2. Why was the Reception of the First Edition of Mises’s Theory of Money and Credit so Lukewarm?

2

Amadeus Gabriel

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Why was the Reception of the First Edition of Mises’s Theory of Money and Credit so Lukewarm?

1. Introduction

The German monetary theorists of the nineteenth century are virtually unknown in English-speaking countries. And yet, their influence on the work of great economists like Carl Menger, Joseph Schumpeter, or Alfred Marshall cannot be denied.[1] This is also true of their influence on Ludwig von Mises. This paper addresses the question if—and in what way—the German monetary theorists were the forerunners of Mises’s first edition of Theory of Money and Credit. Likewise, this paper will not only focus on their influence, but also on the similarities and differences of their theoretical approaches regarding monetary theory. This evaluation will shed light on why the response to his treatise was so lukewarm in the German-speaking world. In the late 1920s, looking back on the reactions to the first edition of 1912, Mises wrote:

Sixteen years ago when I presented the circulation credit theory of the crisis in the first German edition of my book on The Theory of Money and Credit (1912), I encountered ignorance and stubborn rejection everywhere, especially in Germany. (Mises 2006, p. 54)

In his memoirs (1978), Mises dedicates a whole chapter to Theory of Money and Credit and states that “as could be expected, my book was rejected summarily by the journals of the German social sciences” (Mises 1978, p. 61). In his book, he had bluntly stated that he did not appreciate the work of most of his German colleagues. That was certainly not conducive to a warm reception by German academia at the time.[2]

Neither the lukewarm reception of Theory of Money and Credit nor Mises’s view of the value of German monetary theory are justified. The leading German monetary theorists of the ninteenth century were Carl Knies, Karl Heinrich Rau, Wilhem Roscher, and Adolph Wagner,[3] and all made significant contributions to monetary theory. The works of the economists who came next, Menger, Schumpeter, and Marshall, were heavily influenced by these earlier theorists,[4] as was Mises himself (Mises 1912, p. 441). So to say that Menger single-handedly revolutionized the way in which monetary theory is examined, as Mises does, may not be appropriate (Mises 1912, p. 408).

In this paper, I analyze the theoretical similarities and differences in Mises’s work concerning such topics as the nature of money, the value of money, the quantity of money, the redistribution effects of money productions, banks of issue and the consequences of uncovered paper money, and the necessity for a central bank. The similarities help us to understand why Mises’s assessment of German banking theories is partly unjust.[5] The differences shed light on the question as to why the first edition of his treatise on monetary theory was rejected by German academia. Many of these ideas were welcomed, when they were first put forward by older German economists of the nineteenth century.

Most German economists of the older generation did not explain the nature of money by the existence of conventional agreements. They were aware of the establishment of money as a natural fruit of indirect exchange and its role as a common medium of exchange. Likewise, Mises’s famous regression theorem can be found similarly expressed in the writings of these economists. The dynamics of fiduciary media and its dangers were not unfamiliar to the older German theorists either. Mises’s approach to state intervention in the banking system and his skepticism about its effectiveness were totally shared by the younger Adolph Wagner.[6]

The main theoretical difference between Mises and the older generation of German economists is the treatment of the socially optimum amount of money. Whereas German economists propose an approach, where the velocity is the main explanatory variable, Mises claims that every amount of money is optimal for the needs of society. When the Theory of Money and Credit was first published most German economists were in favor of central banking. Mises was skeptical about central banking and its function, only becoming a full-fledged advocate of free banking with the publication of the second edition. Considering the favorable light in which central banking was esteemed by the political environment and advocated in policy, the rejection of the first edition can be understood and maybe expected. Things changed after World War I. The former scientific authorities in monetary theory rapidly lost their reputation when the implementation of their policies led to disastrous developments in Germany. Not surprisingly, the second edition had a more favorable reception.

The paper is structured as follows. We first analyze the literature pertaining to the nature of money (Section 2), and then deal accordingly with the determination of the value of money (Section 3); the optimal quantity of money (Section 4); the redistributive effects of money production (Section 5); the consequences of uncovered paper money (Section 6); as well as the necessity of a central bank (Section 7). We present our conclusions in the final Section 8.

2. The Nature of Money

One of the great insights of Austrian monetary theory is that money had to be a commodity in the first place and not just some sort of numeric value. Mises points out in several places that a commodity can never become money just because the state decides to attribute a value to it. Money is the fruit of indirect exchange (Mises 1912, p. 45). The spontaneous emergence of money becomes necessary as the division of labor increases and wants become more refined (Mises 1912, p. 5). Individuals only choose indirect exchange when the goods they can acquire are more marketable than those which they surrender.

The most marketable commodities will become common media of exchange and their position is strengthened as their relative marketability increases in comparison to other commodities (Mises 1912, p. 6). The main function of money is its universal use as a general medium of exchange (Mises 1912, p. 7). The secondary functions of money can mostly be neglected and deduced from its function as medium of exchange. As Mises says:

The simple statement, that money is a commodity whose economic function is to facilitate the interchange of goods and services, does not satisfy those writers who are interested rather in the accumulation of material than in the increase of knowledge. (Mises 1981, p. 46f.)[7]

As mentioned earlier, goods can only become a common media of exchange through their use by those who take part in commercial transactions (Mises 1912, p. 59). For this purpose, it would not be appropriate to attribute the function of money—money being always an economic good—to a certificate which constitutes only a claim.

One might say that Mises’s statements on the nature of money are simply the integration of Menger’s ideas formulated in his famous essay on the origins of money, thereby reflecting Menger’s influence on Mises. Menger’s paper was written in 1892. In his treatise, Menger denounces Roscher as being among the economists who believe that the medium of exchange has been established by general convention or law and points out, referring to the convention claim, that “even the more modern developments in the theory of money have not in substance got beyond this standpoint.” (Menger 1892, sec. II) I will show that not all German economists of this time can be put into this category and the statement is an oversimplification. Many arguments of nineteenth-century German monetary theorists can be found within Menger’s work on money.

As a consequence, Mises was perhaps not influenced directly by these German economists, but rather indirectly by Menger’s work. German theorists before him had also recognized the spontaneous emergence of money. Knies points out that money is the natural fruit of indirect exchange, but at the same time refuses to recognize the need of conventions in order to establish money.

