Mises Corrected a Fallacy Held by a Leading Official of the Hungarian Soviet Republic Who Assumed that the Valuation of the Monetary Unit Depended on the Wealth of the Country

In the course of speculation in stocks and securities, the speculator has developed the procedure which is his tool in trade. What he learned there he now tries to apply in the field of foreign exchange speculations. His experience has been that stocks which have dropped sharply on the market usually offer favorable investment opportunities and so he believes the situation to be similar with respect to the monetary unit. He looks on the monetary unit as if it were a share of stock in the government. When the German mark was quoted in Zurich at ten francs, one banker said: “Now is the time to buy marks. The German economy is surely poorer today than before the war so that a lower evaluation for the mark is justified. Yet the wealth of the German people has certainly not fallen to a twelfth of their prewar assets. Thus, the mark must rise in value.” And when the Polish mark had fallen to five francs in Zurich, another banker said: “To me this low price is incomprehensible! Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher.”

Similarly, in the spring of 1919, a leading official of the Hungarian Soviet Republic told me: “Actually, the paper money issued by the Hungarian Soviet Republic should have the highest rate of exchange, except for that of Russia. Next to the Russian government, the Hungarian government, by socializing private property throughout Hungary, has become the richest and thus the most credit-worthy in the world.”

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. Nevertheless, even though the theory of these bankers is false, and must eventually lead to losses for all who use it as a guide for action, it can temporarily slow down and even put a stop to the decline in the foreign exchange value of the monetary unit.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 17-18.

Ignoring the Currency Theory’s Criticism of the Banking Theory, Statist Theory has Prescribed the Banking Theory

Statist Theory has tried to explain every social phenomenon by the operation of mysterious power factors. It has disputed the possibility that economic laws for the formation of prices could be demonstrated. Failing to recognize the significance of commodity prices for the development of exchange relationships among various moneys, it has tried to distinguish between the domestic and foreign values of money. It has tried to attribute changes in exchange rates to various causes—the balance of payments, speculative activity, and political factors. Ignoring completely the Currency Theory’s important criticism of the Banking Theory, Statist Theory has actually prescribed the Banking Theory. It has moreover even revived the doctrine of the canonists and of the legal authorities of the Middle Ages to the effect that money is a creature of the government and the legal order. Thus, Statist Theory prepared the philosophical groundwork from which the inflationism of recent years developed.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 43-44.

The Circulation Credit Theory of the Trade Cycle (also called the Monetary Theory)

Of all the theories of the trade cycle, only one has achieved and retained the rank of a fully-developed economic doctrine. That is the theory advanced by the Currency School, the theory which traces the cause of changes in business conditions to the phenomenon of circulation credit. All other theories of the crisis, even when they try to differ in other respects from the line of reasoning adopted by the Currency School, return again and again to follow in its footsteps. Thus, our attention is constantly being directed to observations which seem to corroborate the Currency School’s interpretation.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 102-103.