On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory

VII. The Goal of Monetary Policy

VII The Goal of Monetary Policy 1. Liberalism and the Gold Standard Monetary policy of the preliberal era was either crude coin debasement , for the benefit of financial administration (only rarely intended as Seisachtheia,1 i.e., to nullify outstanding debts), or still more crude paper money inflation. However, in addition to, sometimes even instead of, its fiscal goal, the driving motive behind paper money inflation very soon became the desire to favor the debtor at the expense of the creditor. In opposing the depreciated paper standard, liberalism frequently took the position that after an inflation the value of paper money should be raised, through contraction, to its former parity with metallic money. It was only when men had learned that such a policy could not undo or reverse the “unfair” changes in wealth and income brought about by the previous inflationary period and that an increase in the purchasing power per unit [by contraction or deflation] also brings other unwanted shifts of wealth and income, that the demand for return to a metallic standard at the debased monetary unit’s current parity gradually replaced the demand for restoration at the old parity. In opposing a single precious metal standard, monetary policy exhausted itself in the fruitless attempt to make bimetallism an actuality. The results which must follow the establishment of a legal exchange ratio between the two precious metals, gold and silver, have long been known, even before Classical economics developed an understanding of the regularity of market phenomena. Again and again Gresham’s 1. [According to Mises, Seisachtheia (Greek) was a term used in the seventh century b. c. to mean “shaking off of burdens.” It described measures enacted to cancel in full or in part public and private debts; creditors then had to bear any loss, except to the extent that they might be indemnified by the government.—Ed.] the goal of monetary policy • 93 Law, which applied the general theory of price controls to the special case of money, demonstrated its validity. Eventually, efforts were abandoned to reach the ideal of a bimetallic standard. The next goal then became to free international trade, which was growing more and more important, from the effects of fluctuations in the ratio between the prices of the gold standard and the suppression of the alternating [bimetallic ] and silver standards. Gold then became the world’s money. With the attainment of gold monometallism, liberals believed the goal of monetary policy had been reached. (The fact that they considered it necessary to supplement monetary policy through banking policy will be examined later in considerable detail.) The value of gold was then independent of any direct manipulation by governments, political policies, public opinion or parliaments. So long as the gold standard was maintained, there was no need to fear severe price disturbances from the side of money. The adherents of the gold standard wanted no more than this, even though it was not clear to them at first that this was all that could be attained. 2. “Pure” Gold Standard Disregarded We have seen how the purchasing power of gold has continuously declined since the turn of the century. That was not, as frequently maintained , simply the consequence of increased gold production. There is no way to know whether the increased production of gold would have been sufficient to satisfy the increased demand for money without increasing its purchasing power, if monetary policy had not intervened as it did. The gold exchange and flexible standards were adopted in a number of countries, not the “pure” gold standard as its advocates had expected. “Pure” gold standard countries embraced measures which were thought to be, and actually were, steps toward the exchange standard . Finally, since 1914, gold has been withdrawn from actual circulation almost everywhere. It is primarily due to these measures that gold declined in value, thus generating the current debate on monetary policy. The fault found with the gold standard today is not, therefore, due to the gold standard itself. Rather, it is the result of a policy which deliberately seeks to undermine the gold standard in order to lower the costs of using money and especially to obtain “cheap money,” i.e., lower in- 94 • monetary stabilization and cyclical policy terest rates for loans. Obviously, this policy cannot attain the goal it sets for itself. It must eventually bring not low interest on loans but rather price increases and distortion...