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I. The Outcome of Inflation

Attempts to stabilize the value of the monetary unit strongly influence the monetary policy of almost every nation today.* They must not be confused with earlier endeavors to create a monetary unit whose exchange value would not be affected by changes from the money side.1 In those olden, and happier times, the concern was with how to bring the quantity of money into balance with the demand, without changing the purchasing power of the monetary unit. Thus, attempts were made to develop a monetary system under which no changes would emerge from the side of money to alter the ratios between the generally used medium of exchange (money) and other economic goods. The economic consequences of the widely deplored changes in the value of money were to be completely avoided.


Today's monetary problem is a very different one. During and after the war [World War I, 1914–1918], many countries put into circulation vast quantities of credit money, which were endowed with legal tender quality. In the course of events described by Gresham's Law, gold disappeared from monetary circulation in these countries. These countries now have paper money, the purchasing power of which is subject to sudden changes. The monetary economy is so highly developed today that the disadvantages of such a monetary system, with sudden changes brought about by the creation of vast quantities of credit money, cannot be tolerated for long. Thus the clamor to eliminate the deficiencies in the field of money has become universal. People have become convinced that the restoration of domestic peace within nations and the revival of international economic relations are impossible without a sound monetary system.

1. Monetary Depreciation2




In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity. If “m” represents the actual number of monetary units on hand before the inflation began in a country, “P” represents the value then of the monetary unit in gold, “M” the actual number of monetary units which existed at a particular point in time during the inflation, and “p” the gold value of the monetary unit at that particular moment, then (as has been borne out many times by simple statistical studies):

mP > Mp.


Mp = mP.

The error in all this is not difficult to recognize. For the moment, let us disregard the fact—which will be analyzed more fully below—that at the start of the inflation the rate of exchange on the Bourse,4 as well as the agio [premium] against metals, races ahead of the purchasing power of the monetary unit expressed in commodity prices. Thus, it is not the gold value of the monetary units, but their temporarily higher purchasing power vis-à-vis commodities which should be considered. Such a calculation, with “P” and “p” referring to the monetary unit's purchasing power in commodities rather than to its value in gold, would also lead, as a rule, to this result:

mP > Mp.




2. Undesired Consequences




3. Effect on Interest Rates



4. The Run From Money




5. Effect of Speculation



6. Final Phases





7. Greater Importance of Money to a Modern Economy





  • *. Die geldtheoretische Seite des Stabilisierungsproblems (Schriften des Vereins für Sozialpolitik 164, part 2 [Munich and Leipzig: Duncker and Humblot, 1923]). The original manuscript for this essay was completed and submitted by the author to the printer in January 1923, more than eight months before the final breakdown of the German mark.
  • 1. [Following the terminology of Carl Menger, Mises wrote here of changes in the “internal objective exchange value” of the monetary unit. However, in this translation, the more familiar English term, later adopted by Mises, will be used—i.e, changes in the value of the monetary unit arising on the money side or, simply, “cash-induced changes.” Menger's term for changes in the monetary unit's “external exchange value” will be rendered as “changes from the goods side” or “goods-induced changes.” See below p. 76, note 17. Also Mises's Human Action (1949; 1963 [Chicago: Contemporary Books, 1966], p. 419; Scholar's Edition [Auburn, Ala.: Ludwig von Mises Institute, 1998], p. 416).—Ed.]
  • 2. [Mises uses the term “inflation” in its historical and scientific sense as an increase in the quantity of money.—Ed.]
  • 3. [Here in the German text Mises used, without special comment, the English term “standard of deferred payments.” For his reasons, see below, p. 58, note 3.—Ed.]
  • 4. Bourse (French). A continental European stock exchange, on which trades are also made in commodities and foreign exchange.
  • 5. The Treaty of Versailles at the end of World War I (1914–1918) reduced German controlled territory considerably, restored Alsace-Lorraine to France, ceded large parts of West Prussia and Posen to Poland, ceded small areas to Belgium and stripped Germany of her former colonies in Africa and Asia.
  • 6. [The post World War I inflation in Austria is not as well known as the German inflation of 1923. The Austrian crown depreciated disastrously at that time, although not to the same extent as the German mark. The leader of the Christian-Social Party and Chancellor of Austria (1922–1924 and 1926–1929), Dr. Ignaz Seipel (1876–1932), acting on the advice of Professor Mises and some of his associates, succeeded in stopping the Austrian inflation in 1922.—Ed.]
  • 7. Moneys issued by no longer existing governments. The Romanovs were thrown out of power in Russia by the Communist Revolution in 1917; Hungary's post World War I Communist government lasted only from March 21, to August 1, 1919.
  • 8. Horace White, Money and Banking: Illustrated by American History (Boston, 1895), p. 142. [NOTE: We could not locate a copy of the 1895 edition to verify this quotation. However, it appears, without the last sentence, in the 5th (1911) edition, p. 99.—Ed.]
  • 9. Louis Adolphe Thiers, Histoire de la Revolution Française, 7th ed., vol. V (Brussels, 1838), p. 171. The interpretation placed on these events by the “School” of G.F. Knapp is especially fantastic. See H. Illig's Das Geldwesen Frankreichs zur Zeit der ersten Revolution bis zum Ende der Papiergeldwährung [The French monetary system at the time of the first revolution to the end of the paper currency] (Strassburg, 1914), p. 56. After mentioning attempts by the state to “manipulate the exchange rate of silver,” he points out: “Attempts to reintroduce the desired cash situation began to succeed in 1796.” Thus, even the collapse of the paper money standard was a “success” for the State Theory of Money. [NOTE: The “State Theory of Money” has been the basis of the monetary policies of most governments in this century. Mises frequently credited the book of Georg Friedrich Knapp (3rd German edition, 1921; English translation by H.M. Lucas and J. Bonar, State Theory of Money, London, 1924) for having popularized it among German-speaking peoples. Knapp held that money was whatever the government decreed to be money—individuals acting and trading on the market had nothing to do with it. See Mises's The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953), pp. 463–69; and (Indianapolis, Ind.: LibertyClassics, 1980), pp. 506–12.—Ed.]
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