As Knies puts it:

The use of money is not the result of one special agreement between human beings and not the consequence of a law by the state. It actually originates everywhere as a natural fruit of exchange. (Knies 1873, p. 107)[8]

Hence, if an object has been chosen as the new general medium of exchange, it is not due to some arbitrary judgment. Rather, it is the flexible and durable commodity which is highly demanded for its properties. It naturally becomes the most marketable commodity and serves to set the standard of value of the other commodities (Knies 1873, p. 108). Money, in the sense that some “economic” value is estimated or measured, has to be a commodity of great value (Knies 1873, p. 114). Knies’s stance on the concept of objective exchange value does not really differ from Mises’s,[9] but this aspect will be analyzed more precisely in the next section. But how did the other German economists define money?

Roscher’s definition of money differs from that of Knies. Roscher believed that money needs the approval of the state, as a medium of payment, in order to bring a commodity as money to perfection (Roscher 1854, p. 222).[10] The development of money circulation goes hand in hand with that of personal freedom (Roscher 1854, p. 227). Only commodities with a generally accepted value have become money (Roscher 1854, p. 229).

Rau assumes that direct exchange is rare and after the introduction of money, indirect exchange divides a single transaction into two separate parts. These two parts consist of acquiring a desired good through the use of a more marketable good, in other words, by purchasing and selling the more marketable good (Rau 1868, p. 317). He describes the spontaneous emergence of money by the following procedure:

One must therefore assume that a generally popular and sought after commodity was even more frequently accepted by persons who did not want to use it themselves; in this way it obtained gradually the nature of money and the utility emanating stepwise from this kind of use was recognized more clearly. (Rau 1868, p. 317)[11]

Knies emphasizes that money by itself is not one function. Rather, it is the function of an economic commodity that is used for some special purpose (Knies 1873, p. 163). Claims cannot be qualified as money (Knies 1873, p. 164). Money must be a real commodity and not only a numeric value (Knies 1873, p. 182).

Furthermore, Knies attributes to money the role of a local transmitter of value through time and space (Knies 1873, p. 223). Mises criticizes this approach and claims that this function can also be traced back to its very existence as a common media of exchange (Mises 1912, p. 11).

The concept of hoarding can also be found in the work of Knies.[12] Hoarding is an artificial problem (Knies 1873, p. 211) because money can never lie idle. Mises and Knies share this viewpoint and emphasize that all money addresses itself to the service of a monetary function (Knies 1876, p. 284; Mises 1912, p. 61).

The famous threefold division into means of production, objects of consumption, and media of exchange by Mises has actually its origins in Knies’s writings (Knies 1873, p. 20). Mises regrets that Knies’s arguments on this were sloppy and thus attracted hardly any attention (Mises 1912, p. 70). Mises develops this point and the threefold division becomes part of his monetary analysis.

3. Value of Money

German economists of the nineteenth century generally do not believe that conventions or the like are necessary for the establishment of money. The similarities in the approaches of Mises and the these German economists go even further.

Roscher and Rau derive the exchange value of commodity money from its natural scarcity and aesthetic properties (Rau 1868, p. 340; Roscher 1854, p. 235). The use value of the employed commodity determines its exchange value. The original use value of the non-monetary employment gets less important as the commodity becomes the common media of exchange (Roscher 1854, p. 239). Roscher uses the concept of supply and demand for money to determine its value (Roscher 1854, p. 241). Rau emphasizes that the good, which is now used as money, had to have a generally accepted value in the past, a value derived from its market value when it was still a commodity (Rau 1868, p. 317).

Similarly, Knies argues that the objective exchange value of money, which already existed due to its past use as a precious metal, obviously determines its objective exchange value as a medium of exchange (Knies 1873, p. 141). Wagner concurs (Wagner 1857, p. 37).

These observations by Knies, Wagner, and Rau are especially interesting in light of Mises’s explanation for the value of money, also known as the regression theorem. The regression theorem states that one traces back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity (Mises 1912, p. 128). Mises’s approach was an extension of Wieser’s (1903) who argued that one has to go back in time to when money was still a commodity in order to understand the circularity problem of the value of money, which had been pointed out by Helfferich.

Most of the components of the regression theorem[13] can be found in the writings of Knies and Rau and are simply a refinement of existing ideas.

Knies and Wagner assert that a new demand for the service of precious metals is added to its previous demand for its services as jewelry, etc., as soon as it becomes the common medium of exchange. The two demands together determine the price for its use as money, as well as its use for other services (Knies 1873, p. 141; Wagner 1857, p. 38).

Mises points out that the value of money is determined by both its industrial employment and its monetary employment. However, it is impossible to say to which extent the value of money is influenced by one or the other (Mises 1912, p. 105).[14]

The notion of subjective valuations is not explicitly used by Knies, but he observes that the objective exchange value is determined by individuals who take part in commercial transactions. As a consequence, a governmental decree as such is insufficient to ascribe an objective exchange value to a commodity. As Knies puts it:

Can a governmental authority, even if it were the most violent and the most persistent, attribute an exchange value to an object, which has no exchange value at all for the human beings that take part in the commercial life? (Knies 1873, p. 189)[15]

Knies adds the following remark a little further on in his text:

The government authority could declare just as well that a mountain is twice as high as it is in reality or that two pounds are actually six pounds. (Knies 1873, p. 189)[16]

Knies denounces that the law considers the value of money as being invariable and constant, whereas in fact no economic good has a stable value (Knies 1873, p. 318).[17] Mises clearly sympathizes with this point of view and insists that money can never be stable but “for the law, invariability of the value of money is not a fiction, but a fact” (Mises 1981, p. 227).[18] This is an important insight.

4. Quantity of Money

German monetary theorists agree that velocity is the most important explanatory variable for determining the money supply.[19] Roscher asserts that the optimal quantity of money cannot be determined either as a function of the population figures or as one of the national income (Roscher 1854, p. 242). The transition from a medieval barter economy to the commercial monetary system necessarily implies a need for a higher quantity of money. One taler that circulates ten times performs the same services as ten talers that circulate just once (Roscher 1854, p. 242).

Rau takes a similar stance. The more a piece of money circulates between participants in commercial transactions, the more goods and services can be bought and a smaller quantity of money is needed in order to fuel commerce (Rau 1868, p. 323). Rau actually formulates in a footnote an equation which corresponds to Irving Fisher’s identity of exchange which shows the concept of velocity and the quantity of money.[20]

Knies is less clear about the optimal quantity of money. He agrees with Rau and Roscher that a unit of money can render more services if its circulation increases. For example, a coin that changes hands three times does the same service as three coins that circulate just once (Knies 1873, p. 180). The general opinion is that the more the money circulates the less quantity is required and vice versa.

