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The Principle of Sound MoneyBy Ludwig von Mises
This article
was excerpted from Chapter 21 of The
Theory of Money and Credit.
The principle of
sound money that guided nineteenth-century monetary doctrines and policies was
a product of classical political economy. It was an essential part of the
liberal program as developed by eighteenth-century social philosophy and
propagated in the following century by the most influential political parties
of Europe and America. The liberal
doctrine sees in the market economy the best, even the only possible, system of
economic organization of society. Private ownership of the means of production
tends to shift control of production to the hands of those best fitted for this
job and thus to secure for all members of society the fullest possible
satisfaction of their needs. It assigns to the consumers the power to choose
those purveyors who supply them in the cheapest way with the articles they are
most urgently asking for and thus subjects the entrepreneurs and the owners of
the means of production, namely, the capitalists and the landowners, to the
sovereignty of the buying public. It makes nations and their citizens free and
provides ample sustenance for a steadily increasing population. As a system of
peaceful cooperation under the division of labor, the market economy could not
work without an institution warranting to its members protection against
domestic gangsters and external foes. Violent aggression can be thwarted only
by armed resistance and repression. Society needs an apparatus of defense, a
state, a government, a police power. Its undisturbed functioning must be
safeguarded by continuous preparedness to repel aggressors. But then a new
danger springs up. How keep under control the men entrusted with the handling
of the government apparatus lest they turn their weapons against those whom
they were expected to serve? The main political problem is how to prevent the
rulers from becoming despots and enslaving the citizenry. Defense of the
individual's liberty against the encroachment of tyrannical governments is the
essential theme of the history of Western civilization. The characteristic
feature of the Occident is its peoples' pursuit of liberty, a concern unknown
to Orientals. All the marvelous achievements of Western civilization are fruits
grown on the tree of liberty.
It is impossible
to grasp the meaning of the idea of sound money if one does not realize that it
was devised as an instrument for the protection of civil liberties against
despotic inroads on the part of governments. Ideologically it belongs in the
same class with political constitutions and bills of rights. The demand for constitutional
guarantees and for bills of rights was a reaction against arbitrary rule and
the nonobservance of old customs by kings. The postulate of sound money was
first brought up as a response to the princely practice of debasing the
coinage. It was later carefully elaborated and perfected in the age which —
through the experience of the American continental currency, the paper money of
the French Revolution and the British restriction period — had learned what a
government can do to a nation's currency system. Modern
cryptodespotism, which arrogates to itself the name of liberalism, finds fault
with the negativity of the concept of freedom. The censure is spurious as it
refers merely to the grammatical form of the idea and does not comprehend that
all civil rights can be as well defined in affirmative as in negative terms.
They are negative as they are designed to obviate an evil, namely omnipotence
of the police power, and to prevent the state from becoming totalitarian. They
are affirmative as they are designed to preserve the smooth operation of the
system of private property, the only social system that has brought about what
is called civilization. Thus the
sound-money principle has two aspects. It is affirmative in approving the
market's choice of a commonly used medium of exchange. It is negative in
obstructing the government's propensity to meddle with the currency system. The sound-money
principle was derived not so much from the Classical economists' analysis of
the market phenomena as from their interpretation of historical experience. It
was an experience that could be perceived by a much larger public than the
narrow circles of those conversant with economic theory. Hence the sound-money
idea became one of the most popular points of the liberal program. Friends and
foes of liberalism considered it one of the essential postulates of a liberal
policy. Sound money
meant a metallic standard. Standard coins should be in fact a definite quantity
of the standard metal as precisely determined by the law of the country. Only
standard coins should have unlimited legal-tender quality. Token coins and all
kinds of moneylike paper should be, on presentation and without delay, redeemed
in lawful standard money.
So far there was
unanimity among the supporters of sound money. But then the battle of the
standards arose. The defeat of those favoring silver and the unfeasibility of
bimetallism eventually made the sound-money principle mean the gold standard.
