Much of the Austrian School Critique of Monetary Policy in the 1920s Could Be Replicated Against the Greenspan-Bernanke Federal Reserve

Yet there are echoes of the earlier monetary catastrophe in the present-day monetary tumult (or catastrophe?) which are eerie and troubling for those who believe strongly in human progress. Here was a renowned professor in monetary economics at the head of the Federal Reserve, who on the occasion of Milton Friedman’s ninetieth birthday party had said that the monetary mistakes which surrounded the Great Depression would never be made again. There were grounds to question whether the professor had learnt the wrong lessons.

The professor (Ben Bernanke) had been the key proponent (back in 2003 already) of the expansionary policy (breathing in inflation) which had played such a critical role in generating the bubble in the first place (even if the buck ultimately stopped at Alan Greenspan’s desk). Indeed, much of the ‘neo-Austrian’ critique (see Rothbard, 1972) of US monetary policy in the 1920s under the leadership of New York Federal Reserve Governor Benjamin Strong in the 1920s could be replicated against the Greenspan–Bernanke Federal Reserve.

At a time when real forces (productivity surge due to technological revolution and terms of trade improvement) were putting downward pressure on the equilibrium level of goods and services prices, the Federal Reserve was setting monetary conditions such as to produce a stable or gently rising price level. In doing so the Federal Reserve created grave monetary disequilibrium with its main symptom being a sharp rise of temperature in credit and asset markets.

--Brendan Brown, Euro Crash: The Implications of Monetary Failure in Europe (Houndmills, UK: Palgrave Macmillan, 2010), 83.

Austrian School Revolutionaries Must Stir Popular Anger!

The starting point of the blueprint is the growing awareness that monetary policies determined by inflation-targeting regimes were responsible for breeding the vast monetary disequilibrium, which was the essential condition for the global credit bubble and bust of the last decade. This ‘growing awareness’, however, is far from being the dominant or even majority view (however that is determined) among monetary economists. The present and previous head of the Federal Reserve (Ben Bernanke and Alan Greenspan respectively) strenuously deny that their policies were responsible for the credit bubble and bust. They would blame all on the massive Asian saving surpluses, claiming that these drove interest rates so low in the US (and Europe) as to set off a credit and asset bubble. . . .

Outside the central banks and in the academic world the main redoubt for attack on the central banks has been the so-called Austrian school (with writings collected, for example, on the von Mises website). The underlying theme is that considerable fluctuations of the price level, sometimes downwards, must occur over short- or medium-term periods of time if overall monetary stability in its widest sense – including asset and credit markets remaining in a temperate zone – is to be achieved as best as possible. Modern writers close to this school refine the notions of ‘asset and credit market inflation’ or ‘mal-investment’ found in the original texts (whether von Mises or Hayek, for example). There the mal-investment which resulted from monetary disequilibrium (characterized by a monetary authority driving rates far below neutral for an extended period) was wholly in the form of ‘ over-investment’ (excess production of capital goods relative to consumer goods). Production processes would become more capital intensive (or ‘time-intensive’) and consumer goods production would be curtailed relative to what would occur under conditions of monetary equilibrium. All of these distortions have to be reversed in the ensuing economic downturn.

The more relevant, and quantitatively much more important, concept of mal-investment, of which today’s ‘Austrians’ write, starts with a tale of temperature rise (irrational exuberance) in various credit and related asset markets stirred by monetary disequilibrium. This (temperature rise) stimulates an excess build-up of capital stock in certain sectors of the economy, which subsequently becomes obsolescent in economic terms when the bubble bursts (or temperature falls), with the result that vast stocks of physical and human capital waste away. The process of renaissance from these devastating experiences requires much new capital (savings), risk-appetite, entrepreneurship, technological progress (bringing new investment opportunity), and overall economic flexibility (including of prices and wages).

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 79-81.

Many Economists Maintain That Distribution Is the Chief Problem in any Socialist Society; It Is Obviously So in One with a Moneyless Economy

In examining the need and possibility of economic calculation in the different forms of socialist communities, it is natural to start with a study of a socialist society which uses no money, i.e., one with a natural economy as it is sometimes called. The moneyless society is the great ideal of many socialists, and even as late as in February, 1932, the Finance Commissar of the Soviet Union said that the policy of his Finance Department aimed at preparing the day when money "could be relegated to the museums."