Wagner, as a follower of Tooke, describes the money supply as the effect of money demand and not as the cause of it (Wagner 1857, p. 122). If the money supply increases, it is a result of more commercial activity causing prices to rise and not the cause as is put forth by the Currency School (Wagner 1857, p. 127). For instance, if the price of wheat increases due to a bad harvest, then the money supply has to increase (Wagner 1857, p. 128).

The scenario portraying the German theorists as being the predecessors of the quantity theory is not very enlightening with regard to how the socially optimal quantity of money is determined. Generally speaking, concepts of the social need of money are pretty imprecise and elusive. None of these German economists is capable of expressing a clear opinion about the social demand of money within the framework of a national economy. Actually, they seem to avoid direct consideration of this, referring to “the demand of the medium of payment for the commerce” without specifying anything in a precise manner. One desperately seeks a definitive predication, such as can be found in the works of the early Austrian economists.[21]

These points of view can clearly be distinguished from those of Mises. Mises’s criticism of the quantity theory and, in particular, its concept of velocity is well known (Mises 1912, p. 142). The arguments of the quantity theorists are too mechanical and their assumption that modifications in the value of money must be proportionate to changes in the quantity of money is not in accordance with empirical facts (Mises 1912, p. 139).

Rather, Mises derives the basis of the demand for and stock of money in the whole community by observing that as long as there are no money substitutes in use, the social demand for money and the social stock of money are merely the respective sums of the individual demands and stocks (Mises 1912, p. 145). Later in his text he further specifies the case when money substitutes are issued:

It is thus obvious that a community’s demand for money in the broader sense cannot be the sum of the demands of individuals of money and money substitutes, because the money that serves as a cover for them as the banks and elsewhere is to count the same amount twice over. (Mises 1981, p. 156)[22]

With regard to the socially optimal quantity of the money, Mises’s statements are articulated in a forthright way. As Mises writes:

In the first place, it must be pointed out that the levels of the total stock of money and of the value of the money unit are matters of complete indifference as far as the utility obtained from the use of the money is concerned. Society is in enjoyment of the maximum utility obtainable from the use of money. Half of the money at disposal of the community would yield the same utility as the whole stock, even if the variation in the value of the monetary unit was not proportioned to the variation in the stock of money. (Mises 1981, p. 165)[23]

This clear opinion, however, was put forward with some reservations.[24] For instance, he states that the need of money depends on the degree of modernization of a society, the season, and other magnitudes (Mises 1912, pp. 341–70). Similarly, he claims that there can be a lack of fiduciary media (Mises 1912, e.g., pp. 345, 350) which suggests that not every quantity of money is sufficient for the economy. This sort of explanation can already be found in the works of Roscher and Rau as I mentioned before.

5. Redistribution Effects of the Production of Money

It may be appropriate here to briefly outline the principle of money redistribution: The new money that enters the market affects the dynamic adjustment process. Richard Cantillon[25] recognized that the demand schedules of those initially affected by the monetary disturbance change before the demands of those who receive additional money balances only as the effects of the monetary change spread through the economy. This phenomenon results in a redistribution of income and wealth in favor of those who are close to the source of money production and at the expense of those who are among the final links of the redistribution chain.

Actually, one of the most important points of Mises’s critique of the production of credit money is the redistribution effect of this procedure. He states that the new money always increases the quantity of money as it is disposed of by individual agents (Mises 1912, p. 150) and the increase in the quantity of money does not mean an increase of income for all individuals (Mises 1912, p. 152). Even if the increase of money was the same for every person, this would not necessarily mean a uniform price increase since the structure of demand is affected during every process of money production (Mises 1912, pp. 153–54).

Knies points out that the economy is dynamic and the prediction of the modifications of economic situations is generally impossible (Knies 1876, p. 135). He contradicts himself when he emphasizes that changes in prices due to the modifications of the quantity of money are only temporary and are likely to be adjusted by those who are involved in the commercial transactions (Knies 1876, pp. 321, 326).

Rau shows that entrepreneurial profits increase as a result of the increase in the money supply. Consequently, there are incentives to expand production, and this in turn dampens the price increase. Rau observes that those higher entrepreneurial profits go in hand with “the affliction of other social classes” (Rau 1868, p. 330). The higher commercial activity (due to the new money) is only for the public good as long as it provides the basis for an increase in production. Otherwise, those who sell goods receive advantages as a result of the additional expenditure of other citizens (Rau 1868, p. 375).

Mises’s approach is similar. Money production per se cannot improve the welfare of the people except for the case of a production increase (Mises 1912, p. 235). Rau is less restrictive and states that an increase of the quantity of money always has a positive impact in the beginning of the process. Nevertheless, Rau clearly observes the redistribution effects of money production:

. . . [C]onsequently the price of the different goods in commerce cannot increase in the same proportion, some earlier and stronger, others later and weaker; many maladjustments arise, several win, others namely the holders of big sums of money, the creditors, the employees lose considerably. (Rau 1868, p. 378)[26]

As does Mises, Knies denounces governmental measures which aim at improving the situation of debtors at the expense of the creditors (Knies 1873, p. 250). He points out the absurdity that we are still surrounded by “the delusion as if the creditor were a rich, otiose senior citizen and that it would be necessary to relieve the burden of the poor, living in bitter misery, by hook or by crook” (Knies 1873, p. 250). Wagner, too, was perfectly aware of the redistribution effects of fiat money. He observes that unredeemable bank notes are a means for first receivers to enrich themselves at the cost of the last receivers (Wagner 1857, p. 83).

Similar to Mises, Rau observes that an increase in the quantity of money by 1 or 2 percent can actually be a large sum, but the consequences would not be remarkable since the ones who take part in the commercial transactions do not perceive it to the same extent (Rau 1868, p. 329). This explains the unjust enrichment of those in charge of the issue of money at the expense of the people who don’t notice a modification of the quantity of money in the first place.

Knies explicitly mentions creditors as being the undeserved losers of “legal tender unredeemable paper money”[27] and that this should be emphatically denounced (Knies 1873, p. 285).[28] It is the creditor and not the debtor who bears the risk. Knies and Mises agree that this is also true in the case of bank notes where the holders, i.e., creditors of the bank, bear the risk of their credit. In this case the debtor, i.e., the bank, makes its profits by receiving the bank notes without paying interest (Knies 1873, p. 306; Mises 1912, p. 312). Without a doubt, these banks of issue benefit from the issue of notes (Knies 1876, p. 319).

