German-Language Predecessors of Mises's Monetary Thought

0:00Good afternoon, I'm very honored to have the opportunity to present my paper about the influence of the German economists on the first edition of The Theory of Money and Credit at the occasion of its 100th anniversary. In my paper, I'm actually asking two questions, which the first one will be to what extent was the first edition of The Theory of Money and Credit influenced by German economists, or more basically, what were the main similarities, what were the main differences? And after, I hope that I can answer the second question, which would be, how does it come that the reception of the first edition in German academia at this time was so lukewarm or so ambivalent? So, here to have some quotes on Mises in 1928 in his essay, A Monetary Stabilization, he wrote, 16 years ago when I presented the circulation credit theory, I encountered ignorance and stubborn rejection everywhere.

0:58Here, he only refers to his circulation credit theory, but actually was the case for his whole work. That's what he's underlining more in his memoirs or notes and recollections, where he says, as could be expected, my book was rejected summarily by the journals of German social sciences. So in this paper, we'll proceed as follows. I will do some sort of comparative analysis, where I will study the four major German economists, This being William Rocha and Karl Heinrich Rao of the 9th century, Karl Heinrich Rao actually afterwards will provide the reference of 1868, but actually already wrote these theories in 1827, so you have to take this into account, William Rocha wrote it in the 50s, and then I will study in more detail as well Adolf Wagner and Karl Knies, who were the major main theorists and who were the major supporters of the and the opposite sides in the central banking versus free banking debate in the 1870s.

1:59So the fields that I'm going to study, origin of money, value of money, quantity of money, contillon effects, banks of issue and the central banking debate. So we'll start right away with the first section. So what was the general critique of Menger was the German economist would consider that money is created by a convention by the state or by law. As you can see here in the quotes, Kniece was perfectly aware that it is the fruit of indirect exchange, or more elegantly formulated by Karl-Einrich Rao. One good, a generally popular sort of the commodity, not for its direct use, but for the use to exchange it for another good, would become gradually money. Wagner had more or less the same opinion. You have to know that Wagner was a doctorate student of Rao, and he took over many of his major ideas.

2:49But I'm not claiming that the Germans were the originators, but just that they have the same point of view about this topic. That's where actually Mises is directly quoting Mises. Where Mises is directly quoting Kniece in his first edition is the topic on hoarding, where Kniece would say, OK, hoarding is an artificial problem, because money can never lie idle. So that's actually the origin in Kyle Kniece's work. If you go further to the value of money discussion, actually, Rao already in 1826, he formulated some sort of, that we should regress in time, at the time when a commodity, at the time when the money used to be a commodity, and we should trace back to the value it had when it was still used as a normal commodity.

3:38The views were shared by Kniece and Wagner, and actually, all the main components The arguments that you can find nowadays in regression theorem, which already was a refinement of Friedrich Wiese's attempt to counter the circularity argument by Hilferich, are already found in these writings. And similarly, Wagner and Kniez were perfectly aware as well that both the industrial employment and the monetary employment determined the value of money. Here additionally, again, for the convention by the law that all the German historicists just thought, okay, the state can decree what is money and what not. Knies would say, no, a government authority cannot attribute a value to anything which is not already accepted by the individual actors in the economy.

4:24And then he would make the comparison, a government authority could also declare, okay, two pounds or six pounds and so on. And Knievel's actually also, that's where Mises is referring to him partly, would renounce, denounce the idea that the law is always considering money as having a constant value. That's where now is the topic of quantity of money, that's actually where the main difference is between the German economists and Mises' attempt. Obviously they have not invented velocity theory, can at least find it already in the 16th century in the writings of Jean Boudin or Davanzati or whatever. but German economists were working on this in more detail and actually Rao already formulated in the 1827 the exchange equation of Irving Fischer the exact same formula only that it was in German but obviously Irving Fischer did not read it in German and to summarize what would it imply for them that okay the money supply it depends on the commercial activity and they would say for instance okay assume as Wagner quoted he as I quote

5:30Wagner here, assumed the wheat prices increased due to a bad harvest, what should we do? Increase the money supply or he, Wagner would be in opposition to what was put forward by the currency school, okay, if the money supply increases, commercial activity increases and that's why prices increase. But there was no clear statement about which a quantity of money would be socially optimal. That's a complete contradict, completely the opposite with Mises who already in 1912 would claim okay every amount of money is basically socially optimal but but I will not talk too much about it because Guido Hülsmann will talk about this topic as well he already made had some reservations about this topic in the first edition he would say okay a claim at some places there can be a lack of fiduciary media and the quantity of money needed can depend on the degree of modernization and seasons and so on which would not be the case in the second Edition, or less the case.

