interest.

The explanation of the balance of payments doctrine presented here shows that under this arrangement the Reichsbank would not run the risk of an outflow of its gold and foreign exchange (Devisen) holdings. Citizens lacking confidence in future banking policy, who in the early years of the new monetary system try to exchange notes for gold or foreign exchange (Devisen), will not be satisfied with the assertion that the Bank will be required to redeem its notes only in larger sums, for gold bars and foreign exchange, not for gold coins. Then it will not be possible to eliminate all notes from circulation. In the beginning a larger amount [of foreign currencies and metallic money] may even be withdrawn from the Bank and hoarded. However, as soon as some confidence in the reliability of the new money develops, the hoards of foreign moneys and gold accumulated will flow into the Bank.

The Reichsbank must renounce every attempt to lower interest rates below those which reflect the actual supply and demand relationships existing in the capital markets, and thus encourage the demand for loans which can only be made by increasing the quantity of notes. This prerequisite for monetary reform will evoke the criticism of the naïve inflationists of the business world. These criticisms will grow as the difficulties of providing credit for the German economy increase during the coming years. In the view of the businessman, the role of the central bank of issue is to provide cheap credit. The businessman believes that the Bank should not deny newly created notes to those who want additional credit. For decades, the errors of the English Banking School theoreticians have prevailed in Germany. Bendixen has recently made them popular through his easily readable Theorie der klassischen Geldschöpfung.27

People keep forgetting that the increase in the cost of credit—which has become known by the very misleading term, “scarcity of money”—cannot be overcome in the long run by inflationist measures. They also forget that the interest rate cannot be reduced in the long run by credit expansion. The expansion of credit always leads to higher commodity prices and quotations for foreign exchange and foreign moneys.

• 24See p. 26 above.
• 25[In view of Mises’s comments here, it appears that he then intended that the Reichsbank redeem at this point only larger sums of marks in gold and foreign exchange. Mises’s insistence in later years on a gold coin standard, with gold coins in daily use, even in the early stages of monetary reform, represents a significant refinement of these earlier recommendations. See Human Action, chapter XXXI, section 3, and his 1953 essay, “Monetary Reconstruction,” the Epilogue to The Theory of Money and Credit, 1953, pp. 448–52; 1980, pp. 490–95. Also above, p. 20, note 14.—Ed.]
• 26[In The Theory of Money and Credit (1953, pp. 377ff.; 1980, pp. 416ff.), Mises describes the “gold premium policy” of making it difficult and expensive to obtain gold—by hampering its export through the manipulation of discount rates and by limiting the redemption of domestic money in gold.—Ed.]
• 27[Apparently works of Friedrich Bendixen (1864–1920) are not available in English language translations.—Ed.]

1. The Ideological Conflict

The purely materialistic doctrine now used to explain every event looks on monetary depreciation as a phenomenon brought about by certain “material” causes. Attempts are made to counteract these imagined causes by various monetary techniques. People ignore, perhaps knowingly, that the roots of monetary depreciation are ideological in nature. It is always an inflationist policy, not “economic conditions,” which brings about the monetary depreciation. The evil is philosophical in character. The state of affairs, universally deplored today, was created by a misunderstanding of the nature of money and an incorrect judgment as to the consequences of monetary depreciation.

Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism.28 Just as the world catastrophe, which has swept over mankind since 1914, is not a natural phenomenon but the necessary outcome of the ideas which dominate our time, so also is the monetary crisis nothing but the inevitable consequence of the supremacy of certain ideologies concerning monetary policy.

Statist Theory has tried to explain every social phenomenon by the operation of mysterious power factors. It has disputed the possibility that economic laws for the formation of prices could be demonstrated. Failing to recognize the significance of commodity prices for the development of exchange relationships among various moneys, it has tried to distinguish between the domestic and foreign values of money. It has tried to attribute changes in exchange rates to various causes—the balance of payments, speculative activity, and political factors. Ignoring completely the Currency Theory’s important criticism of the Banking Theory, Statist Theory has actually prescribed the Banking Theory. It has moreover even revived the doctrine of the canonists and of the legal authorities of the Middle Ages to the effect that money is a creature of the government and the legal order. Thus, Statist Theory prepared the philosophical groundwork from which the inflationism of recent years developed.

The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.

• 28[In his later works, Mises would have covered all these ideas, except “socialism,” with the terms “interventionism” or “hampered market.”—Ed.]

The printing press played an important role in creating the means for carrying on the war.29 Every belligerent nation and many neutral ones used it. With the cessation of hostilities, however, no halt was called to the money-creating activities of the banks of issue. Previously, notes were printed to finance the war. Today, notes are still being printed, at least in some countries, to satisfy domestic demands of various kinds. The entire world is under the sway of inflation. The prices of all goods and services rise from day to day and no one can say when these increases will come to an end.