Knies provides an explanation for the favoritism of the debtor at the expense of the creditor. Debtors benefit from better treatment since they are represented by the government (Knies 1873, p. 207); the largest debtor, though, is the state itself via the issue of governmental bonds that offer very favorable conditions to the creditors (Knies 1873, p. 143). If they ever get paid back, it is a long time coming (Knies 1876, p. 144).

6. Banks of Issue and the Consequences of Uncovered Paper Money

Knies is mistrustful of the banks of issue. The issuance of paper money must be legally restricted to guarantee the money at par. Compliance with regulations cannot be assured if it depends solely on individual attitudes and the short-sighted will of statesmen (Knies 1873, p. 279).

Similarly, Rau thinks that confidence in the government is an essential factor. Government attempts to avoid depreciation and to limit the losses for the receivers of money (Rau 1868, p. 379). He prefers redeemable paper money to unredeemable paper money since the issuance of an enormous quantity of fiat money is highly probable. Experience shows that the issuance of fiat money was always tempting and the consequences were always confusing for commerce (Rau 1868, p. 381). The lower the proportion of paper money is in comparison to the total quantity, the smaller is the danger of abuse (Rau 1868, p. 381).

As does Rau, Knies points out that it is much easier to refrain from a substantial issuance of paper money than to recover from it. The population always fears that the state benefits from its position and procures financial aid in the case of an emergency through the issue of notes (Knies 1873, p. 279). “The money supply is determined by the financial requirements of the government, rather than by the needs of the national economy” (Knies 1873, p. 208).

Knies cites a French incident from the first quarter of the eighteenth century to make his point. In this case, the “infinite fruitfulness of a paper press” (he uses this expression in an ironic way) and its consequences were clear, but in spite of everything, masses of supporters for this sort of procedure could still be found throughout that century (Knies 1876, p. 66). Knies describes the perpetual circulation of “depreciated paper money” as one of the worst plagues that could infest a national economy (Knies 1873, p. 281). The issuance of paper money is especially handy for the “weak, restricted, selfish and frivolous statesman” (Knies 1873, p. 274). He even develops a sort of business cycle[29] which is likely to be caused by the issue of unredeemable paper money. As Knies puts it:

Suddenly one is exposed to the demoniacal rule of insuperable accidents, which one had once learned to perceive as a characteristic feature of “barbaric” economic conditions. Property and commerce become uncertain, even though the police and the courts continue their work as usual. Efforts made along time-tested paths, intense work in the pursuit of well-known objectives are paralyzed, and the floodgates are widely opened to the “adventurers.” Even the profits that result from calculated foresight are acquired only at the expense of others. No-one is grateful to the government for his undeserved profit, and everybody accuses it for his undeserved losses. Was it not one of the government’s most important missions to vouch for the soundness of money? But how often has this already been said! How much to the point, how congruently have the consequences of depreciated paper money been perceived! (Knies 1873, p. 282)[30]

Similarly, Knies analyzes the consequences of the overissue for the value of paper money:

The paper money that has become subject to price fluctuations has become a medium of exchange whose market value should be established anew by every acceptor, whereas the great bulk of the population is unable to carry out such examinations. (Knies 1873, p. 284)[31]

The existing problems of price fluctuations are augmented with the uncertainty about the value of future payments. This is not brought about by fluctuations of value and price measures, but by the value fluctuations of the imposed media of exchange whose amount is also measured in money (Knies 1873, p. 284). Thus, there is a tendency toward the reduction of objective exchange value as has been pointed out by Mises (Mises 1981, p. 331). As Mises writes:

If the fiduciary media are perfect substitutes for money and do all that money could do, if they add to the social stock of money in the broader sense, their issue must be accompanied by appropriate effects on the exchange ratio between money and other economic goods. (Mises 1981, p. 349)[32]

The effects of the uncovered notes also reach those who can deny the acceptance of all notes (Knies 1873, p. 311). Similarly, Mises describes it in the following way:

The fact that is peculiar to money alone is not that mature and secure claims to money are as highly valued in commerce as the sums of money to which they refer, but rather that such claims are complete substitutes for money, and, as such, are able to fulfill all the functions of money in those markets in which their essential characteristics of maturity and security are recognized. It is this circumstance that makes it possible to issue more of this sort of substitute than the issuer is always in a position to convert. And so the fiduciary medium comes into being in addition to the money. (Mises 1981, p. 300)[33]

In addition, Knies points out that by the use of claims, people forget about their real nature, i.e., claims for money which can be redeemed at the bank (Knies 1873, p. 304). Similar, Mises declares:

The immediately convertible note of a solvent bank is employable everywhere as fiduciary medium instead of money in commercial transactions, and nobody draws a distinction between the money and the notes which he holds as cash. (Mises 1981, p. 305)[34]

Governmental authorities have always used deposits to secure credits. Moreover, they accept the losses of the note holders if it helps to avoid the bankruptcy of the debtor (i.e., the national banks) (Knies 1873, p. 309). Knies denounces several times the idea of an interest free loan through the issuance of bank notes. This is a complete “abnormality” in the private loan sector (Knies 1873, p. 310). However, the bank of issue engages into this sort of business (Knies 1873, p. 311). That’s why Knies prefers the constrained note issuance to one without limits even if it is not the perfect solution (Knies 1873, p. 312).

Likewise, Knies is opposed to the issuance of unredeemable paper money in combination with credits. Any deals that involve sums of money whose value equivalence cannot be guaranteed are likely to entail arbitrary gambling and betting about losses and profits determine the outcome (Knies 1876, p. 142).

Wagner is of the opinion that credits cannot create money. Banks should always have enough reserves to redeem the notes (Wagner 1857, p. 73). The devaluation of money is made possible by the introduction of fiat money (Wagner 1857, p. 96) and that is why bank notes must be redeemable at any time (Wagner 1857, p. 97). However, the same applies for deposits as they feature the same characteristics as bank notes (Wagner 1857, pp. 163, 214). Under the banking system with voluntary reserve ratios, there are no problems for the banks to fulfill the redemption demands of their clients. Under the new system with required reserve ratios, banks go bankrupt (Wagner 1857, p. 220).

Wagner already anticipated to some extent Mises’s critique of the Currency School which failed to treat bank notes and deposits as a form of money (Mises 1912, pp. 43–48). Like Mises, Wagner claims that the physical characteristics of money is not important. Metallic and paper money are not really different in his opinion (Wagner 1857, p. 99).