At the end of the nineteenth century there was all over the world unanimity
among businessmen and statesmen with regard to the indispensability of the gold
standard. Countries which were under a fiat-money system or under the silver
standard considered adoption of the gold standard the foremost goal of their
economic policy. Those who disputed the eminence of the gold standard were
dismissed as cranks by the representatives of the official doctrine —
professors, bankers, statesmen, editors of the great newspapers and magazines. It was a serious
blunder of the supporters of sound money to adopt such tactics. There is no use
in dealing in a summary way with any ideology however foolish and contradictory
it may appear. Even a manifestly erroneous doctrine should be refuted by
careful analysis and the unmasking of the fallacies implied. A sound doctrine
can win only by exploding the delusions of its adversaries. The essential
principles of the sound-money doctrine were and are impregnable. But their
scientific support in the last decades of the nineteenth century was rather
shaky. The attempts to demonstrate their reasonableness from the point of view
of the Classical value theory were not very convincing and made no sense at all
when this value concept had to be discarded. But the champions of the new value
theory for almost half a century restricted their studies to the problems of
direct exchange and left the treatment of money and banking to routinists
unfamiliar with economics. There were treatises on catallactics which dealt
only incidentally and cursorily with monetary matters, and there were books on
currency and banking which did not even attempt to integrate their subject into
the structure of a catallactic system.[1]
Finally the idea evolved that the modern doctrine of value, the subjectivist or
marginal utility doctrine, is unable to explain the problems of money's
purchasing power.[2]
It is easy to
comprehend how under such circumstances even the least tenable objections
raised by the advocates of inflationism remained unanswered. The gold standard
lost popularity because for a very long time no serious attempts were made to
demonstrate its merits and to explode the tenets of its adversaries. The Virtues and Alleged Shortcomings of the Gold Standard The excellence
of the gold standard is to be seen in the fact that it renders the
determination of the monetary unit's purchasing power independent of the
policies of governments and political parties. Furthermore, it prevents rulers
from eluding the financial and budgetary prerogatives of the representative
assemblies. Parliamentary control of finances works only if the government is
not in a position to provide for unauthorized expenditures by increasing the
circulating amount of fiat money. Viewed in this light, the gold standard
appears as an indispensable implement of the body of constitutional guarantees
that make the system of representative government function. When in the
'fifties of the nineteenth century gold production increased considerably in
California and Australia, people attacked the gold standard as inflationary. In
those days Michel Chevalier, in his book Probable Depreciation of Gold,
recommended the abandonment of the gold standard, and Béranger dealt with the
same subject in one of his poems. But later these criticisms subsided. The gold
standard was no longer denounced as inflationary but on the contrary as
deflationary. Even the most fanatical champions of inflation like to disguise
their true intentions by declaring that they merely want to offset the contractionist
pressure which the allegedly insufficient supply of gold tends to produce. Yet it is clear
that over the last generations there has prevailed a tendency of all commodity
prices and wage rates to rise. We may neglect dealing with the economic effects
of a general tendency of money prices and money wages to drop.[3]
For there is no doubt that what we have experienced over the last hundred years
was just the opposite, namely, a secular tendency toward a drop in the monetary
unit's purchasing power, which was only temporarily interrupted by the
aftermath of the breakdown of a boom intentionally created by credit expansion.
Gold became cheaper in terms of commodities, not dearer. What the foes of the
gold standard are asking for is not to reverse a prevailing tendency in the
determination of prices, but to intensify very considerably the already
prevailing upward trend of prices and wages. They simply want to lower the
monetary unit's purchasing power at an accelerated pace. Such a policy of
radical inflationism is, of course, extremely popular. But its popularity is to
a great extent due to a misapprehension of its effects. What people are really
asking for is a rise in the prices of those commodities and services they are
selling while the prices of those commodities and services which they are
buying remain unchanged. The potato grower aims at higher prices for potatoes.
He does not long for a rise in other prices. He is injured if these other prices
rise sooner or in greater proportion than the price of potatoes. If a
politician addressing a meeting declares that the government should adopt a
policy which makes prices rise, his hearers are likely to applaud. Yet each of
them is thinking of a different price rise.
