Introduction

In December of 1911, Ludwig von Mises finished revising the proof pages of his Theorie des Geldes und der Umlaufsmittel. He had worked on the book for most of the previous six years, and he had also submitted the manuscript to the University of Vienna as a habilitation thesis in order to obtain the much-coveted license to lecture on the university level (venia legendi). A few months later, he would hold the first copies in his hands. At the mere age of 30, he had published a great treatise, the first out of four such works that he would publish in his life-time, in addition to a plethora of smaller books, pamphlets, and articles.[1]

His book was a magnificent synthesis of six strands of literature that hitherto had only been very loosely connected: (1) the classical theory of money, most notably in its Ricardian coloration; (2) the mid-nineteeth century debate revolving around currency and banking principles; (3) the standard German textbooks on money and banking, including works by Adolf Wagner, Carl Knies, and Wilhelm Lexis; (4) the works of the Austrian School pertaining to subjective value, prices, capital, and money; and (5) the recent literature on money and banking at the onset of the twentieth century, including the writings of Knut Wicksell, Irving Fisher, and Carl Helfferich. Mises also paid due attention to (6) the publications of the most important money cranks (Geldreformer)—authors such as Pierre-Joseph Proudhon, Silvio Gesell, and Ernest Solvay—who proposed to heal all sorts of economic ills through policies designed to increase aggregate monetary spending. At the time their ideas had been rejected out of hand by academic economists. Nevertheless they continued to have a significant impact on the larger public, not least of all because nobody bothered to refute them by following their arguments to their ultimate conclusion.

The visible ambition behind the Theorie des Geldes und der Umlaufsmittel was to integrate all the valid elements in the previous literature into one coherent and systematic whole, to build this theory up from first principles—that is, from Carl Menger’s theory of value—and to root out the most important errors about money and banking in the light of the new synthesis. Mises’s treatise closed a century of monetary thought. In the same breath, it opened up new areas for the future development of economic theory, most notably in the fields of economic calculation, business accounting, expectations, business cycles, currency competition, monetary interventionism, and monetary reform.

One of the great misfortunes of the twentieth century was that Mises’s book was not published some thirty or forty years earlier. Fundamentally new ideas need at least a generation or two to become the majority opinion among the experts, and thus to have any practical impact. The Wealth of Nations (1776) had such an impact only as from the 1840s, after many years of vociferous and strong support from outstanding economists such as David Ricardo, James Mill, and Jean-Baptiste Say. Mises did not have such support. The wrong ideas that he had very effectively refuted—most notably, the ideas of the Banking School—enjoyed the support of John Stuart Mill and other respected economists. They had already begun to work their way through the minds of academia and politics. By the time Mises published his treatise, this ill-fated movement was in full swing and had conquered the hearts and minds of the new generation. John Maynard Keynes read and even appreciated Mises’s book, but all in all he considered it to be old-fashioned. However, he later confessed that his German language skills were superficial.[2] Irving Fisher had worked for many years on turning economics into a quantitative discipline, and many others had joined their forces. They would not be deterred because of some difficulties on the level of basic theory, such as the ones Mises had highlighted in his treatise.

As a consequence, for many years, the Theorie des Geldes und der Umlaufsmittel has been read, studied, criticized, and developed mainly by Mises’s own students. F.A. Hayek and Fritz Machlup in the interwar period, and Hans Sennholz, Murray Rothbard, and George Reisman after WWII were first in line. They preserved the Misesian approach throughout the dark ages of socialism and rampant interventionism.

But even the most ardent love for their teacher could not have kept the flame alive. The growth of attention to Mises’s monetary treatise—slow for many years, almost explosive within the past two decades—has been spurred by two other forces.

The first one is the power of truth. Mises’s book is not just a very solid piece of scholarship, both in its factual foundation and in its argument. It is also original, written with a philosophical bent and with an astounding knowledge of the history of money and banking. Its judgements are amazingly mature for an author of barely thirty years of age. These qualities give it unequalled depth, width, and balance. They have attracted readers all throughout the past century, and even in its darkest hours. The book has been in print almost without interruption and was translated into six languages. Of particular interest is the English translation by Harold E. Batson, first published in 1934 in London by Jonathan Cape and republished in all subsequent American editions.[3] The book was also translated into Spanish,[4] Japanese,[5] Chinese,[6] Russian,[7] and French.[8] Even the second German edition of 1924 (without the fourth part of the American editions) has recently been reprinted by the original publisher (Berlin: Duncker & Humblot, 2005).