The criterion for a society with a moneyless economy is that its goods are distributed in natura without the use of money or of other means of payment which could serve as units for accounting. It is obvious that there must be certain difficulties in undertaking calculation in a society where neither prices nor other forms of common denominators exist. Could it be shown that economic calculation is not possible in a society with a moneyless economy owing to the difficulties it creates for calculation in the purely productive stages, this would be the end of the investigation so far as this form of society was concerned.

Nevertheless, the distribution side of the question has also to be examined, partly because the distribution of goods which have no common denominator will create the need for a different form of control, and partly because the distribution of communal goods raises special and interesting problems in a society with a moneyless economy.

In this connection it should be remembered that in an economy of private enterprise production and distribution take place uno acto, so that distribution automatically results from the individual's contribution to the process of production, whether it takes the form of mental or physical labour, of special capability or knowledge, or of putting land or other forms of capital at the disposal of production.

In socialist communities production and distribution will be two separate operations, nor will there necessarily be any connection between contribution and remuneration, for the central authority will decide the distribution of income. Many economists maintain that distribution is the chief problem in any socialist society; at any rate it is obviously so in one with a moneyless economy.

--Trygve J. B. Hoff, Economic Calculation in the Socialist Society, trans. M. A. Michael (London: William Hodge and Company, 1949), 32-33.

The Socialists Want to Abolish “the Worst of All Evils”--Competition, But This Is Impossible

The socialists assert that capitalism is degrading, that it is incompatible with man’s dignity, that it weakens man’s intellectual abilities and spoils his moral integrity. Under capitalism, they say, everybody must regard his fellowmen as competitors. Man’s innate instincts of benevolence and companionship are thus converted into hatred and a ruthless striving for personal success at the expense of all other people. But socialism will restore the virtues of human nature. Amicableness, fraternity, and comradeship will be the characteristic features of future man. What is needed first is to eliminate this worst of all evils, competition.

However, competition can never be eliminated. As there will always be positions which men value more highly than other positions, people will strive for them and try to outstrip their rivals. It is immaterial whether we call this emulation rivalry or competition. At any rate, in some way or other it must be decided whether or not a man ought to get the job he is applying for. The question is only what kind of competition should exist.

The capitalist variety of competition is to outdo other people on the market through offering better and cheaper goods. The bureaucratic variety consists in intrigues at the “courts” of those in power.

--Ludwig von Mises, Bureaucracy, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 85-86.

Fiat Money! Let the State "Create" Money, and Make the Poor Rich, and Free Them from the Bonds of the Capitalists!

Inflationism is that monetary policy that seeks to increase the quantity of money.

Native inflationism demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money. It wants more money because in its eyes the mere abundance of money is wealth. Fiat money! Let the state "create" money, and make the poor rich, and free them from the bonds of the capitalists! How foolish to forgo the opportunity of making everybody rich, and consequently happy, that the state's right to create money gives it! How wrong to forgo it simply because this would run counter to the interests of the rich! How wicked of the economists to assert that it is not within the power of the state to create wealth by means of the printing press!--You statesmen want to build railways, and complain of the low state of the exchequer? Well, then, do not beg loans from the capitalists and anxiously calculate whether your railways will bring in enough to enable you to pay interest and amortization on your debt. Create money, and help yourselves.

--Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 251.

Economic Activity Is Necessarily Speculative Because It Is Based upon an Uncertain Future

In any economic system which is in process of change all economic activity is based upon an uncertain future. It is therefore bound up with risk. It is essentially speculation.