From time immemorial
inflation has been recommended as a means to alleviate the burdens of poor
worthy debtors at the expense of rich harsh creditors. However, under
capitalism the typical debtors are not the poor but the well-to-do owners of
real estate, of firms, and of common stock, people who have borrowed from
banks, savings banks, insurance companies, and bondholders. The typical
creditors are not the rich but people of modest means who own bonds and savings
accounts or have taken out insurance policies. If the common man supports
anti-creditor measures, he does it because he ignores the fact that he himself
is a creditor. The idea that millionaires are the victims of an easy-money
policy is an atavistic remnant. For the naive
mind there is something miraculous in the issuance of fiat money. A magic word
spoken by the government creates out of nothing a thing which can be exchanged
against any merchandise a man would like to get. How pale is the art of
sorcerers, witches, and conjurors when compared with that of the government's
Treasury Department! The government, professors tell us, "can raise all
the money it needs by printing it."[4]
Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York,
are "obsolete."[5]
How wonderful! And how malicious and misanthropic are those stubborn supporters
of outdated economic orthodoxy who ask governments to balance their budgets by
covering all expenditures out of tax revenue! These
enthusiasts do not see that the working of inflation is conditioned by the
ignorance of the public and that inflation ceases to work as soon as the many
become aware of its effects upon the monetary unit's purchasing power. In
normal times, that is in periods in which the government does not tamper with
the monetary standard, people do not bother about monetary problems. Quite
naively they take it for granted that the monetary unit's purchasing power is
"stable." They pay attention to changes occurring in the money prices
of the various commodities. They know very well that the exchange ratios
between different commodities vary. But they are not conscious of the fact that
the exchange ratio between money on the one side and all commodities and
services on the other side is variable too. When the inevitable consequences of
inflation appear and prices soar, they think that commodities are becoming
dearer and fail to see that money is getting cheaper. In the early stages of an
inflation only a few people discern what is going on, manage their business
affairs in accordance with this insight, and deliberately aim at reaping
inflation gains. The overwhelming majority are too dull to grasp a correct
interpretation of the situation. They go on in the routine they acquired in
non-inflationary periods. Filled with indignation, they attack those who are
quicker to apprehend the real causes of the agitation of the market as
"profiteers" and lay the blame for their own plight on them. This
ignorance of the public is the indispensable basis of the inflationary policy.
Inflation works as long as the housewife thinks: "I need a new frying pan
badly. But prices are too high today; I shall wait until they drop again."
It comes to an abrupt end when people discover that the inflation will
continue, that it causes the rise in prices, and that therefore prices will
skyrocket infinitely. The critical stage begins when the housewife thinks:
"I don't need a new frying pan today; I may need one in a year or two. But
I'll buy it today because it will be much more expensive later." Then the
catastrophic end of the inflation is close. In its last stage the housewife
thinks: "I don't need another table; I shall never need one. But it's
wiser to buy a table than keep these scraps of paper that the government calls
money, one minute longer." Let us leave the
problem of whether or not it is advisable to base a system of government
finance upon the intentional deception of the immense majority of the citizenry.
It is enough to stress the point that such a policy of deceit is
self-defeating. Here the famous dictum of Lincoln holds true: You can't fool
all of the people all of the time. Eventually the masses come to understand the
schemes of their rulers. Then the cleverly concocted plans of inflation
collapse. Whatever compliant government economists may have said, inflationism
is not a monetary policy that can be considered as an alternative to a
sound-money policy. It is at best a temporary expedient. The main problem of an
inflationary policy is how to stop it before the masses have seen through their
rulers' artifices. It is a display of considerable naivete to recommend openly
a monetary system that can work only if its essential features are ignored by the
public.
The index-number
method is a very crude and imperfect means of "measuring" changes
occurring in the monetary unit's purchasing power. As there are in the field of
social affairs no constant relations between magnitudes, no measurement is
possible and economics can never become quantitative.[6]
But the index-number method, notwithstanding its inadequacy, plays an important
role in the process which in the course of an inflationary movement makes the
people inflation-conscious. Once the use of index numbers becomes common, the
government is forced to slow down the pace of the inflation and to make the
people believe that the inflationary policy is merely a temporary expedient for
the duration of a passing emergency, one that will be stopped before long.
While government economists still praise the superiority of inflation as a
lasting scheme of monetary management, governments are compelled to exercise
restraint in its application. It is
permissible to call a policy of intentional inflation dishonest as the effects
sought by its application can be attained only if the government succeeds in
deceiving the greater part of the people about the consequences of its policy.
