Money

I said a few months back that I will write a post on Money and Banking in the next few “days.” The days have become months and the post is still a draft because I haven’t managed to wrap my head around a few concepts. So I will complete it when I complete it. But then Mises has written a great book on that very subject – “The Theory of Money and Credit” (pdf; ~25mb) (or html). It has an introduction by the English economist Lionel Robbins, and begins with this short, sarcastic, and optimistic preface-

Forty years have passed since the first German-language edition of this volume was published. In the course of these four decades the world has gone through many disasters and catastrophes. The policies that brought about these unfortunate events have also affected the nations’ currency systems. Sound money gave way to progressively depreciating fiat money. All countries are today vexed by inflation and threatened by the gloomy prospect of a complete breakdown of their currencies.

There is need to realize the fact that the present state of the world and especially the present state of monetary affairs are the necessary consequences of the application of the doctrines that have got hold of the minds of our contemporaries. The great inflations of our age are not acts of God. They are man-made or, to say it bluntly, government-made. They are the offshoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and of making people happy by raising the “national income.”

One of the main tasks of economics is to explode the basic inflationary fallacy that confused the thinking of authors and statesmen from the days of John Law down to those of Lord Keynes. There cannot be any question of monetary reconstruction and economic recovery as long as such fables as that of the blessing of “expansionism” form an integral part of official doctrine and guide the economic policies of the nations.

None of the arguments that economics advances against the inflationist and expansionist doctrine is likely to impress demagogues. For the demagogue does not bother about the remoter consequences of his policies. He chooses inflation and credit expansion although he knows that the boom they create is short-lived and must inevitably end in a slump. He may even boast of his neglect of the long-run effects. In the long run, he repeats, we are all dead; it is only the short run that counts.

But the question is, how long will the short run last? It seems that statesmen and politicians have considerably overrated the duration of the short run. The correct diagnosis of the present state of affairs is this: We have outlived the short run and have now to face the long-run consequences that political parties have refused to take into account. Events turned out precisely as sound economics, decried as orthodox by the neo-inflationist school, had prognosticated.

In this situation an optimist may hope that the nations will be prepared to learn what they blithely disregarded only a short time ago. It is this optimistic expectation that prompted the publishers to republish this book and the author to add to it as an epilogue an essay on monetary reconstruction.

Mises wrote this in 1952, and the world hasn’t learned the lesson even in 2008. That’s why optimism is a bad joke.

Another interesting book, and this is actually a textbook for undergraduate students and a self study guide of general interest, is “Money and Banking” by John Thom Holdsworth, a Professor of Economics at Pittsburgh University, and the Dean of their School of Economics. This book was written in 1917, immediately after the creation of the US Federal Reserve and devotes a few chapters to the history of money in the United States.

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