Mises’s insight, that banks of issue can diminish the interest of the loan market, in the short run, via the issue of new money (Mises 1912, p. 358) had been observed by Rau in a similar manner:

Given that the supply of goods cannot be increased quickly enough during a substantial increase in the quantity of money, the prices must increase as a consequence and this is perceived as a difficulty to invest the new money in an advantageous way that arranges for the rate of interest to decrease during a certain period. (Rau 1868, p. 375)[35]

Rau believes that banks of issue should have the freedom to issue three to four times more notes than they keep as a reserve in order to increase the profits of the banks (Rau 1868, p. 384). However, he perceives the danger for banks if they grant loans in a less cautious manner than capitalists normally do, thus giving incentives to undertake risky projects.

I have demonstrated that the viewpoint of German economists about the banks of issue and the consequences of issuing uncovered paper money are similar to those of Mises. However, they do not necessarily share the same opinion about the necessity of a central bank.

7. The Necessity for a Central Bank

As one would expect, Knies asserts that the minting and issuing of money is the vocation of the state, i.e., its right and its duty (Knies 1873, p. 293). It is now even more important than in the past that the state guarantees the soundness of the national money, even if it is necessary to collect taxes to cover the expenditures (Knies 1873, p. 292). Knies is totally opposed to the idea of competing banks and compares it to the establishment of weights and measures. Knies writes:

Everybody concedes right away that it is unacceptable for sellers to enjoy the “liberty” of using different weights and measures, and that no buyer of a commodity should suffer harm due to the unreliability of weights and measures. Indeed, not everybody has the right to provide the weights and measures that shall be used in general commerce. Neither may private persons be entitled to provide those “weights and measures” of value, which shall be used in all spheres of the economic and legal life of a nation, in competition with the government. (Knies 1873, p. 294)[36]

Knies is a supporter of the Peel system and condemns the principle of free banking. However, Knies has a nuanced point of view. On the one hand, he is convinced that the state’s issue of uncovered paper money is unjust. On the other hand, the legal authorization for private banks to engage in this business is inappropriate and must be condemned (Knies 1873, p. 297). Similarly, the practically costless issuance of bank notes makes free banking impossible (Knies 1873, p. 313).

The common man does not distinguish between private paper money and state paper money. Private banks can issue (quasi-) legal tender notes with the aid of the state and everybody must accept them whether they want to or not (Knies 1873, p. 305). Moreover, Knies thinks that money is of public utility. He points out that “the issue of the notes which have actually come into use as money is not the task of the private industry that aims at entrepreneurial profits” (Knies 1873, p. 306).[37]

Knies’s feelings about currency competition in a bank note system are rather negative as well. He was in favor of uniform circulating notes that were used in the single states of Germany at the time when he wrote his book. His comment is quite harsh:

One cannot alter the diastrous heritage of the last years and decades, that is, the conduct of “banking policy” on the level of the individual states; the existing presumptuous note-proletariat has regular certificates of origin and of residence. (Knies 1873, p. 312)[38]

The most important opponent of Knies was Adolph Wagner. According to Wagner, the freedom of banks is the best guarantee for the good management of banks (Wagner 1857, p. 15). He underscores his argument by including statistics of the Scottish and English banking system. The issue of money was less reckless in Scotland,[39] where competition of banks was allowed (Wagner 1857, pp. 21, 59, 60). As long as bank notes are redeemable, it is impossible to have an “inundation” of notes under a system of free banking (Wagner 1857, p. 144). Wagner denounces the required reserve ratio of one third, which entailed the unintended consequence that deposits were backed less than before[40] (Wagner 1857, p. 172). Banks relied on the state to help out in the case of urgency. But “how can the state even know how many reserves a bank needs?” (Wagner 1857, p. 173). It is impossible to know a priori how many cash reserves are required and the competition among banks will sort it out (Wagner 1857, p. 214).

The legal imposition of a reserve rate is one of the worst state interventions, according to Wagner, as new banks are founded with lower reserves than required. This necessarily leads to a weaker banking system. In a framework of free banking, a bank would have to gain some reputation in order to hold lower reserves. Banks would only be founded where there is an actual need (Wagner 1857, p. 218). However, as pointed out by Smith (1990, p. 80), Wagner eventually became more and more prone to the influence of the German Historical School and ultimately stated that “all systems can be justified in the appropriate circumstances”[41] (Smith 1990, p. 80). This “partial recantation” of free banking by one of its most strident supporters, Adolph Wagner, represented the end of opposition to the idea of central banking in Germany[42] (Smith 1990, p. 81).

Mises’s view on free banking evolved and this evolution and development can be seen in the different editions of Theory of Money and Credit. Hülsmann gives a full account of these differences (Hülsmann 2012). In the first edition, he found several justifications for the existence of central banks. He favored a system of redeemable paper money as it allows to save on metal for other uses (Mises 1912, p. 150). As stated in the previous section, Mises believed in the increase of production through forced saving and the promotion of commercial banking. He also considered the possibility of a potential lack of fiduciary media. This implied more or less the need for a central bank.

He only evolves into a complete free banker in the second edition. In his opinion, etatism has been a failure (Mises 1981, p. 435) and the current arguments for central banking are unsound (Mises 1981, p. 437). He fears the establishment of uniform procedures on the part of all the credit-issuing banks throughout the world. Furthermore, monopolization of the banks-of-issue in the separate countries would facilitate the uniformity of the procedures. As the banks proceed uniformly, there tends to be a permanent increase of the circulation of fiduciary media, and consequently a fall of the objective exchange value of money (Mises 1981, p. 347). But are the problems of uniformity the only reasons for his support of free banking? Actually, Selgin provides a complementary explanation by pointing out that Mises’s support for free banking is based in part on his agreement with Cernuschi, who (along with Modeste) believed that freedom of note issue would automatically lead 100-percent reserve banking (which is contrary to what Knies advocated). In addition, Mises “believed that free banking will somehow lead to the suppression of fractionally-based inside monies” (Selgin 1988, pp. 62, 164).