Many of the champions of interventionist policies will not scruple greatly about
such cheating; in their eyes what the government does can never be wrong. But
their lofty moral indifference is at a loss to oppose an objection to the
economist's argument against inflation. In the economist's eyes the main issue
is not that inflation is morally reprehensible but that it cannot work except
when resorted to with great restraint and even then only for a limited period.
Hence resort to inflation cannot be considered seriously as an alternative to a
permanent standard such as the gold standard is. The
pro-inflationist propaganda emphasizes nowadays the alleged fact that the gold
standard collapsed and that it will never be tried again: nations are no longer
willing to comply with the rules of the gold-standard game and to bear all the
costs which the preservation of the gold standard requires. First of all
there is need to remember that the gold standard did not collapse. Governments
abolished it in order to pave the way for inflation. The whole grim apparatus
of oppression and coercion — policemen, customs guards, penal courts, prisons,
in some countries even executioners — had to be put into action in order to
destroy the gold standard. Solemn pledges were broken, retroactive laws were
promulgated, provisions of constitutions and bills of rights were openly
defied. And hosts of servile writers praised what the governments had done and
hailed the dawn of the fiat-money millennium. The most
remarkable thing about this allegedly new monetary policy, however, is its
complete failure. True, it substituted fiat money in the domestic markets for
sound money and favored the material interests of some individuals and groups
of individuals at the expense of others. It furthermore contributed
considerably to the disintegration of the international division of labor. But
it did not succeed in eliminating gold from its position as the international
or world standard. If you glance at the financial page of any newspaper you
discover at once that gold is still the world's money and not the variegated
products of the diverse government printing offices. These scraps of paper are
the more appreciated the more stable their price is in terms of an ounce of
gold. Whoever today dares to hint at the possibility that nations may return to
a domestic gold standard is cried down as a lunatic. This terrorism may still
go on for some time. But the position of gold as the world's standard is
impregnable. The policy of "going off the gold standard" did not
relieve a country's monetary authorities from the necessity of taking into
account the monetary unit's price in terms of gold.
What those
authors who speak about the rules of the gold-standard game have in mind is not
clear. Of course, it is obvious that the gold standard cannot function
satisfactorily if to buy or to sell or to hold gold is illegal, and hosts of
judges, constables, and informers are busily enforcing the law. But the gold
standard is not a game; it is a market phenomenon and as such a social
institution. Its preservation does not depend on the observation of some
specific rules. It requires nothing else than that the government abstain from
deliberately sabotaging it. To refer to this condition as a rule of an alleged
game is no more reasonable than to declare that the preservation of Paul's life
depends on compliance with the rules of the Paul's-life game because Paul must
die if somebody stabs him to death. What all the
enemies of the gold standard spurn as its main vice is precisely the same thing
that in the eyes of the advocates of the gold standard is its main virtue,
namely, its incompatibility with a policy of credit expansion. The nucleus of
all the effusions of the anti-gold authors and politicians is the expansionist
fallacy. The expansionist
doctrine does not realize that interest, that is, the discount of future goods
as against present goods, is an originary category of human valuation, actual
in any kind of human action and independent of any social institutions. The
expansionists do not grasp the fact that there never were and there never can
be human beings who attach to an apple available in a year or in a hundred
years the same value they attach to an apple available now. In their opinion
interest is an impediment to the expansion of production and consequently to
human welfare that unjustified institutions have created in order to favor the
selfish concerns of money lenders. Interest, they say, is the price people must
pay for borrowing. Its height therefore depends on the magnitude of the supply
of money. If laws did not artificially restrict the creation of additional
money, the rate of interest would drop, ultimately even to zero. The
"contractionist" pressure would disappear, there would no longer be a
shortage of capital, and it would become possible to execute many business
projects which the "restrictionism" of the gold standard obstructs. What
is needed to make everyone prosperous is simply to defy "the rules of the
gold-standard game," the observance of which is the main source of all our
economic ills. These absurd
doctrines greatly impressed ignorant politicians and demagogues when they were
blended with nationalist slogans. What prevents our country from fully enjoying
the advantages of a low-interest-rate policy, says the economic isolationist,
is its adherence to the gold standard. Our central bank is forced to keep its
rate of discount at a height that corresponds to conditions on the
international money market and to the discount rates of foreign central banks.