The second force sustaining interest in Mises’s book is, ironically, the almost complete neglect of its content in mainstream thought. In the post-WWII era, academic monetary economists have turned themselves into handmaidens of central banks and other monetary authorities. In their quest to be “practical” and “relevant” they have neglected to study, and to question, the theoretical foundations of the “conventional” approach that they had inherited from the Banking School. As a consequence, they have eventually adopted a great number of the inflationist ideas of the nineteenth century. Some of those who a century ago would have been considered to be cranks are today respected academic experts on money and banking.

Unsurprisingly, we have trodden down the expansionary-monetary-policy-road all the way to its logical dead end. One hundred years of monetary experiments and manipulations have not ushered into a brave new world of growth, stability, and liberty. Rather, in all countries they have produced rampant cronyism, uncontrolled growth of the state, economic and political dependence of the great mass of the population, comparatively sluggish growth even in the midst of enormous technological progress, and never-ending sequences of booms and busts.

This sorry state of affairs invariably raises questions about the state of economic knowledge. Those who ask such questions are likely to end up reading Mises. Whoever is earnest enough to enquire into the shortcomings of contemporary mainstream economics, and to look for alternatives, is likely to encounter the Theorie des Geldes und der Umlaufsmittel or some of the works it has inspired.

In a word, Mises’s book is a classic, but it is more than a classic. It is of current interest, and will remain so, as long as the majority of the economists rely in their monetary thought precisely on those wrong foundations that Mises demolished once and for all in 1912. Its current interest will actually grow if professors of economics think they can go on writing, teaching, and counselling without doing their homework. It will grow unless they start reading Mises, and the literature he quotes, and the literature he has inspired.

Unfortunately, such a change of heart is nowhere near in sight. At the very moment of this writing, two eminent academic economists in the United States have gone to some length trying to discredit Mises’s monetary thought—which they believe to be the intellectual backbone of a political campaign that they despise—yet without making the slightest effort to acquaint themselves with the views they are attacking. One of them even surmises that Mises’s opposition to fraction-reserve banking “springs out of Medieval Christian (and earlier) condemnations of usury as unjust enrichment.” He then goes on to speculate on “where von Mises is coming from,” again, without taking the time to actually read and study any of Mises’s writings, except for short paragraphs quoted seemingly at random. Unsurprisingly, he ends up imputing all kinds of views to Mises that the latter did not endorse at all, for example, the view that fractional-reserve bankers are inherently fraudulent: “These people, Ludwig von Mises says, are thieves: thieves pure and simple.” Or, another half-baked characterization, this time of Mises’s business-cycle theory: “And, Ludwig von Mises would say, the larger the unbacked circulating medium the bigger the lie and the theft. It is all guaranteed to end in tears. Whenever society thinks that it is richer than it is, plans will be inconsistent and unattainable. When that unattainability becomes manifest, that will trigger the crash and the depression. That is, I think, where von Mises is coming from.”[9]

Admittedly, these statements were made in a journalistic publication. But even so they do betray a sorry lack of erudition and integrity. It can only be hoped that the rising generation of academic economists will not follow this example.

Fortunately, Mises’s monetary thought is being carefully studied by a growing number of scholars—many at the beginning of their career—from all over the world. The following pages feature thirteen essays written in celebration of the centennial of the first publication of the Theorie des Geldes und der Umlaufsmittel. Accordingly, the title of the present volume—Theory of Money and Fiduciary Media—is the literal translation of that original German title, which unfortunately had not been used for the English edition of 1934, and for all subsequent American editions.[10]

Most of the following papers (chapters 1, 2, 5, 6, 7, 9, 12, and 13) were presented at a symposium within the Austrian Scholars Conference in Auburn, Alabama on March 8-10, 2012. Chapters 4 and 11 were prepared for that symposium, but could not eventually be presented there for technical reasons. And chapters 3, 8, and 10 were solicited from their authors after the symposium as a complement for the present volume.

Our opening chapter outlines the logical structure of Mises’s book and highlights the evolution of his monetary thought, with special emphasis on the changes between the two German editions of his treatise, and on its English translation. One main finding is that Mises’s arguments initially revolved around the so-called inner exchange value of money, whereas in later works he criticized the pertinence of that perspective and focused more on the question of how money is being produced (competitively or monopolistically).

In the second chapter, Amadeus Gabriel studies the continuities and differences between Mises’s treatise and the standard German-language textbooks on money and banking in the late nineteenth and early twentieth century. He highlights several intriguing facts, most notably, that these forerunners were well acquainted with the existence and relevance of Cantillon effects, and with the idea that the use-value of money was a function of its previous purchasing power. However, they did not endorse the monetary axiom of Hume, Ricardo, and the Currency School according to which the size of the money stock was essentially unrelated to the production of wealth.

