Abstract
This paper discusses Ludwig von Mises's proposals for monetary reform. We will largely focus on technical aspects—the concrete practical steps he recommended—without detailing how these relate to his general conceptions of money and of a sound monetary order. We will highlight two characteristic features of Mises's proposals. One, he stressed the role of the competitive market process and of private initiative in establishing a monetary order based on gold, effective gold coin circulation, and 100% reserve banking. Two, he presented an original scheme for privatizing the control of the money supply.
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Notes
Mises presents his monetary theory in Theory of Money and Credit (1980) and in Human Action (1949), especially chapters 17 and 20. He discusses the principles of a sound monetary order (and thus the goals to be pursued by monetary reform) in his Theory of Money and Credit, chap. 20 (first published in 1924) and chap. 21 (first published in 1953). See Pallas (2005) and Hülsmann (2007) for a general discussion of Mises’s contributions to monetary economics. For an analysis of the evolution of his monetary thought see Gertchev (2004).
He also discussed monetary reform in papers written during the 1930s and World War II, mainly restating ideas he had already presented in 1919 and 1923.
It was Mises's (1919a, pp. 156ff.) position that Austria should be granted a special subsidy during the first years of the unification because Austrians had made greater contributions to the war effort, and had suffered more from defeat. Also, the financial agreement between the two states had to allow Austrian entrepreneurs to redeem discounted war bonds at the central bank. This was absolutely essential because they had invested much more of their capital in war bonds than had the German entrepreneurs. Mises insisted on these two points, mentioning each of them twice in his 25-page report.
This scheme corresponds more or less exactly to the way the euro has been introduced based on prevailing market exchange rates. In a first step (1999 to 2002), the different national currencies were kept in circulation, but they had changed their economic natures. They were no longer independent monies, but legal substitutes for the new money that had not yet any visible embodiment (however, electronic counterparts—the so-called central-bank “liquidities” already existed as from 1999). With Mises we could say that in those three years the mark, the franc, the schilling, etc., were but names for a part of the euro. In a second step, then, the old national paper notes were replaced by euro notes and coins.
Without knowing it, Mises had spelled out here an idea that, many years before him, Carl Menger had stated in a private note, saying that ideas must run their course. F.A. Hayek discovered this note at the beginning of the 1930s, when he worked on a new edition of Menger's works. Mises (1969, pp. 3–6) later referred to this note in his The Historical Setting of the Austrian School of Economics.
The deficiences he alludes to concern the absence of legal limitations on checking accounts and other money substitutes.
The reform enacted by the German government in 1923 differed from the Mises plan in respect to the second point. It stopped the printing press, but then introduced a new paper money without any backing in gold. This worked because the government had successfully created new confidence among the population that the decline of the currency had reached its limit. It established a new note-issuing Rentenbank endowed with a claim to 3,200 million marks which were said to be “backed up” by all commercial assets in Germany. On the day when this new bank started issuing its Rentenmarks, the printing of the old marks was halted, thus breaking the vicious circle of inflation.
Similarly, he wrote in private correspondence: “There is only one effective method of avoiding inflation: All government expenditure must be covered by taxes and by borrowing from the public, not by borrowing from the commercial banks” (1951).
He had little doubt that these warnings would go unheeded (1952).
Mises repeated this warning about the Fed:
It is essential for the reform suggested that the Federal Reserve System should be kept out of its way. Whatever one may think about the merits or demerits of the Federal Reserve legislation of 1913, the fact remains that the system has been abused by the most reckless inflationary policy. No institution and no man connected in any way with the blunders and sins of the past decades must be permitted to influence future monetary conditions. (1980, p. 493)
References
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Hülsmann, J.G. Mises on Monetary Reform: the Private Alternative. Quart J Austrian Econ 11, 208–218 (2008). https://doi.org/10.1007/s12113-008-9044-4
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DOI: https://doi.org/10.1007/s12113-008-9044-4