Otherwise "speculators" would withdraw funds from our country for
short-term investment abroad and the resulting outflow of gold would make the
gold reserves of our central bank drop below the legal ratio. If our central
bank were not obliged to redeem its banknotes in gold, no such withdrawal of
gold could occur and there would be no necessity for it to adjust the height of
the money rate to the situation of the international money market, dominated by
the world-embracing gold monopoly. The most amazing
fact about this argument is that it was raised precisely in debtor countries
for which the operation of the international money and capital market meant an
inflow of foreign funds and consequently the appearance of a tendency toward a
drop in interest rates. It was popular in Germany and still more in Austria in
the 1870s and 80s, but it was hardly ever seriously mentioned in those years in
England or in the Netherlands, whose banks and bankers lent amply to Germany
and Austria. It was advanced in England only after World War I, when Great
Britain's position as the world's banking center had been lost. Of course, the
argument itself is untenable. The inevitable eventual failure of any attempt at
credit expansion is not caused by the international intertwinement of the
lending business. It is the outcome of the fact that it is impossible to
substitute fiat money and a bank's circulation credit for non-existing capital
goods. Credit expansion initially can produce a boom. But such a boom is bound
to end in a slump, in a depression. What bring about the recurrence of periods
of economic crises are precisely the reiterated attempts of governments and
banks supervised by them to expand credit in order to make business good by
cheap interest rates.[7]
The inflationist
or expansionist doctrine is presented in several varieties. But its essential
content remains always the same. The oldest and
most naive version is that of the allegedly insufficient supply of money.
Business is bad, says the grocer, because my customers or prospective customers
do not have enough money to expand their purchases. So far he is right. But
when he adds that what is needed to render his business more prosperous is to
increase the quantity of money in circulation, he is mistaken. What he really
has in mind is an increase of the amount of money in the pockets of his
customers and prospective customers while the amount of money in the hands of
other people remains unchanged. He asks for a specific kind of inflation;
namely, an inflation in which the additional new money first flows into the
cash holdings of a definite group of people, his customers, and thus permits
him to reap inflation gains. Of course, everybody who advocates inflation does
it because he infers that he will belong to those who are favored by the fact
that the prices of the commodities and services they sell will rise at an
earlier date and to a higher point than the prices of those commodities and
services they buy. Nobody advocates an inflation in which he would be on the
losing side. This spurious
grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptiste
Say. In our day it has been revived by Lord Keynes, and under the name of
full-employment policy is one of the basic policies of all governments which
are not entirely subject to the Soviets. Yet Keynes was at a loss to advance a
tenable argument against Say's law. Nor have his disciples or the hosts of
economists, pseudo and other, in the offices of the various governments, the
United Nations, and diverse other national or international bureaus done any
better. The fallacies implied in the Keynesian full-employment doctrine are, in
a new attire, essentially the same errors which Smith and Say long since
demolished.
Wage rates are a
market phenomenon, are the prices paid for a definite quantity of labor of a
definite quality. If a man cannot sell his labor at the price he would like to
get for it, he must lower the price he is asking for it or else he remains
unemployed. If the government or labor unions fix wage rates at a higher point
than the potential rate of the unhampered labor market and if they enforce
their minimum-price decree by compulsion and coercion, a part of those who want
to find jobs remain unemployed. Such institutional unemployment is the
inevitable result of the methods applied by present-day self-styled progressive
governments. It is the real outcome of measures falsely labeled pro-labor.