8. Conclusion

This paper has compared Mises’s monetary treatise with those of the major German monetary theorists of the nineteenth century, namely Knies, Rau, Roscher, and Wagner. Essential points of Mises’s monetary theory can also be found in the writings of the German economists, in particular in that of Karl Knies.[43] Even if direct influence cannot be proven in all of the cases, it seems plausible that many German ideas found their way into Mises’s work through Menger and Böhm-Bawerk.[44]

However, another purpose of this paper was to show the similarities and differences of the monetary theories of the leading German monetary economists of the nineteenth century compared to Mises’s Theory of Money and Credit in order to understand the lukewarm reception of his first edition.[45] Thus, contrary to what is often supposed with regard to the tradition of the German economists, the nature of money is not explained by the existence of conventional agreements. German monetary theorists were aware of the establishment of money as a natural fruit of indirect exchange and its role as a common medium of exchange. Likewise, Mises’s regression theorem can be found similarly expressed in the writings of these economists. The dynamics of fiduciary media and its dangers were not unfamiliar to the German theorists either. Adolph Wagner was a champion of “Bankfreiheit” and promoted the idea of free banking which is similar to Mises’s approach to state intervention in the banking system, put forth in the second edition of Theory of Money and Credit.

What were the main differences? Mises claimed that any amount of money can serve the needs of society, thereby making a strong argument against state intervention. Free banking disappeared from the German academic scene with the gradual conversion of Adolph Wagner into a full historicist. However, Mises was not in favor of a full free banking system at that time in any case and was only partly skeptical of central banks. The rebuttal of the first edition has to be put into the context of the political environment which was supporting a strong central bank to control the economy, eventually leading to the German hyperinflation in 1923. Not surprisingly, the second edition which was published in 1924, had a much better reception. The German monetary theorists who rejected the first edition so thoroughly eventually disappeared from the forefront of monetary theory and Mises’s treatise of money lived to see a revival in his second edition.

References

Bodin, Jean. 1581. Les six livres de la République. Paris: Chez Jacques du Puys.

Böhm-Bawerk, Eugen von. 1998. Innsbrucker Vorlesungen über Nationalökonomie: Wiedergabe aufgrund zweier Mitschriften / Eugen von Böhm-Bawerk. Hrsg. von Shigeki Tomo. Marburg: Metropolis-Verl.

Cantillon, Richard. 1755. Essai sur le commerce. London: Chez Fletcher Gyles.

Greaves, Bettina. 1993. Mises: An Annotated Bibliography: A Comprehensive Listing of Books and Articles by and About Ludwig von Mises. Irvington-on-Hudson, N.Y.: Foundation for Economic Education.

Helfferich, Karl. 1903. Das Geld. 1st ed. Leipzig: C.L. Hirschfeld.

Hülsmann, Jörg Guido. 2007. Mises: The Last Knight of Liberalism. Auburn, Ala.: Ludwig von Mises Institute.

——. 2012. “The Early Evolution of Mises’s Monetary Thought.” In The Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial. J.G. Hülsmann, ed. Auburn, Ala.: Ludwig von Mises Institute.

Knies, Carl. 1873. Geld und Credit. Darlegungen der Grundlehren von dem Gelde und des Credites. 1. Band. Das Geld. Berlin: Weidmannsche Buchhandlung.

——. 1876. Geld und Credit. Darlegungen der Grundlehren von dem Gelde und des Credites. 2. Band. Der Credit. Berlin: Weidmannsche Buchhandlung.

Law, John. 1720. Considérations sur le numéraire et le commerce. La Haye: Chez Jean Neaulme.

Menger, Carl. 1892. “On the Origins of Money.” Economic Journal 2: 239–55.

Mises, Ludwig. [1912] 2007. Theorie des Geldes und der Umlaufsmittel. 1st ed. Auburn, Ala.: Ludwig von Mises Institute.

——. 1966. Human Action: A Treatise on Economics. 3rd rev. ed. New York: Contemporary Books.

——. 1978. Notes and Reollections. Spring Mills, Penn.: Libertarian Press.

——. 1981. The Theory of Money and Credit. 5th ed. Indianapolis: Liberty Fund.

——. 2006. The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression. Auburn, Ala.: Ludwig von Mises Institute.

Monroe, Arthur. [1923] 2001. Monetary Theory before Adam Smith. Ontario: Batoche Books.

Rau, Karl Heinrich. 1868. Lehrbuch der politischen Ökonomie. Grundsätze der Volkswirthschaftslehre. 8th ed. Leipzig and Heidelberg: Winter’sche Verlagshandlung.

Roscher, Wilhelm. 1854. Die Grundlagen der Nationalökonomie: ein Hand- und Lesebuch für Geschäftsmänner und Studierende. 6th ed. Stuttgart: Verlag der J. G. Cotta’schen Buchhandlung.

Schumpeter, Joseph. 1994. History of Economic Analysis. 12th ed. New York: Routledge.

Selgin, George. 1988. The Theory of Free Banking. Lanham, Maryland: Rowman & Littlefield Publishers.

Smith, Vera. 1990. The Rationale of Central Banking and the Free Banking Alternative. 2nd ed. Indianapolis: Liberty Press.

Streissler, Erich. 1989. The Influence of German Economics on the Work of Menger and Marshall. Duke University Program in Political Economy.

Wagner, Adolph. 1857. Beiträge zur Lehre von den Banken. Leipzig: Leopold Voss.

Wieser, Friedrich. 1903. “Der Geldwert und seine geschichtlichen Veränderungen. Antrittsvorlesung gehalten am 26. Oktober 1903 an der Wiener Universität.” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, pp. 43–63.

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Amadeus Gabriel is a Ph.D. candidate at the University of Angers in France.

[1] On this, the author recommends the outstanding paper “The Influence of German Economics on the Work of Menger and Marshall” by Erich W. Streissler (1989). In this essay, Streissler shows in what way and to what extent the concepts of marginal utility, opportunity cost, Marshall’s demand curve and others can already be found in the writings of German economists. In addition, Streissler comes to the conclusion that “the real revolutionary was Schmoller, not Menger” (Streissler 1989, p. 44).

[2] For instance, Mises states that “It is undeniable that there are some excellent works of a descriptive nature to be found among the huge piles of valueless publications on banking policy of recent years, but it is equally undeniable that with a few honorable exceptions their contribution to theory cannot compare with the literary memorials left by the great controversy of the Currency and Banking Schools” (Mises 1981, p. 381). Later on, he stated with some satisfaction, that “Men such as Knapp, Bendixen, Liefmann, Diehl, Adolf Wagner and Bortkiewicz who then were celebrated in Germany as ‘monetary theorists’ are no longer considered authorities” (Mises 1978, p. 61) .

[3] Mises quotes Knies no less than ten times, Wagner five times, Helfferich four times, Roscher twice, and Rau only once. The high number of references to the work of Knies confirms (even in the case in which the quotations serve as a form of criticism) of his influence in the writings of Mises. All things considered, it is without a doubt evidence that Mises was familiar with the writings of the German economists.

