Last Skirmishes with the Monetarists

Rothbard's apparent decline was not the main worry for the aging Mises. He followed with great concern how the American monetary system, and the global monetary system built on it, unraveled all through the 1960s. In the middle of the decade, the alarm bells were ringing at the headquarters of the U.S. monetary authorities. Foreign central banks and individuals were following the lead of France in redeeming dollars in gold. The United States government's stock of gold shrank on a daily basis and at an accelerating rate. The new economists were quick to repeat their endless lamentation that all of this was the consequence of the “unfavorable balance of payments” and they demanded measures against greedy businessmen driving up prices in the States; some were even calling for controls of foreign exchange. Philip Cortney wrote to Mises, inquiring why he had not published anything on the present calamity. Mises replied that in his books he had said everything on the issue. But then he set forth his view anyway:

Those ascribing inflow and outflow of money in or out of a country to the sales and purchases of the country's inhabitants are committed to a fallacy. They assume that the size of an individual's cash-holding is not planned by the man but is merely the unintentional outcome of his buying and selling. A man (or a business firm or a department of the public administration) may one morning be surprised to discover that there is no money left in his pocket to buy a postage stamp. What a catastrophe if this happens to a considerable part of the nation! The supporters of this doctrine are inconsistent as they think that this calamity can only occur in the mutual transactions of the inhabitants of sovereign nations and not also in the business relations of the administrative subdivisions....

There prevails in the world the opinion that the inflationary policy of the American Government will continue, that sooner or later the gold hoard in Fort Knox will be exhausted and the American Administration will be forced to abandon its policy of selling the ounce to foreign governments and central banks at $35. This explains the drain upon the American Government's gold holdings.

If our civilization will not in the next years or decades completely collapse, the gold standard will be restored.⁴⁴

Cortney replied with news about his talks with Jacques Rueff. And he reported that the French press had quoted Fritz Machlup's testimony before a congressional committee in Washington, D.C., in which Machlup had pronounced himself against a return to the gold standard.⁴⁵ Mises had already been informed, by Machlup himself. His former student asked him for “hints about books or articles that may contain pertinent material” to bolster his claim that the French monetary authorities in the 1920s had successfully abolished the “self-restriction” that comes with the gold standard.⁴⁶

This must have come as a shock for Mises. In the fall of the same year, he met Machlup at the Mont Pèlerin Society meeting in Stresa, only to witness him reiterating his new views. He got very upset and told Margit not to talk to Machlup any more.⁴⁷ Here is Machlup's version of the event:

Philip Cortney made his customary plea for an immediate return to the gold standard with a substantial increase in the official price of gold. After listening to the reasons he gave for raising the price of gold, I used the chairman's prerogative to make a comment in the subject. I compared the plea of the gold-boosters to the pleas of trade-union leaders who want wage rates to be raised after a period of falling prices... and want wage rates to be raised also after a period of rising prices.... Similarly, the gold lobby wants the price of gold to be raised after a period of falling commodity prices... and want the price of gold to be raised also after a period of increasing commodity prices.⁴⁸

No wonder Mises was upset. His former student, an erstwhile champion of the gold standard, had now publicly reduced the issue to a question of special interest politics.

Another year later Mises sensed a seismic shift in the quality of the developing crisis. He wrote:

What not so long ago could be called a monetary crisis is more and more—at least for the U.S.—developing into a most serious political crisis. The federal Government as well as the States and the Municipalities have since 1960 wasted fabulous sums of money for more or less unnecessary expenditures and are now facing tremendous deficits. There cannot be any question of a serious monetary reform because the ruling party (for many years probably Leftists) thinks—probably correctly—that its popularity could not survive a return to balanced budgets. This means that inflation is now the main financial basis of the nation's political actions and that no “practical” man, no man who counts in an election campaign, gives any thought to a state of affairs without a continuous increase in the quantity of money in circulation.⁴⁹

Mises planned to take part in an April 1968 conference on international monetary problems organized by the Graduate Institute of International Studies. The invitation came from Jacques Freymond, who then headed the Institute, but had been extended at the behest of Philip Cortney. Mises was looking forward to the event, but then Cortney explained that the agenda and the conclusions were already set, and that academic discussion was to be kept to a strict minimum. “For your guidance: we do not recommend putting an end to the I.M.F.”⁵⁰ Mises immediately declined participation.