The Theory of Money and Credit

The common characteristic of all acatallactic monetary doctrines is a negative one; they cannot be fitted into any theory of catallactics. This does not mean that they involve a complete absence of views as to the value of money. Without any such views, they would not be monetary doctrines at all. But their theories of the value of money are constructed subconsciously; they are not made explicit; they are not completely thought out. For if they were consistently thought out to their logical conclusions, it would become obvious that they were self-contradictory. A consistently developed theory of money must be merged into a theory of exchange, and so cease to be acatallactic.

According to the naivest and most primitive of the acatallactic doctrines, the value of money coincides with the value of the monetary material. But to attempt to go farther and begin to inquire into the grounds of the value of the precious metals, is already to have arrived at the construction of a catallactic system. The explanation of the value of goods is sought either in their utility or in the difficulty of obtaining them. In either case, the starting point has been discovered for a theory of the value of money also. Thus this naive approach, logically developed, conducts us automatically to the real problems. It is acatallactic, but it leads to catallactics.

Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce.1  The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money. By stressing the contrast between valor impositus and bonitas intrinseca, the canonists did indeed make it possible for scholastic sophistry to reconcile the Roman-canonist legal system with the facts of economic life. But at the same time they revealed the intrinsic futility of the doctrine of valor impositus; they demonstrated the impossibility of explaining the processes of the market with its assistance.

Nevertheless the nominalistic doctrine did not disappear from monetary literature. The princes of the time, who saw in the debasement of money an important means of improving their financial position, needed the justification of this theory, If, in its endeavors to construct a complete theory of the human economy, the struggling science of economics kept itself free from nominalism, there were nevertheless always enough nominalists for fiscal needs. At the beginning of the nineteenth century, nominalism still had representatives in Gentz and Adam Müller, writing in support of the Austrian monetary policy of the Bankozettel period. And nominalism was used as a foundation for the demands of the inflationists. But it was to experience its full renascence in the German “realistic” economics of the twentieth century.

An acatallactic monetary theory is a logical necessity for the empirico-realistic trend in economics. Since this school, unfavorable to all “theory,” refrains from propounding any system of catallactics, it is bound to oppose any monetary doctrine that leads to such a system. So at first it avoided any treatment of the problem of money whatever; so far as it did touch upon this problem (in its often admirable work on the history of coinage and in its attitude toward political questions), it retained the traditional Classical theory of value. But gradually its views on the problem of money glided unconsciously into the primitive acatallactic ideas described above, which regard money made of precious metal as a good that is valuable “in itself.” Now this was inconsistent. To a school that has inscribed the device of etatism on its banner, and to which all economic problems appear as questions of administration, the state theory of nominalism is more suitable.2  Knapp completed this connection. Hence the success of his book in Germany.

The fact that Knapp has nothing to say about the catallactic monetary problem, the problem of purchasing power, cannot be regarded as an objection from the point of view of a doctrine which repudiates catallactics and has abandoned in advance any attempt at a causal explanation of the determination of prices. The difficulty over which the older nominalistic theories had come to grief did not exist for Knapp, whose public consisted solely of the disciples of the realistic economics. He was able—in fact, considering his public, he was bound—to abandon all attempt at an explanation of the validity of money in commerce. If important questions of monetary policy had arisen in Germany in the years immediately succeeding the appearance of Knapp’s work, then the inadequacy of a doctrine that was unable to say anything about the value of money would naturally have soon become evident.

That the new state theory did compromise itself immediately it was put forward, was due to its unlucky attempt to deal with currency history from an acatallactic point of view. Knapp himself, in the fourth chapter of his work, had briefly related the monetary history of England, France, Germany, and Austria. Works on other countries followed, by members of his seminar. All of these accounts are purely formal. They endeavor to apply Knapp’s scheme to the individual circumstances of different states. They provide a history of money in Knappian terminology.

There could be no doubt of the results that were bound to follow from these attempts. They expose the weaknesses of the state theory. Currency policy is concerned with the value of money, and a doctrine that cannot tell us anything about the purchasing power of money is not suitable for dealing with questions of currency policy. Knapp and his disciples enumerate laws and decrees, but are unable to say anything about their motives and effects. They do not mention that there have been parties supporting different currency policies. They know nothing, or nothing of great importance, about bimetallists, inflationists, or restrictionists; for them, the supporters of the gold standard were led by “metallistic superstition,” the opponents of the gold standard were those who were free from “prejudices.” They studiously avoid all reference to commodity prices and wages and to the effects of the monetary system on production and exchange. Beyond making a few remarks about the “fixed rate of exchange,” they never touch upon the connections between the monetary standard and foreign trade, the problem which has played so great a part in currency policy. Never has there been a more miserable and empty representation of monetary history.

As a result of the World War, questions of currency policy have again become very important, and the state theory feels itself obliged to produce something on topical questions of currency policy. That it has nothing more to say about these than about the currency problems of the past is shown by Knapp’s article “Die Währungsfrage bei einem deutsch-österreichischen Zollbündnis” in the first part of the work published by the Verein für Sozialpolitik: Die wirtschaftliche Annäherung zwischen dem deu tschen Reiche und seinen Verbündeten. There can hardly be two opinions about this essay.

