11 Further Studies in Indirect Exchange

I was not satisfied with a number of things in The Theory of Money and Credit. I found it necessary to remedy its short- comings.

Neither the criticism of my book, nor the works of others published on the problems of indirect exchange since 1911 were in any way able to shake my claims. I am grateful for the incentive provided by the works of B.M. Anderson, T.E. Gregory, D.H. Robertson, Albert Hahn, Hayek, and Machlup. They caused me to reconsider my theory and improve its presentation. Even where they opposed my reasoning, they confirmed rather than rejected the core of my teaching. From the writings of these men I gained not only an education, but found in them as well the comfort that I was not on my own as an economist, working for the sake of libraries alone.

Surely enough, the rest of the publications on the problems of money and credit published in the last thirty years were rather insignificant. The decline in scientific thinking was shocking. One can say that some of the works appearing during this time were acceptable in general, even though some things seemed untenable and there were deficiencies with regard to presentation. Indeed, the majority of the books and articles are completely worthless.

Such harsh judgment applies principally to works that claim to point out “errors” that are contradicted or remain unexplained by “orthodox” theories. With but little understanding of the history of money and banking, the authors see these errors as new and unprecedented. They do not attempt to explain the facts in light of “orthodox” theory, because knowledge of the same and the ability to think scientifically escapes them.

I believe that keeping up with the literature day to day and providing solid critique for every nonsensical and insignificant assertion was an important job. Of course this would not prevent the repetition of old errors, but one could do a great service to the public interested in economic questions. Some friends and I pondered the launching of a new publication with this as its aim. But we were unable to find a publisher willing to take on the project without the assurance of financial subsidy.

What’s more, I am of the opinion that the refutation of current errors has much to offer as a topic for doctoral theses by the younger practitioners of our science. In fact, the minimal requirement of an economist is that he be able to recognize fallacies and refute them critically. I have encouraged works of this type on occasion.

There is only one such thesis I would like to mention here, one whose publication was prevented due to the difficult conditions prevailing in Austria in 1920. This is the work that earned Helene Lieser the first doctorate in the social sciences ever conferred upon a woman by an Austrian university. The dissertation dealt with the currency reform programs advanced in Austria during the years of the bank-note depreciation. She demonstrated that most of the reform proposals discussed in European countries in 1920 were not as new as their authors would have had us believe.

In my seminar, I seized every opportunity to refute popular errors. Indeed, I had neither the time nor the intent to dedicate my polemic efforts to falsities that had already been refuted a hundred times. I rather regret having spent too much of my limited strength in the war against pseudoeconomics. In hours of quiet reflection I repeatedly renewed my resolve to be guided by the passage of Spinoza: veritas norma sui et falsi est.¹ But time and again I let myself be carried away by my temperament.

I published many articles during the inflation that were intended to explain the nature of monetary depreciation and refute the balance-of-payment theory of exchange rates. In addition to the article on quantity theory just mentioned, I wrote “Zahlungsbilanz und Devisenkurs”² for the Mitteilungen des Vereins Österreichischer Banken und Bankiers,³ a journal that has in the meantime become available to the public.

For the Schriften des Vereins für Sozialpolitik I wrote “Geldtheorie Seit des Stabiliserungsproblems.”⁴ This essay was held in abeyance for many months by the board members of the Verein: they found questionable its rejection of the official thesis that the depreciation of the mark was caused by reparation payments and the French occupation. It was not published until the summer of 1923, my second article appearing in the journal. In 1919 I had contributed an essay to a volume on annexation problems of the reentry of German Austria into the German Empire and the currency problem.

In the second edition of The Theory of Money and Credit and in the small publication “Geldwertstabilisierung und Konjunkturpolitik”⁵ I framed the lessons on the trade cycle in a way that explained the cycle completely. The boom is facilitated by credit expansion. But what causes credit expansion? I had not answered this question in the first edition. Since that time I had found the answer. Banks want to lower the interest rate through credit expansion. Monetary policy that favors “cheap money” and the notion that credit expansion is the suitable means for attaining interest reduction encourages this practice and attempts to create the institutional conditions necessary for it.

Writing my Nationalökonomie afforded me the opportunity to think through my theory of money and credit yet again and present it in a new form.

In my book on money I had directed my critique at the widely accepted concept of direct exchange without use of money only inasmuch as it was necessary to reject the doctrine of the neutrality of money. I had only dealt with the problems of monetary calculation as was necessary for my inquiry into the social consequences of monetary depreciation. Anything further was to be left to the theory of direct exchange. But the basic thought was introduced in the book on money: there are values and valuations, to be sure, but no measurements of value and no value calculations; the market economy calculates with money prices. This was not new; it was that which flowed logically from the theory of subjective value. Gossen had already hinted at the conclusions that could thereby be drawn for the theory of a socialist economy. Pierson, whose work I came to know many years later through Hayek’s translation, had repeated Gossen’s thought.

When I set out to work on my book, Socialism, I was compelled to place special emphasis on the fundamentals of catallactics. A theory of socialism not having a consideration of the problem of economic calculation at its very foundation would be simply absurd. In 1919, therefore, I wrote and presented the Nationalökonomisch Gesellschaft with the essay, “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen.”⁶ At the suggestion of friends, I published it in 1920 in Archiv für Sozialwissenschaft und Sozialpolitik.⁷ It is incorporated in Socialism in an essentially unaltered form.

All attempts at disproving the conclusiveness of my thesis were destined for failure because they did not penetrate the value theory at the core of the problem. All of these books, theses, and essays tried to rescue socialism. They wanted to show that it was indeed possible to construct a socialist commonwealth in which economic calculations could be performed. They failed to see that one must begin with the question of how in an economy consisting of preferring or deferring–that is, making unequal valuations–one can arrive at comparable valuations and the use of equations. So it was that they came upon the absurd idea of recommending the equations of mathematical catallactics, which depict an image devoid of human action, as a substitute for the monetary calculation of the market economy.

It was in Socialism that I finally had the opportunity to present the problems of economic calculation in all of its significance. In the meantime I had to content myself with demonstrating the errors and contradictions of theretofore proposed suggestions for socialist economic calculation. It was only in the explanations put forth in the third part of Socialism that my theory of money (1940) found completion. Thus did I carry out the plan I had conceived thirty-five years earlier; I combined the theory of indirect exchange with the theory of direct exchange into a unified system of human action.