The Theory of Money and Credit

The oldest and most popular instrument of etatistic monetary policy is the official fixing of maximum prices. High prices, thinks the etatist, are not a consequence of an increase in the quantity of money but a consequence of reprehensible activity on the part of “bulls” and “profiteers”; it will suffice to suppress their machinations in order to ensure the cessation of the rise of prices. Thus it is made a punishable offense to demand, or even to pay; “excessive” prices.

Like most other governments, the Austrian government during the war began this kind of criminal-law contest with price raising on the same day that it put the printing press in motion in the service of the national finances. Let us suppose that it had at first been successful in this. Let us completely disregard the fact that the war had also diminished the supply of commodities, and suppose that there had been no forces at work on the commodity side to alter the exchange ratio between commodities and money. We must further disregard the fact that the war, by increasing the period of time necessary for transporting money, and by limiting the operation of the clearing system, and also in other ways, had increased the demand for money of individual economic agents. Let us merely discuss the question, what consequences would necessarily follow if, ceteris paribus, with an increasing quantity of money, prices were restricted to the old level by official compulsion?

An increase in the quantity of money leads to the appearance in the market of new desire to purchase, which had previously not existed; “new purchasing power,” it is usual to say, has been created. If the new would-be purchasers compete with those that are already in the market, then, so long as it is not permissible to raise prices, only part of the total purchasing power can be exercised. This means that there are would-be purchasers who leave the market without having effected their object although they were ready to agree to the price demanded, would-be purchasers who return home with the money with which they set out in order to purchase. Whether or not a would-be purchaser who is prepared to pay the official price gets the commodity that he desires depends upon all sorts of circumstances, which are, from the point of view of the market, quite inessential; for example, upon whether he was on the spot in time, or has personal relations with the seller, or other similar accidents. The mechanism of the market no longer works to make a distinction between the would-be purchasers who are still able to buy and those who are not; it no longer brings about a coincidence between supply and demand through variations in price. Supply lags behind demand. The play of the market loses its meaning; other forces have to take its place.

But the government that puts the newly created notes in circulation does so because it wishes to draw commodities and services out of their previous avenues in order to direct them into some other desired employment. It wishes to buy these commodities and services; not, as is also a quite conceivable procedure, to commandeer them by force. It must, therefore, desire that everything should be obtainable for money and for money alone. It is not to the advantage of the government that a situation should arise in the market that makes some of the would-be purchasers withdraw without having effected their object. The government desires to purchase; it desires to use the market, not to disorganize it. But the officially fixed price does disorganize the market in which commodities and services are bought and sold for money. Commerce, so far as it is able, seeks relief in other ways. It redevelops a system of direct exchange, in which commodities and services are exchanged without the instrumentality of money. Those who are forced to dispose of commodities and services at the fixed prices do not dispose of them to everybody, but merely to those to whom they wish to do a favor Would-be purchasers wait in long queues in order to snap up what they can get before it is too late; they race breathlessly from shop to shop, hoping to find one that is not yet sold out.

For once the commodities have been sold that were already on the market when their price was authoritatively fixed at a level below that demanded by the situation of the market, then the emptied storerooms are not filled again. Charging more than a certain price is prohibited, but producing and selling have not been made compulsory. There are no longer any sellers. The market ceases to function. But this means that economic organization based on division of labor becomes impossible. The level of money prices cannot be fixed without overthrowing the system of social division of labor

Thus official fixing of prices, which is intended to establish them and wages generally below the level that they would attain in a free market, is completely impracticable. If the prices of individual kinds of commodities and services are subjected to such restrictions, then disturbances occur that are settled again by the capacity for adjustment possessed by the economic order based on private property sufficiently to make the continuance of the system possible. If such regulations are made general and really put into force, then their incompatibility with the existence of a social order based upon private property becomes obvious. The attempt to restrain prices within limits has to be given up. A government that sets out to abolish market prices is inevitably driven toward the abolition of private property; it has to recognize that there is no middle way between the system of private property in the means of production combined with free contract, and the system of common ownership of the means of production, or socialism. It is gradually forced toward compulsory production, universal obligation to labor, rationing of consumption, and, finally, official regulation of the whole of production and consumption.

This is the road that was taken by economic policy during the war. The etatist, who had jubilantly proclaimed the state’s ability to d o everything it wanted to do, discovered that the economists had nevertheless been quite right and that it was not possible to manage with price regulation alone. Since they wished to eliminate the play of the market, they had to go farther than they had originally intended. The first step was the rationing of the most important necessaries; but soon compulsory labor had to be resorted to and eventually the subordination of the whole of production and consumption to the direction of the state. Private property existed in name only; in fact, it had been abolished.

The collapse of militarism was the end of wartime socialism also. Yet no better understanding of the economic problem was shown under the revolution than under the old regime. All the same experiences had to be gone through again.

The attempts that were made with the aid of the police and the criminal law to prevent a rise of prices did not come to grief because officials did not act severely enough or because people found ways of avoiding the regulations. They did not suffer shipwreck because the entrepreneurs were not public spirited, as the socialist-etatistic legend has it. They were bound to fail because the economic organization based upon division of labor and private property in the means of production can function only so long as price determination in the market is free. If the regulation of prices had been successful, it would have paralyzed the whole economic organism. They only thing that made possible the continued functioning of the social apparatus of production was the incomplete enforcement of the regulations that was due to the paralysis of the efforts of those who ought to have executed them.

During thousands of years, in all parts of the inhabited earth, innumerable sacrifices have been made to the chimera of just and reasonable prices. Those who have offended against the laws regulating prices have been heavily punished; their property has been confiscated, they themselves have been incarcerated, tortured, put to death. The agents of etatism have certainly not been lacking in zeal and energy. But, for all this, economic affairs cannot be kept going by magistrates and policemen.