9. Money, Inflation, and War

CHAPTER

NINE

Money, Inflation, and War

Now, one may say that there are situations when the government is forced to increase the quantity of money, when it is the highest wisdom on the part of the government to proceed in this way. Such a situation would be when the country is menaced by invasion by foreign armies. What can the government do then? It must spend more. And as the people are not paying enough in taxes and the government can’t tax them any more because they don’t have more money, the government has to print money. To see if this reasoning is correct, let us now talk about historical problems.

What does this mean that there are some situations in which you cannot avoid inflating? One talks about one particular case—war! Now, please! In a war governments needs armaments and various other things in order to defend the country—I don’t want to enumerate them. All these things must be produced and they cost money. If the citizens are not prepared to supply the armaments or to give the money to pay for the armaments, then their country will be defeated in the war, and the country will become dependent. But an increase in the quantity of paper money does not change this.

There can be certain conditions under which the government inflated and you can say the situation was such that the alternative to inflation, to increasing the quantity of money, was also very bad. When the American colonies were fighting against England in the War of Independence, they proceeded to inflation. The alternative, let us assume, would have been defeat, because certainly in the eyes of the men responsible for this inflation, for this increase in the quantity of money, this was the alternative. You can say that, if it was really possible to preserve the independence of what later became the United States through inflation, then the inflation was justified. The catastrophe couldn’t be avoided then. But the catastrophe, the breakdown of this currency in 1781 after the Revolutionary War, did not mean the same thing that it would have meant years later when the economic conditions changed. In the years of the Revolutionary War the American colonies were a predominantly agricultural country; most of the people were owners or workers of an agricultural piece of land and could survive the catastrophe which the breakdown of the American currency, the Continental Currency, meant after the Revolutionary War. Getting food was not then a matter of going to the market. They didn’t use money to buy food or hardly any other things. When the Continental government inflated in 1781, the man who had a small farm and who worked with his family on this farm and had a few dollars, he lost these few dollars because of the inflation, but that didn’t affect him very much. Therefore, the whole problem of inflation was only of minor importance for the Americans at the end of the Revolutionary War.

We cannot compare conditions today in the United States with those in the United States of 1781. Today we no longer have the simple system which existed at that time under which the money economy meant very little for most people. We have had other such examples in the past. But under the conditions of a highly developed society, under the division of labor under the conditions of society in which practically everybody depends on working for other people and is paid by money and uses this money in order to buy things, under these conditions which I do not have to describe because they are known to everybody, a breakdown of the currency would mean something quite different. There is no excuse for a government that resorts to inflation today saying, “But, don’t forget, we have an old tradition of inflation. We are an independent nation today because we had an inflation in the War of Independence, in the Revolution.” You cannot compare conditions.

There was also, for instance, the great problem of the United States, the greatest historical problem for the United States, the Civil War in the 1860s. There were the Northern States and the Southern States. And the Southern States were in a very bad situation because they had very little industry. Their agricultural production was great, but their industries were not in a position to produce the needed armaments. From the first day of the Civil War, this was a very unfortunate situation for the Southerners especially as the Navy of the North was in a position to prevent trade between the Southern States and the European countries which would have been in a position to deliver armaments to the South. Now it is impossible to improve a country’s military situation by inflation, even in a country in which all the materials required for the war are available. Therefore, even from the point of view of the necessities of a situation in which a country is fighting for its survival, inflation as such is not a measure to improve conditions. Now the shortage of armaments could be affected in no way by the fact that the secession government increased the quantity of money. But if you were a statesman in the Southern States and you were already approaching defeat, and somebody asked you, “Don’t you know that printing money, banknotes, more and more dollar bills of the southern quality, will destroy this system?” this southern statesman would have answered, “Why are you talking about the money? The problem now is whether the Southern States, our system, which is more important than anything else in the world, should survive or not. Our war, or our rebellion,” it depends on how you looked upon this problem, “is finished.” He could print money to try to get what was needed to keep on fighting. And so he printed the notes, and more and more notes. And they went to zero.

With the outbreak of World War I, many governments that had not resorted to inflation previously and had provided all the money they needed by taxation, started printing additional banknotes, paper notes. The effect necessarily was an upward movement of prices. The governments were probably not so naive that they did not know what their new methods of providing money for the government spending would bring about. The governments knew that the policy of adding enormous quantities of new additional money into the market would necessarily bring about a tendency toward higher prices. But what did the government do? With the outbreak of the war, with the change in their policies, they also began making laws which punished people who, according to the ideas of the government, were asking higher prices for commodities than they had asked before. What the governments of some countries, of many countries, did in this regard is just unbelievable—I would say it was a “swindle”—they introduced a new crime, a new method of punishing citizens. They declared that there was a special crime of profiteering. And they began to imprison people. Why? Because, these governments said, these people were profiteers; they were asking more than they had before, more than the government thought necessary.

