LUDWIG von MISES
MONEY AND INFLATION
Now, we must realize that historically people everywhere used at the beginning a deﬁnite type of commodity as a medium of exchange. Sometimes you ﬁnd mentioned in books what kinds of goods and commodities were used in diﬀerent countries at diﬀerent ages as a general medium of exchange, as money. People once chose various kinds of commodities as media of exchange, as intermediaries between sellers and buyers. These commodities which they chose were commodities which were available in limited quantities only. If something is available in suﬃcient quantity to meet all possible kinds of demand, or can be increased in quantity in such a way as to meet all possible kinds of demand, then it doesn’t have any value in exchange. Only something that is available in a limited quantity can have exchange value, can be considered as valuable by people.
Over centuries traders eliminated everything else from among the various articles and commodities used as media of exchange until only the precious metals—gold and silver—remained. All other commodities were eliminated as media of exchange. When I say that the other things were eliminated from being used as money, what I mean is that people in making agreements eliminated them; people in making agreements rejected other things as media of exchange and turned to using only gold and silver; they speciﬁed gold and silver in the contracts they made when trading with other parties. Thus we must realize that the evolution to gold and silver money was brought about by private persons. Then silver also disappeared as a medium of exchange in the last centuries and the fact remained that the commodity gold was used as the medium of exchange. The function of the government consisted of producing small pieces of this medium of exchange, the weight and content of which was determined by the government oﬃces and acknowledged by the laws and by the courts. I cannot enter into the whole history of money. But what resulted was the gold standard. The system of the gold standard, the gold exchange standard, is practically the only monetary system in the world. This was not done
by governments; it was done through the market; it was done by parties
exchanging on the market.
In the history of money, which is identical with the history of government attempts to destroy money, we must distinguish two great periods. And these two periods are not separated from one another by some monetary fact or by some speciﬁc monetary problem—they are separated from one another by the great invention made in the 15th century by a man named Gutenberg. If the governments need more money—and they always need more money because they don’t earn it—the simplest way for them to increase the quantity of money since Gutenberg is just to print it.
Just as the government says “dollar”—but let us not use the term of a country with money which still functions today—let us say “ducats.” You have agreed upon a deﬁnite quantity of ducats. And then, because the government doesn’t want to restrict its expenditures, it declares: “What I have printed in my printing oﬃce, in my government printing oﬃce and called a Ducat is also a Ducat, the same thing as a gold Ducat.” These things started when there were private banks to which the government
gave privileges. At the time you made this agreement a Ducat meant a deﬁnite quantity of gold. But the government now says it is something else. When the government does this, the situation is similar to what it would be if you agreed to deliver a horse to another party but instead of a horse you delivered a chicken, saying, “This is all right ... I say that this chicken means a horse.” It is such a system that destroys the markets, you know.
I want to say something about the reason why the gold standard was adopted in the ﬁrst place and also why today it is considered as the only really sound system of money. It is because gold alone makes the determination of the purchasing power of the monetary unit independent of the changes in ideas of governments and political parties. Gold has one advantage. It cannot be printed. It cannot be increased ad libitum [at pleasure]. If you think that you, or an institution with which you are connected doesn’t have enough gold money, you cannot do anything about it that would increase the quantity of gold money in a very simple and cheap way. The reason why there is the gold standard, why the gold standard was accepted, is that an increase in the quantity of gold costs money. Gold is restricted; it is limited by nature; the production of an additional quantity of gold is not cheaper than the acquisition of such a quantity by exchanges on the market. That means that the metal gold was used as a medium of
Governments and writers for governments make fun of the fact that the world, the nations of the world, consider gold as money. They say a lot of things against the gold standard. But what they say is not what matters. What matters is that, without any interference on the part of a central authority, without any government action, individuals chose gold as “money” through the process of trading on the market. People make jokes about the uselessness of gold. It is just a silly yellow metal. We can’t
eat it, they say. It is only good for dentists and for unimportant things like jewelry. There are people who say, “Why gold? Why use precisely this yellow metal as money? Leave the gold to the dentists. Don’t use it for monetary purposes.” Now I do not have the right to talk about the dentists; I use the dentists only as an illustration. Whether they want the gold is another question. Lord Keynes called the gold standard a “barbarous relic.” Many books say that the government had to step in because the gold standard failed. But the gold standard didn’t fail! The government abolished the gold standard by making it illegal to hold gold. But still today, all international trade is calculated in gold. Critics have no valid arguments against the gold standard because the gold standard works while the paper standard of the government does not work, not even in a way which the government itself considers satisfactory.