[4] On this, cf. for example Otto Hübner, Johann Louis Tellkampf, Adolf Wagner, and so forth.

[5] I do not want to imply that the German economists were the originators of these ideas. Many of these concepts had appeared earlier. For instance, Monroe (2001); Schumpeter (1994) treat in much detail the theoretical developments in monetary analysis by authors such as Bodin, Cantillon, Law, and others. This paper focuses on the German economists as I attempt to understand the rebuttal of Mises’s first edition by the German academia. Yet, in some places, I point out the original authors to avoid any confusion.

[6] Wagner was one of the major figures, together with Knies, in the discussion about free banking versus central banking (Smith 1990, p. 79).

[7] In German: “Die einfache Umschreibung der volkswirtschaftlichen Funktion des Geldes, dass es ein den Austausch von Gütern und Dienstleistungen vermittelndes Verkehrsgut sei, konnte alle jene nicht befriedigen, welche in der Wissenschaft nicht so sehr die Tiefe der Erkenntnis als die Fülle von Material suchen” (Mises 1912, p. 10).

[8] In German: “Der Gebrauch des Geldes ist nicht das Ergebnis einer besondern Uebereinkunft der Menschen und nicht Folge einer gesetzlichen Vorschrift des Staates. Er wächst vielmehr überall als eine natürliche Frucht des Tauschverkehres an sich” (Knies 1873, p. 107). All translations are by the author of the essay.

[9] As Knies, Mises points out that “If in this sense we wish to attribute to money the function of being a measure of prices, there is no reason why I should not do so” (Mises 1981, p. 62).

[10] Actually, this differs only slightly from what Menger said: “On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law” (Menger 1892, sec. IX).

[11] In German: “Man muss daher vermuten, dass eine allgemein beliebte und gesuchte Waare allmälig immer häufiger auch von solchen Personen im Verkehre angenommen wurde, die sie nicht selbst gebrauchen wollten, dass sie auf diese Weise nach und nach die Natur des Geldes erhielt und hiebei auch stufenweise der hieraus entspringende Nutzen deutlicher erkannt wurde” (Rau 1868, p. 317).

[12] Mises elaborates on this point more thoroughly and more precisely in his later works (cf. Mises 1966).

[13] This term only appeared in Mises (1966).

[14] This approach can be found in earlier writings by authors like John Law (cf. for example Law 1720).

[15] In German: “Wir müssen vielmehr vor Allem grade fragen: Kann denn eine Staatsgewalt, und wäre sie die gewaltsamste und hartnäckigste, einem Gegenstand, der als solcher für das Wirthschaftsleben der Menschen keinen Tauschwerth hat, mittels einer Vorschrift Tauschwerth schaffen?” (Knies 1873, p. 189).

[16] In German: “Die Staatsgewalt könnte grade so gut erklären, ein Berg sei doppelt so hoch, als er in Wirklichkeit ist, oder zwei Pfund seien sechs Pfund” (Knies 1873, p. 189).

[17] Menger (1892) endorses the stabilization of the inner objective exchange value of money, which corresponds, to a great extent, to the views of Knies.

[18] Mises talks about this point in the first edition (Mises 1912, pp. 222–25), but it is only in the second edition that he makes such a clear-cut statement.

[19] As Monroe (2001, pp. 56, 58) points out, although there are some vague allusions in the Spanish Scholastics, Bodin (1581) is still the father of quantity theorizing. However, Cantillon (1755) is one of the first economists (together with John Locke or Bernardo Davanzati), to treat the topic of velocity in more detail. Rau cites him for this reason (Rau 1868, p. 245).

[20] Rau establishes the following equation: u · g = w · p, where u is the average velocity of the money (mittlere Umlaufszahl des Geldes); g is the quantity of money (Geldmenge); w is the turned over quantity of goods and services (umgesetze Menge von Gütern und Leistungen) and p is the price level (Preisniveau). Hence, this example shows clearly to what extent the ignorance of German Economics is prevalent in the Anglo-Saxon perception of the history of economic thought. This finding has already been pointed out in the writings of other economists (ia. Streissler). For a more detailed analysis of the influence of German Economics on Marshall (in particular his demand curve), refer to Streissler (1989).

[21] Böhm-Bawerk (1998, p. 217) writes for example: “Every quantity of money has the capacity to meet the national demand for money fully in the same way.” (Jede Quantität von Geld ist dem Geldbedarf eines Volkes in völlig gleicher Weise zu genügen im Stande.)

[22] “Es leuchtet somit ohne weiteres ein, dass der Geldbedarf einer Volkswirtschaft im weiteren Sinne nicht als die Summe des Bedarfes der Einzelwirtschaften an Geld und Geldsurrogaten erscheinen kann, weil durch die Zahlung des Bedarfes sowohl an Geldzertifikaten als auch an jenem Gelde, das als Deckung dieser bei den Banken usw. dienen soll, eine zweimalige Einstellung eines und desselben Postens erfolgen würde” (Mises 1912, pp. 144–45).

[23] In German: “Zunächst muss festgestellt werden, dass die Grösse des Geldvorrates und des Wertes der Geldeinheit für die Grösse der vom Geldgebrauche ausgehenden Nutzwirkung überhaupt gleichgültig ist. Die Volkswirtschaft steht stets im Genusse der grössten durch das Geld erreichbaren Nutzwirkung. Die Hälfte des der Volkswirtschaft zur Verfügung stehenden Geldvorrates wurde auch dann die gleiche Nutzwirkung vollbringen wie der ganze Vorrat, wenn die Veränderung des Wertes der Geldeinheit nicht proportional zu der Veränderung der Grösse des Vorrates eintritt” (Mises 1912, p. 156).

[24] These reservations already diminished in the second edition of his Theory of Money and Credit are almost completely gone in his magnum opusHuman Action (Mises 1966).

[25] Roscher is the only author who mentions Richard Cantillon (cf. Cantillon 1755) in his work (Roscher 1854, p. 245).

[26] In German: “. . . folglich der Preis der verschiedenen im Verkehre befindlichen Gegenstände kann nicht in gleichem Verhältnis steigen, einige werden früher und stärker, andere später und schwächer vertheuert, es entstehen daher viele Missverhältnisse, wobei Einzelne gewinnen, anderen namentlich die Besitzer grosser Geldsummen, die Gläubiger, die Angestellten, ansehnlich verlieren” (Rau 1868, p. 378).