The great majority of people, not knowing how to speculate successfully, and socialist writers of all shades of opinion, speak very ill of speculation. The literateur and the bureaucrat, both alien to an atmosphere of business activity, are filled with envy and rage when they think of fortunate speculators and successful entrepreneurs. To their resentment we owe the efforts of many writers on economics to discover subtle distinctions between speculation on the one hand and "legitimate trade," "value creating production," etc., on the other. In reality all economic activity outside the stationary state is speculation. Between the work of the humble artisan who promises to deliver a pair of shoes within a week at a fixed price, and the sinking of a coal mine based upon conjectures with regard to the disposal of its products years hence, there is only a difference of degree. Even those who invest in gilt-edged fixed-interest-bearing securities speculate--quite apart from the  risk of the debtor's inability to pay. They buy money for future delivery--just as speculators in cotton buy cotton for future delivery. Economic activity is necessarily speculative because it is based upon an uncertain future. Speculation is the link that binds isolated economic action to the economic activity of society as a whole.

--Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 181-182.

The Usual Terminology of Political Language Is Stupid! Why Should Hitler Be “Right” and Stalin, His Temporary Friend, Be “Left”?

The workers in the Anglo-Saxon countries, too, knew that the socialist parties competing for their favor usually accused each other of favoring capitalism. Communists of all shades advance this accusation against socialists. And within the Communist groups the Trotskyites used this same argument against Stalin and his men. And vice versa. The fact that the “progressives” bring the same accusation against Nazism and Fascism will not prevent labor someday from following another gang wearing shirts of a different color.

What is wrong with Western civilization is the accepted habit of judging political parties merely by asking whether they seem new and radical enough, not by analyzing whether they are wise or unwise, or whether they are apt to achieve their aims. Not everything that exists today is reasonable; but this does not mean that everything that does not exist is sensible.

The usual terminology of political language is stupid. What is “left” and what is “right”? Why should Hitler be “right” and Stalin, his temporary friend, be “left”? [Remember that when Mises wrote this in 1940, Hitler and Stalin were allies under the terms of their August 1939 mutual nonaggression treaty.] Who is “reactionary” and who is “progressive”? Reaction against an unwise policy is not to be condemned. And progress towards chaos is not to be commended. Nothing should find acceptance just because it is new, radical, and fashionable. “Orthodoxy” is not an evil if the doctrine on which the “orthodox” stand is sound. Who is anti-labor, those who want to lower labor to the Russian level, or those who want for labor the capitalistic standard of the United States? Who is “nationalist,” those who want to bring their nation under the heel of the Nazis, or those who want to preserve its independence?

What would have happened to Western civilization if its peoples had always shown such liking for the “new”? Suppose they had welcomed as “the wave of the future” Attila and his Huns, the creed of Mohammed, or the Tartars? They, too, were totalitarian and had military successes to their credit which made the weak hesitate and ready to capitulate. What mankind needs today is liberation from the rule of nonsensical slogans and a return to sound reasoning.

--Ludwig von Mises, Interventionism: An Economic Analysis, ed. Bettina Bien Greaves, trans. Thomas Francis McManus and Heinrich Bund (Indianapolis: Liberty Fund, 2011), 91-92.

The Rich Have No Special Reason to Desire the Preservation of Unhampered Competition, but They Do Have a Special Interest in Interventionism

Hence, it is nothing but specious propaganda designed to rely for its effectiveness on the lack of judgment of the thoughtless to assert, as people do, that the defense of capitalism is purely an affair of the capitalists and the entrepreneurs, whose special interests, as opposed to those of other groups, are furthered by the capitalist system.The “have’s” do not have any more reason to support the institution of private ownership of the means of production than do the “have-not’s.” If their immediate
special interests come into question, they are scarcely liberal. The notion that, if only capitalism is preserved, the propertied classes could remain forever in possession of their wealth stems from a misunderstanding of the nature of the capitalist economy, in which property is continually being shifted from the less efficient to the more efficient businessman. In a capitalist society one can hold on to one’s fortune only if one perpetually acquires it anew by investing it wisely. The rich, who are already in possession of wealth, have no special reason to desire the preservation of a system of unhampered competition open to all; particularly if they did not themselves earn their fortune, but inherited it, they have more to fear than to hope from competition. They do have a special interest in interventionism, which always has a tendency to preserve the existing division of wealth among those in possession of it.

--Ludwig von Mises, Liberalism: The Classical Tradition, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 145.