Inflation today is a general phenomenon, but its magnitude is not the same in every country. The increase in the quantity of money in the different currency areas is neither equal statistically—an equality which, given the different demands for money in the different areas, would be apparent only—nor has the increase proceeded in all areas in the same ratio to the demand for money. Thus, price increases, insofar as they are due to changes from the money side, have not been the same everywhere. ...

Price increases, which are called into existence by an increase in the quantity of money, do not appear overnight. A certain amount of time passes before they appear. The additional quantity of money enters the economy at a certain point. It is only from there, step by step, that it is dispersed. It goes first to certain individuals in the economy only and to certain branches of production. As a result, in the beginning it raises the demand for certain goods and services only, not for all of them. Only later do the prices of other goods and services also rise. Foreign exchange quotations, however, are speculative rates of exchange—that is, they arise out of the transactions of business people, who, in their operations, consider not only the present but also potential future developments. Thus, the depreciation of the money becomes apparent relatively soon in the foreign exchange quotations on the Bourse—long before the prices of other goods and services are affected. ...

Now, there is one theory which seeks to explain the formation of foreign exchange rates by the balance of payments, rather than by a currency’s purchasing power. This theory makes a distinction in the depreciation of the money between the decline in the currency’s value on international markets and the reduction in its purchasing power domestically. It maintains that there is only a very slight connection between the two or, as many say, no connection at all. The exchange rate of foreign currencies is a result of the momentary balance of payments. If the payments going abroad rise without a corresponding increase in the payments coming into the country, or if the payments coming from abroad should decline without a corresponding reduction of the payments going out of the country, then foreign exchange rates must rise.

We shall not speculate on the reasons why such a theory can be advanced. Between the change in the exchange rates for foreign currencies and the change in the monetary unit’s domestic purchasing power, there is usually a time lag—shorter or longer. Therefore, superficial observation could very easily lead to the conclusion that the two data were independent of one another. We have also heard that the balance of payments is the immediate cause of the daily fluctuations in exchange rates. A theory which explained surface appearances only and did not analyze the situation thoroughly could easily overlook the facts that (a) the day-to-day ratio between the supply of and demand for foreign exchange determined by the balance of payments can evoke only transitory variations from the “static” rate formed by the purchasing power of various kinds of money, (b) these deviations must disappear promptly, and (c) these variations will vanish more quickly and more completely the less restraints are imposed on trade and the freer speculation is.

Certainly there shouldn’t be any reason to examine this theory further. It has been settled scientifically. The fact that it plays a significant role in economic policy may be a reason for investigating the political basis for its undoubted popularity among government officials and writers. Still that may be left to others.

However, we must concern ourselves with a new variety of this balance of payments doctrine which originated with the war. People say it may be generally true that the purchasing power of the money, rather than the balance of payments, determines the exchange rate of foreign currencies. But now, in view of the reduction of trade brought about by the war, this is not the case. Since trade is hampered, the process which would restore the disrupted “static” exchange ratios among foreign currencies is held in check. As a result, therefore, the balance of payments becomes decisive for the exchange rates of foreign currencies.30 If it is desired to raise the foreign exchange rate, or to keep it from declining further, one must try to establish a favorable balance of payments. ...

The basic fallacy in this theory is that it completely ignores the fact that the height of imports and exports depends primarily on prices. Neither imports nor exports are undertaken out of caprice or just for fun. They are undertaken to carry on a profitable trade, that is to earn money from the differences in prices on either side. Thus imports or exports are carried on until price differences disappear. ...

The balance of payments doctrine of foreign exchange rates completely overlooks the meaning of prices for the international movement of goods. It proceeds erroneously from the act of payment, instead of from the business transaction itself. That is a result of the pseudo-legal monetary theory—a theory which has brought the most cruel consequences to German science—the theory which looks on money as a means of payment only, and not as a general medium of exchange.

When deciding to undertake a business transaction, a merchant does not ignore the costs of obtaining the necessary foreign currency until the time when the payment actually comes due. A merchant who proceeded in this way would not long remain a merchant. The merchant takes the ratio of foreign currency very much into account in his calculations, as he always has an eye to the selling price. Also, whether he hedges against future changes in the exchange rate, or whether he bears the risk himself of shifts in foreign currency values, he considers the anticipated fluctuations in foreign exchange. The same situation prevails mutatis mutandis with reference to tourist traffic and international freight. ...

It is easy to recognize that we find here only a new form of the old favorable and unfavorable balance of trade theory championed by the Mercantilist School of the sixteenth to eighteenth centuries. That was before the widespread use of banknotes and other bank currency. The fear was then expressed that a country with an unfavorable balance of trade could lose its entire supply of the precious metals to other lands. Therefore, it was held that by encouraging exports and limiting imports so far as possible, a country could take precautions to prevent this from happening. Later, the idea developed that the trade balance alone was not decisive, that it was only one factor in creating the balance of payments and that the entire balance of payments must be considered. As a result, the theory underwent a partial reorganization. However, its basic tenet—namely that when a government did not control its foreign trade relations, all its precious metals might flow abroad—persisted until it lost out finally to the hard-hitting criticism of Classical economics.