The advantage of this gold money system, as of every system of nongovernmental money, is that an increase in the quantity of money does not depend on decisions of the government. The advantage of the gold standard is that the quantity of gold available is independent of the actions, the wishes, the projects and, I would say, of the “crimes,” of the various governments. Gold may not be an ideal money, certainly not; there are no ideals in the world of reality. But we can use gold as a medium of exchange because the quantity of gold is by and large limited and the production of additional quantities requires expenditures that do not inﬂuence the purchasing power of the already existing gold to a greater extent than such changes are occurring daily again and again in everything. We can therefore live, we can therefore exist, with the system of gold money. With gold money, there is no danger that a great revolution in prices will be brought about. The advantage of the gold standard is not that gold is yellow and shiny and heavy, but on account of the fact that the production of gold, like the production of everything else, depends on actors who cannot be manipulated by the government in the way in which the government can manipulate the production of government paper money. When the government prints a piece of paper, it doesn’t cost more to print “100” than it does to print “10” or “1” on this same piece of paper. And the market situation, the situation for all human exchanges, the whole economic system is undermined, destroyed, by the governments when they consider it advisable to increase the quantity of money by increasing the quantity of government money.
The monetary crisis, the monetary problem which faces the world today is due to the fact that the governments think they are free to do anything they want with regard to money, you know. Not only do individuals sometimes fail to fulﬁll promises they have made, but governments do the same.They have already used practically all possible methods of trying to evade the necessity of paying what they have promised. And this is the problem which we have now.
Legal tender legislation made it impossible for anybody to refuse to accept the paper money. Gold clauses were written into some contracts by some people in the attempt to protect them against the legal tender laws which would force them to accept paper. To give an example, there is a country in Europe, a very nice country with a great history, considered even today as one of the most civilized countries of the world. I don’t want to give the name of the nation, but let us call it Utopia. This country issued a loan, a public loan. On every page of this loan there was inscribed: “This government promises to pay 20 pieces of Utopian gold money, that is a deﬁnite quantity of gold coins in the coinage of this nation, that amount in gold, or an equivalent quantity in American dollars redeemable in gold according to the McKinley standard.” The man who bought this obligation, this letter of indebtedness, would have said: “I am really protected against all accidents. It has happened in the past that a country did not pay the same weight of gold which it had promised to pay. But now I have the promise not only of being paid in gold, but I also have the power to choose. I can ask them to pay me in the Utopian national
currency, or the equivalent in American dollars, which are redeemable in gold.” Then in 1933 the United States changed the “price” of gold, as you know; it reduced the ratio of gold to the U.S. dollar. In 1935 the U.S. Supreme Court ruled that, as the bondholders had received payment in legal tender notes, they could not show damage and would not be paid in gold. This country of Utopia said, “We also accept this new ‘price.’ We will pay you, the bondholder, only the lower quantity of gold according to the new American law, a law which didn’t exist at the time we sold you
this obligation when we bound ourselves to pay to you.” That means the right of governments concerning money is considered as something quite special today, something which is not subject to the general conditions and practices of the market economy. This precisely is the reason for the monetary problem which we now have.
All this was possible only on account of the fact that government is the institution that determines what the agreements between the citizens mean, what the content of these agreements are. Government has the power to force people who, according to their government’s declaration, do not comply with their agreement to pay the sums required. And as the government assumes, necessarily, that the courts should have the power to declare whether or not the parties have complied with an agreement concluded between them, so do the governments presume that they alone have the power to declare what money is and what money is not. Just as the courts have to determine if there is a conﬂict between the parties
to an agreement as to whether a certain thing referred to in a contract is wool, for instance, or is not wool, so do the governments presume to say whether a certain thing is money or is not money of a certain deﬁnite quantity. And in this way, again and again, governments have destroyed
the markets of the world. And in destroying the markets they have gone so far as to destroy completely the system of money, making it necessary to develop a new monetary system.
What we have to realize is this: Every kind of human arrangement is connected in some way or other with money payments. And, therefore if you destroy the monetary system of a country or of the whole world, you are destroying much more than simply one aspect. When you destroy the monetary system, you are destroying in some regards the basis of all interhuman relations. If one talks of money, one talks about a ﬁeld in which governments were doing the very worst thing which could be done, destroying the market, destroying human cooperation, destroying all peaceful relations between men.
The fact is that with the gold standard it is possible to have a monetary standard that cannot be destroyed by the governments. There is no reason to give to the governments greater inﬂuence over monetary problems.
While it is really absolutely correct to say that it is just an accident that it is precisely gold and not something else that serves this monetary purpose, the fact is that with the gold standard it is impossible for governments to destroy the monetary system. On the other hand, there is nothing easier for
governments to do than to destroy a system of money which is based upon too much conﬁdence in the government.
The majority of the Court found on February 18, 1935 in the Gold Clause cases that the plaintiﬀs had not been harmed by the abrogation of the gold clause because they did not show that in relation to buying power they had sustained any loss whatsoever. —BBG