There is only one efficacious way toward a rise in real wage rates and an
improvement of the standard of living of the wage earners: to increase the
per-head quota of capital invested. This is what laissez-faire capitalism
brings about to the extent that its operation is not sabotaged by government
and labor unions. We do not need
to investigate whether the politicians of our age are aware of these facts. In
most universities it is not good form to mention them to the students. Books that
are skeptical with regard to the official doctrines are not widely bought by
the libraries or used in courses, and consequently publishers are afraid to
publish them. Newspapers seldom criticize the popular creed because they fear a
boycott on the part of the unions. Thus politicians may be utterly sincere in
believing that they have won "social gains" for the
"people" and that the spread of unemployment is one of the evils
inherent in capitalism and is in no way caused by the policies of which they
are boasting. However this may be, it is obvious that the reputation and the
prestige of the men who are now ruling the countries outside the Soviet bloc
and of their professorial and journalistic allies are so inseparably tied up
with the "progressive" doctrine that they must cling to it. If they
do not want to forsake their political ambitions, they must stubbornly deny
that their own policy tends to make mass unemployment a permanent phenomenon
and must try to put on capitalism the blame for the undesired effects of their
procedures. The most
characteristic feature of the full-employment doctrine is that it does not
provide information about the way in which wage rates are determined on the
market. To discuss the height of wage rates is taboo for the "progressives."
When they deal with unemployment, they do not refer to wage rates. As they see
it, the height of wage rates has nothing to do with unemployment and must never
be mentioned in connection with it. If there are
unemployed, says the progressive doctrine, the government must increase the
amount of money in circulation until full employment is reached. It is, they
say, a serious mistake to call inflation an increase in the quantity of money
in circulation effected under these conditions. It is just "full-employment
policy." We may refrain
from frowning upon this terminological oddity of the doctrine. The main point
is that every increase in the quantity of money in circulation brings about a
tendency of prices and wages to rise. If, in spite of the rise of commodity
prices, wage rates do not rise at all or if their rise lags sufficiently behind
the rise in commodity prices, the number of people unemployed on account of the
height of wage rates will drop. But it will drop merely because such a
configuration of commodity prices and wage rates means a drop in real wage
rates. In order to attain this result it would not have been necessary to
embark upon increasing the amount of money in circulation. A reduction in the
height of the minimum-wage rates enforced by the government or union pressure
would have achieved the same effect without at the same time starting all the
other consequences of an inflation. It is a fact
that in some countries in the 1930s, recourse to inflation was not immediately
followed by a rise in the height of money wage rates as fixed by the
governments or unions, that this was tantamount to a drop in real wage rates,
and that consequently the number of unemployed decreased. But this was merely a
passing phenomenon. When in 1936 Lord Keynes declared that a movement of
employers to revise money-wage bargains downward would be much more strongly
resisted than a gradual and "automatic" lowering of real wage rates
as a result of rising prices,[8]
he had already been outdated and refuted by the march of events. The masses had
already begun to see through the artifices of inflation. Problems of purchasing
power and index numbers became an important issue in the unions' dealings with
wage rates. The full-employment argument in favor of inflation was already
behind the times at the very moment when Keynes and his followers proclaimed it
as the fundamental principle of progressive economic policies. The Emergency Argument in Favor of Inflation All the economic
arguments in favor of inflation are untenable. The fallacies have long since
been exploded in an irrefutable way. There is,
however, a political argument in favor of inflation that requires special
analysis. This political argument is only rarely resorted to in books,
articles, and political speeches. It does not lend itself to such public
treatment. But the underlying idea plays an important role in the thinking of
statesmen and historians.
Its supporters
fully accept all the teachings of the sound-money doctrine. They do not share
the errors of the inflationist quacks. They realize that inflationism is a
self-defeating policy which must inevitably lead to an economic cataclysm and
that all its allegedly beneficial effects are, even from the point of view of the
authors of the inflationary policy, more undesirable than the evils which were
to be cured by inflation. In full awareness of all this, however, they still
believe that there are emergencies which peremptorily require or at least
justify recourse to inflation. A nation, they say, can be menaced by evils
which are incomparably more disastrous than the effects of inflation. If it is
possible to avoid the total annihilation of a nation's freedom and culture by a
temporary abandonment of sound money, no reasonable objection can be raised
against such a procedure. It would simply mean preferring a smaller evil to a
greater one. In order to
appraise correctly the weight of this emergency argument in favor of inflation,
there is need to realize that inflation does not add anything to a nation's
power of resistance, either to its material resources or to its spiritual and
moral strength. Whether there is inflation or not, the material equipment
required by the armed forces must be provided out of the available means by
restricting consumption for non-vital purposes, by intensifying production in
order to increase output, and by consuming a part of the capital previously
accumulated. All these things can be done if the majority of citizens are
firmly resolved to offer resistance to the best of their abilities and are
prepared to make such sacrifices for the sake of preserving their independence
and culture. Then the legislature will adopt fiscal methods which warrant the
achievement of these goals. They will attain what is called economic
mobilization or a defense economy without tampering with the monetary system.