Malavika Nair stresses the importance of Mises’s subjectivist typology of money for current historical research and she traces the basic distinction between money and money substitutes back to Eugen von Böhm-Bawerk’s economic analysis of legal rights and legal obligations (chapter 3). She points out that Böhm-Bawerk had elaborated his own theory starting from a critical discussion of the monetary theories of John Law and Henry D. Macleod.

In the subsequent chapter 4, Mateusz Machaj revisits one of Mises’s neglected achievements in the Theorie des Geldes und der Umlaufsmittel, namely, the transformation of Carl Menger’s theory of value. Mises based the theory of subjective value squarely on the phenomenon of choice. At his hands it became so-to-say a decisional theory of value. Machaj compares this approach to the present-day neoclassical approach. He stresses the fact that, in the Misesian framework, subjective value is context-dependent, whereas in the neoclassical framework it is an ultimate given. He highlights the implications for the debate on economic calculation in socialist economies.

Joseph T. Salerno revisits the on-going debate on free banking and examines the question whether Mises’s monetary thought stands in the tradition of the Currency School (chapter 5). He emphatically answers this question affirmatively. However, he underscores that Mises, at least in the more mature exposition of his theory of money in Human Action, did not endorse the typical policy stance of the Currency School. Rather, he became a champion of free banking precisely because he expected free banking to limit the money supply much more effectively than any government intervention.

In chapter 6, Matthew McCaffrey sets forth an in-depth study of three young Viennese authors who in the early twentieth century became famous for their treatises on money and banking: Schumpeter, Hilferding, and Mises. Most notably he examines the question to which extent these writers worked in the continuity of the nineteenth century debate between the Currency School and the Banking School. He finds that Mises was essentially a representative of the Currency School, Hilferding a champion of the Banking School, whereas Schumpeter occupied some intermediate position. Intriguingly, all three authors tried to complement the earlier theories by focusing on the dynamic transformation of the economy resulting from changes in monetary conditions.

Switching from the history of thought to philosophy, Gary North takes issue with the epistemological status of one of Mises’s most famous monetary theorems, namely, the regression theorem (chapter 7). He argues that this theorem cannot be deduced from the logical structure of human action. It is not part of praxeology. Rather, it is more akin to some sort of conjectural history, or to “developmentalism” as understood by Robert Nisbet.

The next paper (chapter 8) stresses the relevance of Mises’s theory of international monetary relations for the present-day debate on international competitiveness. David Howden argues that Mises anticipated most of the later literature in focusing his analysis on individual prices, expectations, and exchange rates. Mises’s argument that expansionary monetary policy was not likely to increase a country’s competitiveness was reinforced through later refinements of his business cycle theory. Still, Howden states that Mises never got to integrating these two elements cohesively and completely.

The next three chapters revolve around one of the most important achievements of Mises’s treatise, namely, his theory of economic crises. In chapter 9, Eduard Braun argues that the presentation of this theory in Human Action (1949) does not rely on the core concept of the subsistence fund, used by previous authors such as the classical economists and also by Böhm-Bawerk. As a consequence, the explanation of the turning point of the business cycle becomes unconvincing. The original exposition of the theory in the Theorie des Geldes und der Umlaufsmittel did not suffer from this shortcoming and must therefore be considered to be superior to his later work, at least in that regard. It was also the starting point for refinements of Mises’s theory by F.A. Hayek and Richard von Strigl.

Nikolay Gertchev extends Mises’s theory of banking by considering the impact of the inter-bank market on fractional-reserve banking (chapter 10). He argues that inter-bank loans are foundational for the latter, that is, fractional-reserve banking could not get off the ground without relying on an inter-bank loan market. Moreover, Gertchev points out that the very existence of an inter-bank market tends to destroy any limitations on the overall issue of fiduciary media within a fractional-reserve banking system. Despite Mises’s and Rothbard’s contentions to the contrary, free banking would therefore not be a suitable institutional arrangement to limit the expansion of the money supply.

In chapter 11, Philipp Bagus compares Mises’s business cycle theory with the prevailing conceptions of booms and busts in our day. He considers Friedman’s plucking model, equilibrium business cycle theory, real business cycle theory, new Keynesian business cycle theory, and Minsky’s financial instability hypothesis. Bagus comes to the stern conclusion that what is valid in the present-day theories has been stated more pertinently in Mises’s framework, whereas the genuinely new elements in contemporary business-cycle theory are unacceptable, lacking as they are in coherence and realism. According to Bagus, this explains the current popularity of the Austrian approach among market analysts.