With regard to These Economic Dogmas, There Is No Difference between Present-Day British Liberals and the British Labor Party and the Nazis

The contemporary criticism of the Nazi program failed to serve the purpose. People were busy dealing with the mere accessories of the Nazi doctrine. They never entered into a full discussion of the essence of National Socialist teachings. The reason is obvious. The fundamental tenets of the Nazi ideology do not differ from the generally accepted social and economic ideologies. The difference concerns only the application of these ideologies to the special problems of Germany.

These are the dogmas of present-day “unorthodox” orthodoxy:

1. Capitalism is an unfair system of exploitation. It injures the immense majority for the benefit of a small minority. Private ownership of the means of production hinders the full utilization of natural resources and of technical improvements. Profits and interest are tributes which the masses are forced to pay to a class of idle parasites. Capitalism is the cause of poverty and must result in war.
2. It is therefore the foremost duty of popular government to substitute government control of business for the management of capitalists and entrepreneurs.
3. Price ceilings and minimum wage rates, whether directly enforced by the administration or indirectly by giving a free hand to trade unions, are an adequate means for improving the lot of the consumers and permanently raising the standard of living of all wage earners. They are steps on the way toward entirely emancipating the masses (by the final establishment of socialism) from the yoke of capital. (We may note incidentally that Marx in his later years violently opposed these propositions. Present-day Marxism, however, endorses them fully.)
4. Easy money policy, i.e., credit expansion, is a useful method of lightening the burdens imposed by capital upon the masses and making a country more prosperous. It has nothing to do with the periodical recurrence of economic depression. Economic crises are an evil inherent in unhampered capitalism.
5. All those who deny the foregoing statements and assert that capitalism best serves the masses and that the only effective method of permanently improving the economic conditions of all strata of society is progressive accumulation of new capital are ill-intentioned and narrow-minded apologists of the selfish class interests of the exploiters. A return to laissez faire, free trade, the gold standard, and economic freedom is out of the question. Mankind will fortunately never go back to the ideas and policies of the nineteenth century and the Victorian age. (Let us note incidentally that both Marxism and trade-unionism have the fairest claim to the epithets “nineteenth-century” and “Victorian.”)
6. The advantage derived from foreign trade lies exclusively in exporting. Imports are bad and should be prevented as much as possible. The happiest situation in which a nation can find itself is where it need not depend on any imports from abroad. (The “progressives,” it is true, are not enthusiastic about this dogma and sometimes even reject it as a nationalist error; however, their political acts are thoroughly dictated by it.)

With regard to these dogmas there is no difference between present-day British liberals and the British labor party on the one hand and the Nazis on the other. It does not matter that the British call these principles an outgrowth of liberalism and economic democracy while the Germans, on better grounds, call them antiliberal and antidemocratic. It is not much more important that in Germany nobody is free to utter dissenting views, while in Great Britain a dissenter is only laughed at as a fool and slighted.

--Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011), 248-249.

On the Fundamental Difference Between Aristocratic Riches and “Bourgeois” or Capitalistic Riches

It is quite customary to liken the entrepreneurs and capitalists of the market economy to the aristocrats of a status society. The basis of the comparison is the relative riches of both groups as against the relatively straitened conditions of the rest of their fellow men. However, in resorting to this metaphor, one fails to realize the fundamental difference between aristocratic riches and “bourgeois” or capitalistic riches.

The wealth of an aristocrat is not a market phenomenon; it does not originate from supplying the consumers and cannot be withdrawn or even affected by any action on the part of the public. It stems from conquest or from largess on the part of a conqueror. It may come to an end through revocation on the part of the donor or through violent eviction on the part of another conqueror, or it may be dissipated by extravagance. The feudal lord does not serve consumers and is immune to the displeasure of the populace.

The entrepreneurs and capitalists owe their wealth to the people who patronize their businesses. They lose it inevitably as soon as other men supplant them in serving the consumers better or cheaper.

--Ludwig von Mises, The Anti-capitalistic Mentality, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 4.

Why the Need to Justify the Existence of the Sub-Discipline of Public Finance?

