1. Monetary Policy Defined

1. Monetary Policy Defined1

The economic consequences of fluctuations in the objective exchange value of money have such important bearings on the life of the community and of the individual that as soon as the state had abandoned the attempt to exploit for fiscal ends its authority in monetary matters, and as soon as the large-scale development of the modern economic community had enabled the state to exert a decisive influence on the kind of money chosen by the market, it was an obvious step to think of attaining certain sociopolitical aims by influencing these consequences in a systematic manner Modern currency policy is something essentially new; it differs fundamentally from earlier state activity in the monetary sphere. Previously, good government in monetary matters—from the point of view of the citizen—consisted in conducting the business of minting so as to furnish commerce with coins which could be accepted by everybody at their face value; and bad government in monetary matters—again from the point of view of the citizen—amounted to the betrayal by the state of the general confidence in it. But when states did debase the coinage, it was always from purely fiscal motives. The government needed financial help, that was all; it was not concerned with questions of currency policy.

Questions of currency policy are questions of the objective exchange value of money. The nature of the monetary system affects a currency policy only insofar as it involves these particular problems of the value of money; it is only insofar as they bear upon these questions that the legal and technical characteristics of money are pertinent. Measures of currency policy are intelligible only in the light of their intended influence on the objective exchange value of money. They consequently comprise the antithesis of those acts of economic policy which aim at altering the money prices of single commodities or groups of commodities.

Not every value problem connected with the objective exchange value of money is a problem of currency policy. In conflicts of currency policy there are also interests involved which are not primarily concerned with the alteration of the value of money for its own sake. In the great struggle that was involved in the demonetization of silver and the consequent movement of the relative exchange ratio of the two precious metals gold and silver, the owners of the silver mines and the other protagonists of the double standard or of the silver standard were not actuated by the same motives. While the latter wanted a change in the value of money in order that there might be a general rise in the prices of commodities, the former merely wished to raise the price of silver as a commodity by securing, or more correctly regaining, an extensive market for it. Their interests were in no way different from those of producers of iron or oil in trying to extend the market for iron or oil so as to increase the profitability of their businesses. It is true that this is a value problem, but it is a commodity-value problem—that of increasing the exchange value of the metal silver—and not a problem of the value of money.2

But although this motive has played a part in currency controversy, it has been a very subordinate part. Even in the United States, the most important silver-producing area, it has been of significance only inasmuch as the generous practical encouragement of the silver magnates has been one of the strongest supports of the bimetallistic agitation. But most of the recruits to the silver camp were attracted, not by the prospect of an increase in the value of the mines, which was a matter of indifference to them, but by the hope of a fall in the purchasing power of money, from which they promised themselves miraculous results. If the increase in the price of silver could have been brought about in any other way than through the extension of its use as money, say by the creation of a new industrial demand, then the owners of the mines would have been just as satisfied; but the farmers and industrialists who advocated a silver currency would not have benefited from it in any way. And then they would undoubtedly have transferred their allegiance to other currency policies. Thus, in many states, paper inflationism was advocated, partly as a forerunner of bimetallism and partly in combination with it.

But even though questions of currency policy are never more than questions of the value of money, they are sometimes disguised so that their true nature is hidden from the uninitiated. Public opinion is dominated by erroneous views on the nature of money and its value, and misunderstood slogans have to take the place of clear and precise ideas. The fine and complicated mechanism of the money and credit system is wrapped in obscurity, the proceedings on the stock exchange are a mystery, the function and significance of the banks elude interpretation. So it is not surprising that the arguments brought forward in the conflict of the different interests often missed the point altogether. Counsel was darkened with cryptic phrases whose meaning was probably hidden even from those who uttered them. Americans spoke of “the dollar of our fathers” and Austrians of “our dear old gulden note”; silver, the money of the common man, was set up against gold, the money of the aristocracy. Many a tribune of the people, in many a passionate dis course, sounded the loud praises of silver, which, hidden in deep mines, lay awaiting the time when it should come forth into the light of day to ransom miserable humanity languishing in its wretchedness. And while some thus regarded gold as nothing less than the embodiment of the very principle of evil, all the more enthusiastically did others exalt the glistening yellow metal which alone was worthy to be the money of rich and mighty nations. It did not seem as if men were disputing about the distribution of economic goods; rather it was as if the precious metals were contending among themselves and against paper for the lordship of the market. All the same, it would be difficult to claim that these Olympic struggles were engendered by anything but the question of altering the purchasing power of money.

• 1The author uses the term Geldwertpolitik in the technical sense defined in the above section. I have reserved the term monetary policy for this special meaning. Currency policy is the term I have used to translate Währungspolitik. H.E.B.]
• 2Similar interests, say those of the printers, lithographers, and the like, may play a part in the production of paper money also. Perhaps such motives had something to do with Benjamin Franklin’s recommendation of an increase of paper money in his first political writing, which was published (anonymously) in Philadelphia in 1729: “A Modest Inquiry into the Nature and Necessity of a Paper Currency” (in The Works of Benjamin Franklin, ed. Sparks [Chicago, 1882], vol. 2, pp. 253-77). Shortly before—as he relates in his autobiography (ibid., vol. 1, p. 73)—he had printed the notes for New Jersey, and when his pamphlet led to the decision to issue more notes in Pennsylvania, despite the opposition of the “rich men,” he got the order to print the notes. He remarks on this in his autobiography: “A very profitable job, and a great help to me. This was another advantage gained by me being able to write” (ibid., p. 92).