The next paper sets out for a similar comparison, but from a more fundamental point of view. Examining present-day textbooks on money, Renaud Fillieule raises the question whether and to which extent these works come to grips with a number of basic insights that can be found in Mises’s one-hundred-year-old treatise (chapter 12). He focuses on the functions of money, the typology of money, the determination of the purchasing power of money, the demand for money, and the neutrality of money. Fillieule comes to the startling conclusion that there is an inverse relationship between the sophistication of a present-day text and its pertinence on those issues. The more “advanced” texts tend to be more deficient than the more elementary ones.

In the final chapter of the present volume (chapter 13), Thorsten Polleit reviews Mises’s arguments against central banking, as exposed in his monetary treatise, and compares them with present-day mainstream theoretical arguments in favor of central banking, both on economic and ethical grounds. He focuses in particular on price-level stabilization policies, on the destabilizing effects of central banking, and on the regression theorem. Polleit concludes that on each account, Mises’s case is stronger than the case for central banking.

Current research in Austrian economics is still very much indebted to, and inspired by, Ludwig von Mises’s foundational works, most notably his theory of money and fiduciary media. Looking back at this masterful treatise, reviewing it with a critical eye, informed by the experience of the past century, is like a journey back to one’s roots. It is patent that these roots still nourish, and will continue to feed, the theory of money and banking in the twenty-first century. It is therefore our hope that the works contained in the present book will provide useful starting points for future research and the further growth of the Austrian School.

Jörg Guido Hülsmann

Angers, 10 October 2012

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[1] The other three treatises are Socialism (Indianapolis: Liberty Fund, 1981), Human Action (Auburn, Ala.: Mises Institute, 1998), and Theory and History (Auburn, Ala.: Mises Institute, 1985). See the complete Mises bibliography at http://mises.org/misesbib.asp. For general biographical information on Mises see Murray Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Mises Institute, 1988), Israel Kirzner, Ludwig von Mises: The Man and His Economics (Wilmington, Del.: ISI Books, 2001), and J.G. Hülsmann, Mises: The Last Knight of Liberalism (Auburn, Ala.: Mises Institute, 2007).

[2] Keynes had written a book review of Mises’s treatise, stating it “is the work of an acute and cultivated mind. But it is critical rather than constructive, dialectical and not original. The author avoids all the usual pitfalls, but he avoids them by pointing them out and turning back rather than by surmounting them.” (Economic Journal, September 1914, p. 417). Sixteen years later he stated that “in German, I can only clearly understand what I know already!—so that new ideas are apt to be veiled from me by the difficulties of language.” Keynes, A Treatise on Money (London: Macmillan, 1930), vol. I, p. 199, note 2.

[3] The 1953 edition (New Haven, Conn.: Yale University Press) included an additional fourth part on “monetary reconstruction” that Mises had written for this new edition. In that form the book was published again three more times: 1971 (Irvington-on-Hudson, N.Y.: Foundation for Economic Education; second print in 1978), 1981 (Indianapolis: Liberty Fund), and 2009 (Auburn, Ala.: Mises Institute).

[4] Several Spanish translations (La Teoría del Dinero y Del Crédito) have been made: one by Antonio Riaño, published in 1936 (Madrid: M. Aguilar), one by José Ma. Claramunda Bes (Barcelona: Ediciones Zeus, 1961), and one by Juan Marcos (Madrid: Union Editorial, 1997).

[5] The Japanese translation was made from the second German edition by Yoneo Azuma: Kahei oyobi Ryütüjshudan no Riron (Tokyo: Jitsugyo no Nipponsha, 1949) and re-published in 1980 (Tokyo: Nihon Hyöron-Sha).

[6] Translated by H.P. Yang (Taiwan: Taiwan Bank, Economic Research Department, 1969).

[7] The Russian translation, along with annotations, was made by G. Sapov who used both the American edition and the second German edition: Теория денег и кредита (Chelyabinsk: Sotsium, 2012).

[8] The French edition (La Théorie de la monnaie et du crédit) is incomplete and only available on the Internet (http://herve.dequengo.free.fr/Mises/Tmc/TMC_1_1.htm). A print edition is forthcoming along with a preface from Antoine Gentier (Paris: Editions de l’Institut Charles Coquelin).

[9] Brad Delong, “Paul Krugman Asks a Question: On the ‘Austrian’ Hatred of Fractional Reserve Banking, Paper Money, etc. Weblogging” (http://delong.typepad.com/sdj/2012/09/paul-krugman-asks-a-question-on-the-austrian-hatred-of-fractional-reserve-banking-paper-money-etc-weblogging.html#more; accessed on 3 October 2012, at 9h32 CET)

[10] On the shortcomings of the Batson translation, see chap. 1, below.