Public finance is the sub-discipline of economics that deals with taxes, fiscal policy and government enterprise in general. In order to assess the case in behalf of taxation commonly made in this field, I shall analyze the public finance textbooks of Atkinson and Stiglitz (1980), Due (1963), Musgrave (1959) and Shoup (1969). I have chosen textbooks because they are a distillation of knowledge, methodology and perspective of an entire profession; they are the amalgamation of what is considered correct and important. I have chosen these four because they are a representative sample, and highly respected amongst the practitioners of economic orthodoxy in this domain.

The category of economic study we shall consider is sometimes called government finance, sometimes public economics, and sometimes government economics. But whatever the name, this field is very different from all other sub-disciplines of economics in one important respect. In every other case, whether it is micro or macro, trade or labor, business cycles or money, resources or growth, development or industrial organization, managerial or accounting, the practitioner plunges right into the subject matter.

In public finance, in contrast, and only in public finance, there is first an attempt to justify the very existence of the topic. In every textbook on this theme I have examined, plus the four to be scrutinized here in detail, there is always an introductory chapter, and in some cases two or three, where the author feels compelled to defend against the charge that the whole enterprise rests upon a foundation of sand.

How can we account for this felt need to vindicate the very subject matter, though this can only be speculative, one possibility is that public finance is the only economic field studying activities to which the use of force is intrinsic.

--Thomas J. DiLorenzo and Walter E. Block, An Austro-Libertarian Critique of Public Choice, Economy and Society (New York: Addleton Academic Publishers, 2016), Kindle e-book.

Democracy Assures That Only Dangerous Men Will Rise to the Top of Government Since They Are Adept at Orchestrating the Rent-Seeking Game

In contrast, for the most part, democratic government involves a process of one group of citizens bribing legislators to attenuate the private property rights of others for no other reason than the first group wishes to (legally) steal the others’ property. It is the domain of rent-seeking behavior. The business of modern democracy is to attenuate property rights in order to fuel the special-interest, rent seeking machine. This is very much the opposite of voluntary, consensual, private property markets. Merely repeating over and over that “politics is like markets,” as Stigler, Wittman, and some other Chicago School scholars have done, does not make it so. The attenuation of property rights that is the defining characteristic of democracy weakens incentives to be productive while increasing the rewards of unproductive rent seeking.

One implication of this analysis is that the people who rise to the top in democratic governments are those who are adept at orchestrating the rent-seeking game. Indeed, years of experience at lower levels of office (city council, state legislature) is the usual prerequisite for higher office. As Hans Hermann Hoppe puts it, “democracy virtually assures that only dangerous men will rise to the top of government.” Dangerous, in the sense that they are adept at destroying property by facilitating the plunder of rent seeking. As rent seeking becomes more pervasive in a democracy, more and more people will decide to try to become adept at it rather than becoming genuinely productive citizens. The proportion of parasites will rise relative to producers, which will cause national wealth to be lower than it would otherwise be.

--Thomas J. DiLorenzo and Walter E. Block, An Austro-Libertarian Critique of Public Choice, Economy and Society (New York: Addleton Academic Publishers, 2016), Kindle e-book.

Under Free Banking a Cartel of the Banks Would Destroy the Country's Whole Banking System

But, some people may ask, what about a cartel of the commercial banks? Could not the banks collude for the sake of a boundless expansion of their issuance of fiduciary media? The objection is preposterous. As long as the public is not, by government interference, deprived of the right of withdrawing its deposits, no bank can risk its own good-will by collusion with banks whose good will is not so high as its own. One must not forget that every bank issuing fiduciary media is in a rather precarious position. Its most valuable asset is its reputation. It must go bankrupt as soon as doubts arise concerning its perfect trustworthiness and solvency. It would be suicidal for a bank of good standing to link its name with that of other banks with a poorer goodwill. Under free banking a cartel of the banks would destroy the country's whole banking system. It would not serve the interests of any bank.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 2:447.

The Conclusion to Which My Investigations Lead Is That Expansion of Credit Cannot Form a Substitute for Capital

This point of view is sometimes called the "orthodox" because it is related to the doctrines of the Classical economists who are Great Britain's imperishable glory; and it is contrasted with the "modern" point of view which is expressed in doctrines that correspond to the ideas of the Mercantilists of the sixteenth and seventeenth centuries. I cannot believe that there is really anything to be ashamed of in orthodoxy. The important thing is not whether a doctrine is orthodox or the latest fashion, but whether it is true or false. And although the conclusion to which my investigations lead, that expansion of credit cannot form a substitute for capital, may well be a conclusion that some may find uncomfortable, yet I do not believe that any logical disproof of it can be brought forward.

