Theory of Money and Credit Reconsidered

Some time before March 1923, Mises had talked to representatives of Duncker & Humblot about a second edition of Theorie des Geldes und der Umlaufsmittel. He planned to incorporate several “major necessary additions” but intended to make cuts elsewhere in order to maintain the overall size of the book. He rejected a first offer as insufficient, both financially and because it stipulated that he cut the book by one sixth. He pointed out that the contract concerning the first edition, which eventually sold out entirely, had been unfavorable to him since he did not even recover his expenses. Eventually he signed a contract on May 31, 1923 that stipulated a production of 2,000 plus 50 complimentary copies and 150 for review.¹⁰⁵

Although the message of the first edition was unaltered in its essentials, he felt obliged to take account of various recent developments in economic theory, as well as changes in his own views, most notably his new perspective on the economics of socialism. He also wanted to further develop the theory of interest and business-cycle theory, about which he now believed he had previously underestimated the significance of his own contribution:

I have come to the conclusion that the theory which I put forward as an elaboration and continuation of the doctrines of the Currency School is in itself a sufficient explanation of crises and not merely a supplement to an explanation in terms of the theory of direct exchange, as I supposed in the first edition.¹⁰⁶

He also added a section on current problems of banking policy, a chapter dealing with the monetary theory and policy of statism, and an essay on the classification of theories of money.¹⁰⁷ He deleted long sections dealing with historical cases of hyperinflation. These passages had been necessary in 1912, at the end of a long phase of monetary stability, to illustrate the possibility of inflationary dangers lurking around the corner if the policies of the day continued. In 1924, this was no longer necessary: “the experiences of recent years afford sufficient illustrations of the fundamental argument to allow these discussions now to be dispensed with.”¹⁰⁸

Indeed, Germany's hyperinflation was a striking illustration of Mises's argument. Especially impressive were his predictions of inflation's “social consequences”—that is, the redistributive effects. All inflations entail redistribution to the benefit of those who receive the new currency first, but the German inflation entailed redistribution on such a massive, visible scale that few could fail to notice it. While the personal savings of most people had become worthless, some ruthless investors with good political connections had amassed great fortunes.

Mises's anger about these events was not directed against those with political connections, but toward those who made such connections relevant to amassing such fortunes. A passage from an unpublished draft of his introduction to the second edition reveals his state of mind at the end of 1923. Reckoning with the “leaders of the campaign of lies” against his book, he states:

Between the first and second edition of this book, the European governments waged a war against economic science that was as tenacious as it was unsuccessful. It was the pitiable collapse of their politics that showed those in power the limits of their might. The statist theories have collapsed with the politics of statism, and economic science, long disdained, has reclaimed its place of honor.... It was inevitable that the first edition of this book—although it only sought to serve the truth—was passionately, bitterly, and perfidiously attacked by the champions of the theories that prepared the way for monetary debacle.¹⁰⁹

At the end of March 1924, the last part of the manuscript was in the hands of the publisher, and Duncker & Humblot worked feverishly toward completion of the printing in the summer semester. The first paperback copies were finally ready in the second week of July, and the bookbindery delivered the hardcover copies on July 18.¹¹⁰

From the start, the book sold exceedingly well for a theoretical treatise, especially one that opposed mainstream views on its subject.¹¹¹ This success was not entirely surprising, given Mises's new prominence as a member of Austria's first postwar government and author of GemeinWirtschaft.¹¹²

The German hyperinflation and the enormous inflation in German-Austria had seriously damaged the credibility of the established authorities. Professional economists and other social scientists were looking for other approaches. In this context, Weber's remark in his posthumous Wirtschaft und Gesellschaft—that of all monetary theories, Mises's was the most acceptable—had directed the attention of a broader learned readership to the work of this Austrian economist.