The balance of payments of a country is nothing but the sum of the balances of payments of all its individual enterprises. The essence of every balance is that the debit and credit sides are equal. If one compares the credit entries and the debit entries of an enterprise the two totals must be in balance. The situation can be no different in the case of the balance of payments of an entire country. Then too, the totals must always be in balance. This equilibrium, that must necessarily prevail because goods are exchanged—not given away—in economic trading, is not brought about by undertaking all exports and imports first, without considering the means of payment, and then only later adjusting the balance in money. Rather, money occupies precisely the same position in undertaking a transaction as do the other commodities being exchanged. Money may even be the usual reason for making exchanges.

In a society in which commodity transactions are monetary transactions, every individual enterprise must always take care to have on hand a certain quantity of money. It must not permit its cash holding to fall below the definite sum considered necessary for carrying out its transactions. On the other hand, an enterprise will not permit its cash holding to exceed the necessary amount, for allowing that quantity of money to lie idle will lead to loss of interest. If it has too little money, it must reduce purchases or sell some wares. If it has too much money, then it must buy goods.

For our purposes here, it is immaterial whether the enterprise buys producers’ or consumers’ goods. In this way, every individual sees to it that he is not without money. Because everyone pursues his own interest in doing this, it is impossible for the free play of market forces to cause a drain of all money out of a city, a province or an entire country. The government need not concern itself with this problem any more than does the city of Vienna with the loss of its monetary stock to the surrounding countryside. Nor—assuming a precious metals standard (the purely metallic currency of the English Currency School)—need government concern itself with the possibility that the entire country’s stock of precious metals will flow out.

If we had a pure gold standard, therefore, the government need not be in the least concerned about the balance of payments. It could safely relinquish to the market the responsibility for maintaining a sufficient quantity of gold within the country. Under the influence of free trade forces, precious metals would leave the country only if a surplus was on hand and they would always flow in if too little was available, in the same way that all other commodities are imported if in short supply and exported if in surplus. Thus, we see that gold is constantly moving from large-scale gold producing countries to those in which the demand for gold exceeds the quantity mined—without the need for any government action to bring this about31 . ...

It may be asked, however, doesn’t history show many examples of countries whose metallic money (gold and silver) has flown abroad? Didn’t gold coins disappear from the market in Germany just recently? Didn’t the silver coins vanish here at home in Austria? Isn’t this evidence a clear-cut contradiction of the assertion that trade spontaneously maintains the monetary stock? Isn’t this proof that the state needs to interfere in the balance of payments?

However, these facts do not in the least contradict our statement. Money does not flow out because the balance of payments is unfavorable and because the state has not interfered. Rather, money flows out precisely because the state has intervened and the interventions have called forth the phenomenon described by the well-known Gresham’s Law. The government itself has ruined the currency by the steps it has taken. And then the government tries in vain, by other measures, to restore the currency it has ruined.

The disappearance of gold money from trade follows from the fact that the state equates, in terms of legal purchasing power, a lesser-valued money with a higher-valued money. If the government introduces into trade quantities of inconvertible banknotes or government notes, then this must lead to a monetary depreciation. The value of the monetary unit declines. However, this depreciation in value can affect only the inconvertible notes. Gold money retains all, or almost all, of its value internationally. However, since the state—with its power to use the force of law—declares the lower-valued monetary notes equal in purchasing power to the higher-valued gold money and forbids the gold money from being traded at a higher value than the paper notes, the gold coins must vanish from the market. They may disappear abroad. They may be melted down for use in domestic industry. Or they may be hoarded. That is the phenomenon of good money being driven out by bad, observed so long ago by Aristophanes, which we call Gresham’s Law.

No special government intervention is needed to retain the precious metals in circulation within a country. It is enough for the state to renounce all attempts to relieve financial distress by resorting to the printing press. To uphold the currency, it need do no more than that. And it need do only that to accomplish this goal. All orders and prohibitions, all measures to limit foreign exchange transactions, etc., are completely useless and purposeless.

If we had a pure gold standard, measures to prevent a gold outflow from the country due to an unfavorable balance of payments would be completely superfluous. He who has no money to buy abroad, because he has neither exported goods nor performed services abroad, will be able to buy abroad only if foreigners give him credit. However, his foreign purchases then will in no way disturb the stability of the domestic currency.

• 29Originally published as “Zahlungsbilanz und Devisenkurse” in Mitteilungen des Verbandes Oesterreichischer Banken und Bankiers 2, nos. 3–4 (1919). This translated excerpt represents about one-third of the original article.
• 30For the sake of completeness only, it should be mentioned that the adherents of this theory attribute domestic price increases, not to the inflation, but to the shortage of goods exclusively.
• 31See Hertzka, Das Wesen des Geldes (Leipzig, 1887), pp. 44ff.; Wieser, “Der Geldwert und seine Veränderungen,” Schriften des Vereins für Sozialpolitik 132 (Leipzig, 1910): 530ff.