--Ludwig von Mises, preface to the English edition of The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 31.

On September 30, 1913, the New York Times Attacked Theodore Roosevelt's Plan for "Super-Socialism"

On September 30, 1913, at a moment when American attention was focused on the revolutionary monetary reform then under debate in Congress, the New York Times astounded and diverted its public by a bitter attack on a former president of the United States. The former president was Theodore Roosevelt who had, the year before, broken away from the Republican Party to run as the Progressive Party (Bull Moose) candidate for president. He had been defeated by Woodrow Wilson, but he had been a powerful candidate who had attracted the greater part of Republican Party votes, and his views on public questions still commanded a large following among the electorate.

What had aroused the mortal apprehensions of the Times' editors was an article in the Century Magazine in which Roosevelt had outlined his proposals for a reorganization of government and society. The editorial attacked his blueprint as "super-socialism." Without going so far as to charge Roosevelt with being a Marxist--this was before the Russian Revolution, but Marxism was even then anathema on these shores--it declared that he would in effect bring a Marxian redistribution of wealth in a "simpler and easier way."

"He leaves," the editorial went on to say, "the mines, the factories, the railroads, the banks--all the instruments of production and exchange--in the hands of their individual owners, but of the profits of their operations he takes whatever share the people at any given time may choose to appropriate to the common use. The people are going to say, We care not who owns and milks the cow, so long as we get our fill of the milk and cream. Marx left socialism in its infancy, a doctrine that stumbled and sprawled under the weight of its own inconsistencies. Mr. Roosevelt's doctrine is of no such complexity. It has all the simplicity of theft and much of its impudence. The means employed are admirably adapted to the end sought, and if the system can be made to work at all, it will go on forever." 

The means by which Roosevelt would achieve these ends, the Times explained, drawing from the Century article, would be by a monolithic one-party political system, along with an indefinite expansion of government powers and functions. ("It will be necessary," the Times quoted Roosevelt as saying, "to invoke the use of governmental power to a degree hitherto unknown in this country, and, in the interest of democracy, to apply principles which the purely individualistic democracy of a century ago would not have recognized as democratic.") Roosevelt would also abolish competition. ("The business world must change from a competitive to a cooperative basis.") He would remove the restraints of an independent judiciary. ("the people themselves should . . . decide for themselves . . . what laws are to be placed upon the statute books, and what construction is to be placed upon the Constitution. . . .") He would confiscate the great fortunes (by a "heavily progressive inheritance tax" and a "heavily graded income tax.")

--Elgin Groseclose, preface to America's Money Machine: The Story of the Federal Reserve (Westport, CT: Arlington House Publishers, 1980), ix-x.

Ludwig von Mises Distinguishes "Credit Money" from "Fiat Money"

Now suppose the issuing institution suspends redemption of its claims on the genuine money but that the public believes the suspension is only temporary. For example, during World War I, the major belligerents, except the United States, abandoned the gold standard because they wanted to use the printing press to pay for the war effort. Mises classified the British pound, the French franc, and other currencies during this period as credit money. The British people still used the pound as their currency, even though it could no longer be immediately redeemed for a specified weight of gold. However, they thought that at some point, the British pound would again be redeemable in gold. During the suspension, the pound was no longer a money substitute; it no longer performed the same services to the owner as physical yellow metal. However, people still treated it as a claim, albeit one of uncertain maturity. The British pound still functioned as a medium of exchange, and it was still commonly accepted. Therefore, it was a form of money. In light of all of these considerations, Mises classified it as a credit money. When the British went back on the gold standard, the British pound would cease being a credit money and would revert to being a money substitute, where the money in question was gold.