The great emergency can be dealt with without recourse to inflation. But the
situation those advocating emergency inflation have in mind is of a quite different
character. Its characteristic feature is an irreconcilable antagonism between
the opinions of the government and those of the majority of the people. The
government, in this regard supported by only a minority of the people, believes
that there exists an emergency that necessitates a considerable increase in
public expenditure and a corresponding austerity in private households. But the
majority of the people disagree. They do not believe that conditions are so bad
as the government depicts them or they think that the preservation of the
values endangered is not worth the sacrifices they would have to make. There is
no need to raise the question whether the government's or the majority's
opinion is right. Perhaps the government is right. However, we deal not with
the substance of the conflict but with the methods chosen by the rulers for its
solution. They reject the democratic way of persuading the majority. They
arrogate to themselves the power and the moral right to circumvent the will of
the people. They are eager to win its cooperation by deceiving the public about
the costs involved in the measures suggested. While seemingly complying with
the constitutional procedures of representative government, their conduct is in
effect not that of elected officeholders but that of guardians of the people.
The elected executive no longer deems himself the people's mandatory; he turns
into a führer. The emergency
that brings about inflation is this: the people or the majority of the people
are not prepared to defray the costs incurred by their rulers' policies. They
support these policies only to the extent that they believe their conduct does
not burden themselves. They vote, for instance, only for such taxes as are to
be paid by other people, namely, the rich, because they think that these taxes
do not impair their own material well-being. The reaction of the government to
this attitude of the nation is, at least sometimes, directed by the sincere
wish to serve what it believes to be the true interests of the people in the
best possible way. But if the government resorts for this purpose to inflation,
it is employing methods which are contrary to the principles of representative
government, although formally it may have fully complied with the letter of the
constitution. It is taking advantage of the masses' ignorance, it is cheating
the voters instead of trying to convince them. It is not just an accident that
in our age inflation has become the accepted method of monetary management.
Inflation is the fiscal complement of statism and arbitrary government. It is a
cog in the complex of policies and institutions which gradually lead toward
totalitarianism. Western liberty
cannot hold its ground against the onslaughts of Oriental slavery if the
peoples do not realize what is at stake and are not ready to make the greatest
sacrifices for the ideals of their civilization. Recourse to inflation may
provide the government with the funds which it could neither collect by
taxation nor borrow from the savings of the public because the people and its
parliamentary representatives objected. Spending the newly created fiat money,
the government can buy the equipment the armed forces need. But a nation
reluctant to make the material sacrifices necessary for victory will never display
the requisite mental energy. What warrants success in a fight for freedom and
civilization is not merely material equipment but first of all the spirit that
animates those handling the weapons. This heroic spirit cannot be bought by
inflation. Ludwig von Mises
(1881-1973) was dean of the Austrian School. This article was excerpted from
Chapter 21 of The
Theory of Money and Credit. Comment on the blog. Notes [1] See Mises, Human Action (New Haven: Yale
University Press, 1949), pp. 204-6. [2] See pp.
117-123 above. [3] About this problem, see Human Action, pp. 463-68. [4] See A. B. Lerner, The Economics of Control (New
York, 1944), pp. 307-8. [5] See B. Ruml, "Taxes for Revenue Are Obsolete," American
Affairs 8 (1946): 35-36. [6] See pp.
187-194 above; Human Action, pp. 55-57, 347-49. [7] Part 3 of this book is entirely devoted to the exposition
of the trade-cycle theory, the doctrine that is called the monetary-or
circulation-credit theory, sometimes also the Austrian theory. See also Human
Action, pp. 535-83, 787-94. [8] See Keynes, The General Theory of Employment, Interest
and Money (London, 1936), p. 264. |
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