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The Causes of the Economic Crisis THE CAUSES OF THE ECONOMIC CRISIS AND OTHER ESSAYS BEFORE AND AFTER THE GREAT DEPRESSION LUDWIG VON MISES The Ludwig von Mises Institute dedicates this volume to all of its generous donors and wishes to thank these Patrons, in particular: Reed W. Mower ~ Hugh E. Ledbetter; MAN Financial Australia; Roger Milliken; E.H. Morse ~ Andreas Acavalos; Toby O. Baxendale; Michael Belkin; Richard B. Bleiberg; John Hamilton Bolstad; Mr. and Mrs. J.R. Bost; Mary E. Braum; Kerry E. Cutter; Serge Danilov; Mr. and Mrs. Jeremy S. Davis; Capt. and Mrs. Maino des Granges; Dr. and Mrs. George G. Eddy; Reza Ektefaie; Douglas E. French and Deanna Forbush; James W. Frevert; Brian J. Gladish; Charles Groff; Gulcin Imre; Richard J. Kossmann, M.D.; Hunter Lewis; Arthur L. Loeb; Mr. and Mrs. William W. Massey, Jr.; John Scott McGregor; Joseph Edward Paul Melville; Roy G. Michell; Mr. and Mrs. Robert E. Miller; Mr. and Mrs. R. Nelson Nash; Thorsten Polleit; Mr. and Mrs. Donald Mosby Rembert, Sr.; top dog™; James M. Rodney; Sheldon Rose; Mr. and Mrs. Joseph P. Schirrick; Mr. and Mrs. Charles R. Sebrell; Raleigh L. Shaklee; Tibor Silber; Andrew Slain; Geoffry Smith; Dr. Tito Tettamanti; Mr. and Mrs. Reginald Thatcher; Mr. and Mrs. Loronzo H. Thomson; Jim W. Welch; Dr. Thomas L. Wenck; Mr. and Mrs. Walter Woodul, III; Arthur Yakubovsky ~ Mr. and Mrs. James W. Dodds; Francis M. Powers Jr., M.D.; James E. Tempesta, M.D.; Lawrence Van Someren, Sr.; Hugo C.A. Weber, Jr.; Edgar H. Williams; Brian Wilton THE CAUSES OF THE ECONOMIC CRISIS AND OTHER ESSAYS BEFORE AND AFTER THE GREAT DEPRESSION LUDWIG VON MISES Edited by Percy L. Greaves, Jr. Ludwig von Mises Institute AUBURN, ALABAMA On the Manipulation of Money and Credit © 1978 by Liberty Fund, Inc. Reprinted by permission. Originally published as On the Manipulation of Money and Credit in 1978 by Free Market Books. Translated from the original German by Bettina Bien Greaves and Percy L. Greaves, Jr. The Mises Institute would like to thank Bettina Bien Greaves for her sup- port and interest in this new edition. Foreword and new material copyright © 2006 by the Ludwig von Mises Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of quotes in the context of reviews. For information write the Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832; www.mises.org. ISBN: 1-933550-03-1 ISBN: 978-1-933550-03-9 CONTENTS FOREWORD by Frank Shostak....................................................................xi INTRODUCTION by Percy L. Greaves, Jr. ............................................ xiii CHAPTER 1—STABILIZATION OF THE MONETARY UNIT —FROM THE VIEWPOINT OF THEORY (1923) ....................................1 I. The Outcome of Inflation ............................................................2 1. Monetary Depreciation ............................................................2 2. Undesired Consequences ........................................................6 3. Effect on Interest Rates ............................................................7 4. The Run from Money ..............................................................8 5. Effect of Speculation ................................................................9 6. Final Phases ..............................................................................10 7. Greater Importance of Money to a Modern Economy ..12 II. The Emancipation of Monetary Value From the Influence of Government ........................................14 1. Stop Presses and Credit Expansion ....................................14 2. Relationship of Monetary Unit to World Money —Gold........................................................................................15 3. Trend of Depreciation ............................................................16 III. The Return to Gold ....................................................................18 1. Eminence of Gold....................................................................18 2. Sufficiency of Available Gold................................................19 IV. The Money Relation ....................................................................21 1. Victory and Inflation ..............................................................21 2. Establishing Gold “Ratio” ......................................................22 V. Comments on the “Balance of Payments” Doctrine ..........25 1. Refined Quantity Theory of Money ....................................25 v vi — The Causes of the Economic Crisis 2. Purchasing Power Parity ..................................................26 3. Foreign Exchange Rates ..................................................27 4. Foreign Exchange Regulations ......................................29 VI. The Inflationist Argument ..................................................31 1. Substitute for Taxes ..........................................................31 2. Financing Unpopular Expenditures ..............................32 3. War Reparations................................................................34 4. The Alternatives................................................................35 5. The Government’s Dilemma ..........................................37 VII. The New Monetary System ................................................39 1. First Steps ..........................................................................39 2. Market Interest Rates ......................................................41 VIII. The Ideological Meaning of Reform ..................................43 1. The Ideological Conflict..................................................43 Appendix: Balance of Payments and Foreign Exchange Rates..................................................................44 CHAPTER 2—MONETARY STABILIZATION AND CYCLICAL POLICY (1928) ............................................................................53 A. Stabilization of the Purchasing Power of the Monetary Unit ........................................................................57 I. The Problem ............................................................................57 1. “Stable Value” Money ......................................................57 2. Recent Proposals ..............................................................58 II. The Gold Standard..................................................................60 1. The Demand for Money..................................................60 2. Economizing on Money ..................................................62 3. Interest on “Idle” Reserves..............................................65 4. Gold Still Money ..............................................................67 III. The “Manipulation of the Gold Standard” ......................68 1. Monetary Policy and Purchasing Power of Gold ......68 2. Changes in Purchasing Power of Gold ........................71 Contents — vii IV. “Measuring” Changes in the Purchasing Power of the Monetary Unit ................................................73 1. Imaginary Constructions ................................................73 2. Index Numbers..................................................................77 V. Fisher’s Stabilization Plan ......................................................80 1. Political Problem ..............................................................80 2. Multiple Commodity Standard......................................81 3. Price Premium ..................................................................82 4. Changes in Wealth and Income ....................................85 5. Uncompensatable Changes ............................................86 VI. Goods-Induced and Cash-Induced Changes in the Purchasing Power of the Monetary Unit ..........................88 1. The Inherent Instability of Market Ratios ..................88 2. The Misplaced Partiality to Debtors ............................91 VII. The Goal of Monetary Policy ..............................................93 1. Liberalism and the Gold Standard ................................93 2. “Pure” Gold Standard Disregarded ..............................94 3. The Index Standard..........................................................96 B. Cyclical Policy to Eliminate Economic Fluctuations ................97 I. Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle ............................................................97 1. Currency School’s Contribution ....................................97 2. Early Trade Cycle Theories ............................................99 3. The Circulation Credit Theory....................................101 II. Circulation Credit Theory ..................................................103 1. The Banking School Fallacy ........................................103 2. Early Effects of Credit Expansion ...................................... 3. Inevitable Effects of Credit Expansion on Interest Rates ............................................................105 4. The Price Premium ........................................................109 5. Malinvestment of Available Capital Goods................................................................................109 viii — The Causes of the Economic Crisis 6. “Forced Savings”..............................................................111 7. A Habit-forming Policy ................................................113 8. The Inevitable Crisis and Cycle ..................................113
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