Now push the analysis one step further: Suppose a government (1) has been issuing notes that are instantly redeemable claims on a commodity money, (2) the public uses these claims as interchangeable with the commodity money itself, so that the claims become money substitutes, (3) the government decides to suspend redemption of the claims, (4) the public believes that the suspension is permanent, and yet (5) the public still uses the notes issued by the government as a commonly accepted medium of exchange. In this scenario, Mises would classify the government notes as fiat currency. They are neither commodity money, money substitutes, nor even credit money because they are no longer claims on anything at all. Yet they still satisfy the definition of money because the public commonly accepts the government's paper notes in trade, with the intention of using them in the future to acquire other goods and services.

Such a money is called fiat money because the government decrees “by fiat” the particular characteristics that an object must possess in order to count as part of this stock of money. For example, ever since Richard Nixon closed the gold window in 1971, the U.S. dollar and other major currencies have been fiat monies.

--Robert P. Murphy, Choice: Cooperation, Enterprise, and Human Action (Oakland, CA: Independent Institute, 2015), Kindle e-book, 202-203.

In 1913 the Mark Was Solidly Based on Gold; in 1923 Its Value Was Something More Ridiculous Than Zero

Germany, in common with other warring countries, departed from the gold standard at the outbreak of hostilities in 1914. On November 20, 1923, the German paper mark, after having fallen to an infinitesimal fraction of its former value, was made redeemable in the newly introduced rentenmark at a trillion to one. . . .

The régime of inconvertible and depreciating paper money thus ran for a little less than a decade. The progress of depreciation was, however, very unevenly distributed over these ten years. During most of the war-period the exchange value of the mark did not fall greatly from par with the dollar and if, when the issue of the conflict was no longer in doubt, it sank heavily, it was still quoted in December 1918 at more than twelve American cents. During the peace negotiations, however, German exchange continued to fall fast. This downward movement persisted till February 1920 when the descent was checked at just a shade below one cent per mark, that is, at about 1/24 of its pre-war value. A quick recovery then set in which carried the rate to nearly 3c in May. Though there was some reaction from this figure relative stability at a level of from 1 1/2 to 2c was attained in June. By early 1920 the period of immediate adjustment to post-war conditions may therefore be considered to have been completed. Not until September 1921 did the value of the mark again fall below one American cent and as late as June 1922 it still sold for about 1/3 of a cent. From then onward the decline was vertiginous till the final collapse in November 1923. At the latter date forty-two billion (42,000,000,000) marks were worth but a single American cent. Without a complete ouster of the currency concerned, no corresponding depreciation appears in the long and varied annals of monetary history. Never before had a paper money fallen at so rapid a rate over such an extended period. In 1913 the mark was solidly based on gold; in 1923 its value was, as one writer has said, something more ridiculous than zero.

--Frank D. Graham, introduction to Exchange, Prices, and Production in Hyper-Inflation: Germany, 1920-1923 (New York: Russell and Russell, 1967), 3-4.

Mises Identified the Final Goal of All Central Banking: The Creation of a Single World Bank

There has been a joint effort by governments and their monopolistic central banks to destroy free market money. Mises minced no words in his chapter, “The Return to Sound Money,” in The Theory of Money and Credit.

The destruction of the monetary order was the result of deliberate actions on the part of various governments. The government-controlled central banks and, in the United States, the government-controlled Federal Reserve System were the instruments applied in this process of disorganization and demolition. Yet without exception all drafts for an improvement of currency systems assign to the governments unrestricted supremacy in matters of currency and design fantastic images of super-privileged super-banks. Even the manifest futility of the International Monetary Fund does not deter authors from indulging in dreams about a world bank fertilizing mankind with floods of cheap credit. The inanity of all these plans is not accidental. It is the logical outcome of the social philosophy of their authors.

At least he did not refer to the insanity of these plans. Those plans were not insane. They were calculated to expand the supply of unbacked credit money. The result, he predicted in 1912, will be the eventual destruction of money. In a profound prediction made in the first edition of Theory of Money and Credit, and reprinted verbatim in the 1924 edition, Mises identified the final goal of all central banking: the creation of a single world bank. The goal of the central bankers is the unrestricted issue of unbacked credit money (whose borrowers must pay interest to the issuers).