[27] In German: “uneinlösliches Papiergeld mit Zwangscurs gegen Jedermann.”

[28] As shown in Monroe (2001, p. 78), Bodin already pointed out that creditors especially suffer when prices rises, but this insight only spread in later times.

[29] Phillipp Geyer, a German banking theorist who published his “Banken und Krisen” in 1865, actually formulated a theory which resembled, to some exten, the circulation credit theory of Ludwig von Mises. As Smith (1990, p. 78) observes, Geyer identified two major drawbacks of the banking system. “First, that it provides the material for trade crises and production cycles by producing ‘artificial capital’ up to a point where there is an excessive amount of capital in existence, and, secondly, that having produced the crisis, it intensifies it by contracting credit and causing forced sales.” However, this theory was not fully developed and the explanation had its roots in underconsumption.

[30] In German: “Man findet sich plötzlich der dämonischen Herrschaft unbekämpfbarer Zufälle preisgegeben, die man als ein bezeichnendes Merkmal ‘barbarischer’ Zustände für wirthschaftlichen Verkehr anzusehen gelernt hatte. Unsicherheit des Vermögens und des Erwerbs greift Platz, trotzdem dass Policei und Gerichte nach wie vor ihres Amtes warten. Der auf erprobten Wegen wandelnde Fleiss, die angestrengte Arbeit auf wohlbekannte Ziele hin sind gelähmt, den ‘Abenteuern’ weit und breit Thor und.Thür geöffnet. Auch derjenige Gewinn, welcher Ergebniss vorschauender Berechnung ist, wird nur durch den Verlust Anderer erworben. Niemand ist der Staatsregierung dankbar für seinen unverdienten Gewinn und Jeder klagt sie an ob seines unverdienten Verlustes. War es nicht eine ihrer wichtigsten Aufgaben, für die Richtigkeit des Geldes einzustehen? Aber wie oft, wie zutreffend, wie übereinstimmend sind solche Wahrnehmungen über die Folgen eines entwertheten Papiergeldes ausgesprochen worden! (1873, pp. 282).

[31] In German: “Das in Preisschwankung gerathene Papiergeld ist ein Tauschmittel geworden, dessen Verkehrswerth von jedem Abnehmer neu festgestellt werden sollte, während die grosse Masse der Verkehrenden gar nicht in der Lage ist, diese Prüfung vornehmen zu können” (1873, p. 284).

[32] In German “Wenn die Umlaufsmittel als Geldsurrogate alle Dienste des Geldes leisten, wenn sie den Geldvorrat der Menschen im weiteren Sinne vermehren, dann muss ihre Ausgabe von entsprechenden Einwirkungen auf die Gestaltung des zwischen dem Gelde und den übrigen wirtschaftlichen Gütern bestehenden Austauschverhältnisses begleitet sein” (1912, p. 363).

[33] In German: “Nicht das ist dem Gelde allein eigentümlich, dass fällige sichere Geldforderungen im Verkehre gerade so hoch geschätzt werden wie die Geldbeträge, auf die sie lauten, vielmehr das, dass solche Forderungen als vollkommene Surrogate des Geldes alien Dienst des Geldes in jenen Marktgebieten, in denen ihre wesentlichen Eigenschaften: Fälligkeit und Sicherheit, erkannt sind, ohne vorherige Realisierung ver- sehen konnen. Auf diesem Umstande erst beruht die Möglichkeit, mehr derartige Surrogate auszugeben, als der Emittent jederzeit einzulosen in der Lage ist. Neben das Geldzertifikat tritt das Umlaufsmittel” (Mises 1912, p. 306).

[34] In German: “Die jederzeit einlösliche Note einer solventen Bank ist als Umlaufsmittel im Verkehre überall an Stelle des Geldes verwendbar, und niemand macht daher einen Unterschied, ob er in seiner Kasse Geld oder Noten liegen hat. Die Note ist gerade so ein gegenwärtiges Gut wie etwa das Geld” (Mises 1912, p. 311).

[35] In German: “Da jedoch das Angebot dieser Gegenstände bei einer beträchtlichen Geldvermehrung nicht schnell genug vergrössert werden kann, so muss der Preis derselben steigen, und es wird daher als eine Schwierigkeit empfunden, die neuen Geldsummen vortheilhaft anzulegen, auch sinkt im Anfange der Geldvermehrung der Zinsfuss auf einige Zeit” (Rau 1868, p. 375).

[36] In German: “Jedermann gesteht sofort zu, dass es unzulässig ist, den Verkäufern, “der Freiheit wegen,” den Gebrauch verschiedenster Maasse und Gewichte zu gestatten, und dass keinem Empfänger einer gekauften Waare ein Nachtheil aus einer Unzuverlässigkeit der Maasse und Gewichte erwachsen soll. In der That, es giebt kein Recht aller zur Beschaffung von Maassen und Gewichten, welche als solche im allgemeinen Verkehr gebraucht werden sollen. Ebensowenig dürfen die Privatpersonen für berechtigt gelten, die in dem gesammten Wirthschafts- und Rechtsleben eines Volkes ununterbrochen zu handhabenden Werth- “Maasse und Gewichte” in Concurrenz mit der Staatsgewalt darzubieten (Knies 1873, p. 294).

[37] In German: “die Ausgabe von Scheinen, welche thatsächlich wie Geld in der ganzen Masse des Volkes in Gebrauch gekommen sind, ist keine Aufgabe privatgeschäftlicher Industrie zur Erzielung von Unternehmeinkommen” (Knies 1873, p. 306).

[38] In German: “Die unselige Erbschaft aus den letzten Jahren und Jahrzehnten der einzelnstaatlichen Behandlung der “Bankpolitik” ist einmal da; das vorhandene aufdringliche Notenproletariat hat regelrechte Ursprungszeugnisse und Heimathschein (Knies 1873, p. 312).

[39] A topic which eventually was treated in detail by Selgin (1988).

[40] However, Wagner would still prefer such a system to that proposed by Peel. Even though the one-third ratio was arbitrary, it was still less constraining for banks.

[41] Wagner still favored the free banking system to a larger extent.

[42] The newer generation of the German Historical School, represented by Knapp, Somary, and Lotz were all in favor of central banking and criticized Theory of Money and Credit in their reviews (see Greaves 1993).

[43] The author would like to point out that Knies has been quoted ten times after all.

[44] On the influence of Menger and Böhm-Bawerk on Mises, cf. Hülsmann 2007.

[45] Again, it is not my claim that the German economists were the orginators of all these theories.