6:32When we look at the topic of the Cantillon effects, Rao also knew that an increase of the quantity of money can disturb the economy. And obviously, it will arrive at several places. And there will be winners and losers, and especially creditors. While this topic has also been treated, for instance, by Jean Boudin, that the creditors are always the big losers. Here, what is interesting, that Knies argues as well, okay, what is the main problem? The government is the biggest debtor, and that's why it is accepted. At the banks, the next chapter, which is the chapter before the last one, it's about the banks of issue and fiat money, and here it is, actually the German, when we talk about the quantity of money theory, the Germans were also referring to the case were actually, we were talking about redeemable money, not necessarily about fiat money and unredeemable paper money.

7:33So in this case, they were basically all in favor of 100% banking, more or less, and Kniece would say, okay, fiat money or the perpetual circulation of depreciated money is one of the biggest plugs in an economy, and that it was exactly, especially interesting for the weak, restricted, selfish, and frivolous statesmen, as he would say. in 1873. Wagner, here's the difference. OK, he was in favor of 100% of banking as well in general. But he actually makes the argument, in contrast to the other economists that I was quoting before, that it has to be the same for banknotes and deposits. So an idea that has to be put forward by Mises as well, Wagner talked about it as well and criticized actually the currency school for the exact same reason Mises would criticize them.

8:23and it follows from that as well. Okay, the physical property of money doesn't play a major role and they're only slightly different which already leads me to my last chapter which is about the necessity of our central bank. So I took basically Kniez and Wagner as they were the major players or supporters of the opposite sides in this discussion as already said in the introduction. And Kniez actually, he would already be aware of the problems of fiat money and so on. as he said, okay, it's one of the biggest blocks, but he still prefers that it's the, as he says, the issue of fiat money by the state is substantially unjust, unfair, but it's still better than private banks that compete with each other. And comparing the whole thing, okay, you would never leave to the market an establishment of measures or weights.

9:13That was his opinion at the time. But Wagner, to the contrast, he would say, okay, the freedom of banks is actually a good way to control the management of those banks and actually he's using statistics of the Scottish bank system, the free banking system and in England where a more monopolized system was going on and to compare and say okay the issue of the money in the Scottish bank system was much less reckless and as long as the notes are redeemable there is no reason that there There is an inundation of banknotes under a free banking system and he says as well as a quote okay the legal imposition of a reserve rate is one of the worst state interventions that have been done in monetary fees because now actually the banking system is much more fragile and banks that would not have been founded before can now enter the market with a lower reserve requirement while under the system of the freedom of banking as Wagner put forward okay you have to have a certain reputation

10:15and so on, that you can afford to have a low reserve. But what was Mises' stance on it? I'm just doing some short things. In the first edition, there were possibilities to intervene, to have the necessity for central bank, but Guido Hülsmann will talk about this as well in his presentation after. And it's only in the second edition that he would state things like, okay, at the time has been a failure, and that free banking would lead to a stronger Banking System by Higher Reserves. And actually, he'd evolved his arguments even further and then the English edition of 53, he would add another chapter about this topic. But arguments are pretty similar to that that were advanced by Adolf Wagner in the 1850s.

11:04So this leads me to my conclusion. So the only thing, the purpose, I'm not saying that there were originators of all of these ideas, but that many of these approaches can already be found in the German monetary economists and that maybe the treatment, because at some time Mises would say, okay, to some extent everything the German economists, what they published were a huge pile of worthless publications because everything has already been said in the banking and monetary, banking and currency debate. And what I wanted to show that the main difference was exactly that about the quantity of money Mises was making a big statement by saying, okay, every amount of money can be socially optimal, which obviously has implications and knowing the political context at the time, 1912, which was only a few years away from the German hyperinflation in 1923.

11:59This would be one of the, it was obviously a not really accepted idea back then. And what is interesting as well that German economists at the time who were the reviewers apparently forgot the basics that already have been taught by those German economists some 40, 50, 60 years ago and were developing the weakest ideas about the conventions and so on, in my opinion. And actually some 10 or 20 years later, nobody would even talk about their works and as Mises says for instance in his memoirs, okay, those reviewers who reviewed me actually are no longer any monetary authorities and it's a good thing for him. So that's about the revival of the second edition of 1924.

12:50So thank you very much for your attention and that's it.