The absurdity of the results at which the nominalistic doctrine of money is bound to arrive as soon as it begins to concern itself with the problems of monetary policy is shown by what has been written by Bendixen, one of Knapp’s disciples. Bendixen regards the circumstance that the German currency had a low value abroad during the war as “even in some ways desirable, because it enabled us to sell foreign securities at a favourable rate.”3  From the nominalistic point of view this monstrous assertion is merely logical.

Bendixen, incidentally, is not merely a disciple of the state theory of money; he is at the same time a representative of that doctrine also which regards money as a claim. In fact, acatallactic views can be blended according to taste. Thus Dühring, who in general regards metallic money as “an institution of Nature,” holds the claim theory but at the same time rejects nominalism.4

The assertion that the state theory of money has been disproved by the events of currency history since 1914 must not be understood to mean that it has been disproved by “facts.” Facts per se can neither prove nor disprove; everything depends upon the significance that can be given to the facts. So long as a theory is not thought out and worked up in an absolutely inadequate manner, then it is not a matter of supreme difficulty to expound it so as to explain the “facts”—even if only superficially and in a way that can by no means satisfy truly intelligent criticism. It is not true, as the naive scientific doctrine of the empirico-realistic school has it, that one can save oneself the trouble of thinking if one will only allow the facts to speak. Facts do not speak; they need to be spoken about by a theory.

The state theory of money—and all acatallactic theories of money in general—breaks down not so much because of the facts as because of its inability even to attempt to explain them. On all the important questions of monetary policy that have arisen since 1914, the followers of the state theory of money have maintained silence. It is true that even in this period their industry and zeal have been demonstrated in the publication of ample works; but they have not been able to say anything on the problems that occupy us nowadays. What could they, who deliberately reject the problem of the value of money, have to say about those problems of value and price which alone constitute all that is important in the monetary system? Their peculiar terminology does not bring us a step nearer to a decision about the questions that are agitating the world at present.5  Knapp is of the opinion that these questions do not need to be solved except by the “economists,” and concedes that his doctrine has nothing to say about them.6  But if the state theory does not help to elucidate the questions that seem important to us, what is its use? The state theory is not a bad monetary theory; it is not a monetary theory at all.7

To ascribe to the state theory a large share of the blame for the collapse of the German monetary system, does not imply that Knapp directly provoked the inflationary policy that led to it. He did not do that. Nevertheless, a doctrine that does not mention the quantity of money at all, that does not speak of the connection between money and prices, and that asserts that the only thing that is essential in money is the authentication of the state, directly encourages fiscal exploitation of the “right” of creating money. What is to prevent a government from pouring more and more notes into circulation if it knows that this will not affect prices, because all rises in prices can be explained by “disturbed trade conditions” or “disturbances in the home market,” but on no account whatever by anything to do with money? Knapp is not so incautious as to speak of the valor impositus of money as did the canonists and jurists of past generations. All the same, his doctrine and theirs lead indifferently to the same conclusions.

Knapp, unlike some of his enthusiastic disciples, was certainly not a government hireling. When he said anything, he said it from genuine personal conviction. That speaks well for his own trustworthiness, but it has no bearing on that of his doctrine.

It is quite incorrect to say that the monetary doctrine of etatism springs from Knapp. The monetary doctrine of etatism is the balance-of-payments theory, which Knapp only refers to casually in speaking of the “pantopolic origin of the exchange rates.”8  The balance-of-payments theory, if an untenable, is at least a catallactic, theory of money. But it was invented long before Knapp’s time. It had already been propounded, with its distinction between the internal value (Binnenwert) and the external value (Aussenwert) of money, by the etatists, by Lexis, for example.9  Knapp and his school added nothing to it.

But the etatist school is responsible for the facility and rapidity with which the state theory of money succeeded in becoming the accepted doctrine in Germany, Austria, and Russia. This school had struck out catallactics, the theory of exchange and prices, as superfluous from the series of problems with which economics was concerned; it undertook the attempt to represent all the phenomena of social life merely as emanations of the exercise of power by princes and others in authority. It is only a logical extension of its doctrine to endeavor eventually to represent money also as being created merely by force. The younger generation of etatists had so little notion even of what economics really was concerned with, that it was able to accept Knapp’s paltry discussion as a theory of money.

• 1See Endemann, Studien in der romanisch-kanonistischen Wirtschafts-und Rechtslehre bis gegen Ende des 17. Jahrhunderts (Berlin, 1874-1883), vol. 2, p. 199.
• 2See Voigt, “Die staatliche Theorie des Geldes,” Zeitschrift für die gesamte Staatswissenschaft 62: 318 f.
• 3Bendixen, Währungspolitik und Geldtheorie im Lichte des Weltkriegs (Munich and Leipzig, 1916), p. 37 (2d ed., 1919, p. 44).
• 4Dühring, Cursus der National-und Sozialökonomie, 3d ed. (Leipzig, 1892), pp. 42 ff., 401.
• 5See also Palyi, Der Streit um die staatliche Theorie des Geldes (Munich and Leipzig, 1922), pp. 88 ff.
• 6Knapp, Staatliche Theorie des Geldes, 3d ed. (1921), pp. 445 ff.
• 7To imagine that the state theory is a juristic theory, is to be ignorant of the purpose that a juristic theory of money has to fulfill. Anybody who holds this opinion should refer to any work on the law of contract and note what questions are there dealt with in the chapter on money.
• 8Knapp, op. cit., pp. 206, 214.
• 9Lexis, “Papiergeld,” in Handwörterbuch der Staatswissenschaften, 3d. ed., vol. 6, pp. 987 ff.