I don’t want to say that inflation is a vice and call it “immoral.” I don’t care for this method of criticizing inflation. But seriously, there is one thing about inflation that we can know for sure. You cannot tell today whether or not people in the government tomorrow or the day after tomorrow will not choose for some reason to increase the quantity of money, that is to inflate. They may have an excuse. They will say: “Inflation is bad. There should never be any question of inflation.” And then they will add: “Yes, but we didn’t take into account the conditions of an important war. Really this situation didn’t exist before.” And then they will increase the quantity of money.

In one of the many belligerent countries of the last fifty years, there was one Minister of Finance who, when asked “Why do you inflate? Is it not a crime that you are destroying the currency of your country by issuing more money and therefore raising prices?” answered, “In time of war, it is the duty of every citizen of every branch of the government and of every part of the country to contribute as much as possible to the defense of the country. From this point of view, as Minister of Finance, I contributed by printing money.”

The Germans before the first World War were highly intelligent and very patriotic. But unfortunately for decades and decades the government and all the professors it had appointed to the universities had taught very bad economics, especially monetary economics. Sixty years ago, a German professor, a teacher of economics of great renown, G. F. Knapp, declared: “Money is what the government says it is. Money is a government product. The government is sovereign and free to do what it wants.” He was not saying something new. The only new thing was that a professor was saying it, that all the people in the government said, “All right,” and that even those who did not say “all right” acted as it they considered it all right. That meant that the governments claimed the privilege to declare what people had in their minds when they made agreements concerning money. It was not remarkable that the professor said this, you know—professors sometimes say things that are not remarkable. But what was very remarkable was that the people accepted it.

An American economist, B. M. Anderson, predicted Professor Knapp’s influence would be such that students would probably “have to read his book if they wished to understand the next decade of German history.… Look at your German theory, look at the German so-called economic doctrine on money and then you will see what will happen to the German money.”¹ And he was perfectly right! The result came very soon. When Germany went to war, the government didn’t realize, and still less did the people realize, that what one needs to fight the war is not paper money but arms and various other things. So they printed paper money. And they printed paper money day and night. The result was that the German paper money from pre-World War I deteriorated in value. The parity with the American dollar in 1914 expressed in German marks was 4.2 as it had been for 60, 80, and 100 years before. You know what the cost of a postage stamp is. The German monetary policy of increasing the quantity of money, printing it continually, until a German postage stamp in the early 20’s of our century cost several million marks. Imagine the situation that developed in 1923 when someone who bought a stamp in order to mail a letter to the next village had to pay several hundred million marks. Twenty million marks was more than the wealth of the richest people in Germany in the earlier period. At the end of this inflation, nine years later, the dollar was 4.2 billion marks, something which is purely fantastic because there are no people who have an idea, a living idea, of what a billion is. This was the outcome of the economic doctrine that money was a creation of the government. The fact that the government had printed money, that the government had increased the quantity of money, did not improve the situation of the German armed forces or the German resistance. It was simply an attempt to deceive the people in Germany and outside of Germany about the effects of the war.

It is true that the Reichsbank printed more and more paper money. But the significance of this famous German inflation of 1923 consisted in the fact that these pieces of paper had legal tender value. Now what did this mean? The government assumed the right to say, not only what money was, but also to decree what people were bound to accept as money. Legal tender legislation makes it impossible for anybody to refuse to accept the paper money. In the same way, the American dollar inflation today [1969] consists of the fact that the paper dollar has legal tender value and at the same time that gold holding is made illegal. Holdings of gold were confiscated and it has been made illegal to deal with gold.²

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¹“[T]here is a fair chance that American students may have to read his book [G. F. Knapp, Staatliche Theorie des Geldes, Leipzig, 1905] if they wish to understand the next decade of German monetary history. It will be well for Germany if this is not the case!” B. M. Anderson, The Value of Money. New York: Macmillan, 1917. p. 435n. —BBG

²U.S. citizens regained the right to own gold only after Mises died in 1973. Legislation effective December 31, 1974, permitted gold sales to resume in January 1975. —BBG