The Theory of Money and Credit

Of all branches of economic science, that part which relates to money and credit has probably the longest history and the most extensive literature. The elementary truths of the Quantity Theory were established at a time when speculation on other types of economic problem had hardly yet begun. By the middle of the nineteenth century when, in the general theory of value, a satisfactory statical system had not yet been established, the pamphlet literature of money and banking was tackling, often with marked success, many of the subtler problems of economic dynamics. At the present day, with all our differences, there is no part of economic theory which we feel to be more efficient to lend practical aid to the statesman and to the man of affairs, than the theory of money and credit.

Yet for all this there is no part of the subject where the established results of analysis and experience have been so little systematized and brought into relation with the main categories of theoretical economics. Special monographs exist by the hundred. The pamphlet literature is so extensive as to surpass the power of any one man completely to assimilate it. Yet in English, at any rate, there has been so little attempt at synthesis of this kind that, when Mr. Keynes came to write his Treatise on Money, he was compelled to lament the absence, not only of an established tradition of arrangement, but even of a single example of a systematic treatment of the subject on a scale and of a quality comparable with that of the standard discussions of the central problems of pure equilibrium theory.

In these circumstances it is hoped that the present publication will meet a real need among English-speaking students. For the work of which it is a translation, the Theorie des Geldes und der Umlaufsmittel of Professor von Mises of Vienna, does meet just this deficiency. It deals systematically with the chief propositions of the theory of money and credit, and it brings them into relation both with the main body of analytical economics and with the chief problems of contemporary policy to which they are relevant. Commencing with a rigid analysis of the nature and function of money, it leads by a highly ingenious series of approximations, from a discussion of the value of money under simple conditions in which there is only one kind of money and no banking system, through an analysis of the phenomena of parallel currency and foreign exchanges, to an extensive treatment of the problems of modern banking and the effects of credit creation on the capital structure and the stability of business. In continental circles it has long been regarded as the standard textbook on the subject. It is hoped that it will fill a similar role in English-speaking countries. I know few works which convey a more profound impression of the logical unity and the power of modern economic analysis.

It would be a great mistake however to suppose that systematization of the subject constituted the only, or indeed the chief, merit of this work. So many of the propositions which it first introduced have now found their way into the common currency of modern monetary theory that the English reader, coming to it for the first time more than twenty years after its first publication, may be inclined to overlook its merits as an original contribution to knowledge—a contribution from which much of what is most important and vital in contemporary discussions takes its rise. Who in 1912 had heard of forced saving, of disparities between the equilibrium and the money rates of interest and of the cycle of fluctuations in the relations between the prices of producers’ goods and consumers’ goods which is the result of the instability of credit? They are all here, not as obiter dicta on what are essentially side issues, as is occasionally the case in the earlier literature, but as central parts of a fully articulated theoretical system—a system which the author has had the somewhat melancholy satisfaction of seeing abundantly verified by the march of subsequent events, first in the great inflations of the immediately post-war period and later in the events which gave rise to the depression from which the world is now suffering. Nor should we overlook its contributions to the more abstract parts of the theory of the value of money. Professor von Mises shares with Marshall and one or two others the merit of having assimilated the treatment of this theory to the general categories of the pure theory of value: and his emphasis in the course of this assimilation on the relation between uncertainty and the size of the cash holding and the dependence of certain monetary phenomena on the absence of foresight, anticipates much that has proved most fruitful in more recent speculation in these matters. In spite of a tendency observable in some quarters to revert to more mechanical forms of the Quantity Theory, in particular to proceed by way of a multiplication of purely tautological formulae, it seems fairly clear that further progress in the explanation of the more elusive monetary phenomena is likely to take place along this path.

The present translation is based upon the text of the second German edition, published in 1924. Certain passages of no great interest to English readers have been omitted and a chapter dealing with more or less purely German controversies has been placed in an appendix. The comments on policy, however, in Part III, chapter vi, have been left as they appeared in 1924.1 But the author, who has most generously lent assistance at every stage of the translation, has written a special introduction in which he outlines his views on the problems which have emerged since that date. A note in the appendix gives the German equivalents to the technical terms which have been employed to designate the different kinds of money, and discusses in detail the translation of one term for which no exact English equivalent existed.

Lionel Robbins
London School of Economics
September 1934

• 1Except for one minor change of tense. In the second edition, the author prefaced the first major division of the last chapter of Part III with a note to the effect that this section was to be read as referring to the time about 1912, when it was originally written. In the present edition, in order to prevent certain misunderstandings that seemed possible even if this note had been reprinted in its proper place on p. 368, certain practices and circumstances (especially in sections 4 to 8) have been described in the past tense. (Cp. pp. 368 n., 377 n., and also 390 n.)