It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction; the development of the fiduciary medium must necessarily lead to its breakdown. Once common principles for their circulation-credit policy are agreed to by the different credit-issuing banks, or once the multiplicity of credit-issuing banks is replaced by a single World Bank, there will no longer be any limit to the issue of fiduciary media.

--Gary North, Mises on Money (Auburn, AL: Ludwig von Mises Institute, 2012), 89-90.

Bankers “Create Money out of Thin Air,” But They Can't Simply Open a New Account and Write Checks to Buy Themselves Sports Cars or Designer Clothes

Mises writes, “[Bank fiduciary media] are entered as liabilities, and the issuing body does not regard the sum issued as an increase of its income or capital, but as an increase on the debit side of its account, which must be balanced by a corresponding increase on the credit side if the whole transaction is not to figure as a loss. This way of dealing with fiduciary media makes it necessary for the issuing body to regard them as part of its trading capital and never to spend them on consumption but always to invest them in business.” This is a crucial point that newcomers to fractional-reserve banking often miss. Even though such bankers in a sense “create money out of thin air,” they can't simply open up a new account for $100,000 and then write checks to buy themselves sports cars and designer clothes. The reason is that the merchants in the community would then have $100,000 in claims on the actual cash reserves of the bank, and ultimately the bank's vault would run out of the genuine money. What fractional bankers do instead is loan out the $100,000 to a productive business at (say) 5 percent interest. When the $105,000 is repaid in a year, the $100,000 that was initially created can be “destroyed” (through bookkeeping) and the $5,000 in interest income can be safely spent without draining the bank's cash reserves. Thus fractional-reserve bankers create money out of thin air not to directly spend it—which would be incredibly reckless and short-lived—but instead to earn interest income from it.

--Robert P. Murphy, Study Guide to the Theory of Money and Credit (Auburn, AL: Ludwig von Mises Institute, 2011), 148.

The Mainstream Technique of Calculating Consumer and Producer “Surplus” Is Entirely Fallacious

All participants to voluntary exchange benefit; each values what he or she receives more than what he or she gives up. However, the mainstream technique of calculating consumer and producer “surplus” is entirely fallacious. In this approach, a consumer who would have been willing to pay up to, say, $10 for the first unit of a good, but only has to pay the market price of $5, is said to enjoy $5 of surplus on this first unit. The smaller surpluses on subsequent units are calculated and added together to reveal this consumer's total surplus. Yet this procedure assumes (a) that we can deduce information from individual's value scales that are not revealed in action, (b) that money is a stable measuring rod of subjective value, and (c) that it makes sense to add “units of utility” together. Other attempts at measuring psychic surpluses involve interpersonal utility comparisons, and thus involve yet another fallacy.

--Robert P. Murphy, Study Guide to Man, Economy, and State a Treatise on Economic Principles with Power and Market Government and the Economy (Auburn, AL: Ludwig von Mises Institute, 2006), 42-43.

It Is the Difference in Marketability of Various Goods That Gives Rise to Media of Exchange

Some goods are more marketable (or "liquid") than others. This means that a seller of such goods would not have to search very long to find a buyer willing to pay the highest likely price that anyone would offer for the good. In contrast, if the seller of an unmarketable (or illiquid) good has to dispose of it quickly, he will have to accept a much lower price than what he would be able to obtain if he had more time to find a suitable buyer.

It is the difference in marketability of various goods that gives rise to media of exchange. For example, if a farmer wishes to trade away a pig in exchange for sweaters, but cannot find someone who wants to trade away sweaters for a pig, then the farmer can still improve his situation by trading away the pig for something that is more marketable, such as tobacco. Not only is he more likely to find someone who wants to trade away sweaters for tobacco, but it is much easier to store and transport the tobacco than the live pig.

Money provides its unique services when it resides in someone's cash balance. There is no such thing as money "in circulation"; at any moment, every unit of money belongs to someone's cash balance. For this reason, there is nothing to distinguish the "hoarder's" cash balance from that of a "normal" person, except for their relative size.

--Robert P. Murphy and Amadeus Gabriel, Human Action Study Guide: A Guided Tutorial of Ludwig von Mises's Classic Work (Auburn, AL: Ludwig von Mises Institute, 2008), 152-153.