On the Manipulation of Money and Credit. Людвиг фон Мизес

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СКАЧАТЬ 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 1, 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.

I

       The Outcome of Inflation

       1. Monetary Depreciation

      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.” 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,¹ 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 1914,² 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 СКАЧАТЬ