by Mises
[Title Page and Table of Contents]: The title page and detailed table of contents for Mises's 1928 work on monetary stabilization and cycle policy. It outlines the structure of the book, covering the problem of purchasing power, the gold standard, Fisher's stabilization plan, and circulation credit theory. [Introduction: The Evolution of Monetary and Business Cycle Theory]: Mises introduces the current state of economic science, noting the popularity of business cycle research. He argues that modern subjectivist economics has successfully integrated and built upon classical foundations, specifically the quantity theory and circulation credit theory. He criticizes the 'Banking School' and historical-institutionalist approaches, asserting that a sound theory of the trade cycle must be rooted in a comprehensive system of indirect exchange. [The Problem of Purchasing Power and Stabilization Plans]: Mises discusses the historical development of the concept of purchasing power and the realization that precious metals are not 'value-stable'. He reviews early proposals for a 'tabular standard' for long-term contracts and examines modern 'manipulated' currency plans by Keynes and Irving Fisher, which aim to stabilize the unit of account through government intervention. [The Gold Standard and the Impact of Monetary Policy]: Mises analyzes the mechanics of the gold standard and the causes of gold's devaluation since 1896. He argues that the decline in gold's purchasing power was largely driven by deliberate monetary policies—such as the shift to the gold exchange standard (Goldkernwährung) and the promotion of cashless payments—which reduced the global demand for physical gold in favor of fiduciary media. [The Manipulability of the Gold Standard]: This section examines the extent to which the gold standard can be influenced by policy. Mises argues that while the gold standard is 'manipulable' through changes in national demand or reserve requirements, its primary virtue is that once established, it removes the daily valuation of money from political whims. He also addresses fears of gold scarcity and falling prices. [The Immeasurability of Changes in Purchasing Power]: Mises provides a critique of index numbers and the attempt to measure the 'price level'. From the perspective of subjectivist economics, he argues that the concept of a stable purchasing power is a fiction. He details the arbitrary nature of choosing averages and weighting coefficients, concluding that while index numbers may have pedagogical use during hyperinflation, they lack scientific precision for policy. [Fisher's Stabilization Plan and the Critique of Index Numbers]: Mises critiques Irving Fisher's plan for stabilizing the purchasing power of money through index-based manipulation. He argues that gold's value is superior precisely because it is independent of political influence, whereas a 'manipulated' currency would become a tool for political parties to favor specific groups. Furthermore, Mises highlights the scientific impossibility of a single 'correct' index method and notes that the quantity theory of money does not support a simple proportional relationship between money supply and purchasing power. [The Failure of Commodity Standards and the Role of the Price Premium]: Mises examines proposals to replace the gold standard with commodity-based standards for deferred payments. He introduces Fisher's significant contribution regarding the 'price premium' (Kaufkraftveränderungsprämie) in interest rates, explaining how expectations of price changes affect gross interest rates. Mises argues that while short-term credit markets can often account for these changes through price premiums, Fisher's plan remains inadequate for long-term contracts and fails to address the fundamental flaws of index-based calculations. [Social Consequences of Non-Uniform Price Changes]: This section details why monetary stabilization via index numbers fails to prevent the social disruptions caused by inflation. Mises explains that changes in the money supply do not affect all prices simultaneously or uniformly (the Cantillon effect). Because new money enters the economy at specific points, it creates shifts in wealth and income between different social groups (e.g., war profiteers vs. public employees) and distorts international trade before the full price adjustment is complete. [Monetary vs. Commodity-Side Changes and the Ethics of Stability]: Mises distinguishes between changes in purchasing power originating from the 'money side' versus the 'commodity side' (productivity changes). He challenges the notion that maintaining a constant price level is inherently 'just.' If productivity increases, a falling price level allows creditors and fixed-income earners to share in the general progress; forcing prices to stay level via index-based manipulation would effectively redistribute wealth away from them. He attributes the popular desire for stability to a psychological urge for a stationary state and a resistance to the dynamic nature of progress. [The History and Goals of Monetary Policy]: Mises traces the evolution of monetary policy from crude debasement to the liberal ideal of the gold standard. He argues that the gold standard's primary virtue was its independence from political interference. He critiques the modern shift toward the 'gold exchange standard' and 'cheap money' policies, which he believes undermined the gold standard's stability. He concludes that while the gold standard is not perfect, chasing the 'chimera' of a perfectly stable index-based currency is a dangerous error that expands government power. [Business Cycle Policy and the Circulation Credit Theory]: Mises transitions to discussing business cycle policy (Konjunkturpolitik). He critiques purely empirical or psychological explanations of economic crises, asserting that a sound theory is necessary to even identify a 'cycle' within the chaos of market events. He champions the 'Circulation Credit Theory' (monetary theory of the cycle) developed by the Currency School, which identifies the expansion of bank credit as the primary cause of the boom-bust cycle. He argues that all modern attempts to influence the cycle are implicitly based on this theory. [The Circulation Credit Theory]: Mises explains the Circulation Credit Theory, distinguishing between 'commodity credit' (backed by savings) and 'circulation credit' (fiduciary media created by banks). He critiques the Banking School's 'needs of trade' doctrine, arguing that banks can artificially lower the money rate of interest below the natural rate, leading to 'forced saving' and a distortion of the production structure. The segment defines money substitutes and explores how credit expansion initially affects the prices of higher-order goods (production goods) before impacting consumer prices. [The Mechanism of the Business Cycle]: This section details the progression of the trade cycle triggered by bank-induced interest rate suppression. Mises describes how the gap between the natural and money rates of interest leads to over-investment in projects that exceed the available subsistence fund. He explains the role of the 'price premium' in the boom phase and why the expansion must eventually end in a crisis once banks cease further credit expansion or the public loses confidence in the currency's value. The aftermath of the crisis is characterized as a period of liquidation and stagnation where the money rate may temporarily fall below the natural rate due to extreme caution. [The Recurrence of Cycles and the Role of Ideology]: Mises argues that the recurring nature of business cycles is not an inherent flaw of capitalism but a result of an 'inflationist ideology' that views low interest rates as a primary goal of economic policy. He contrasts paper money inflation with circulation credit expansion, noting that the latter is systematically encouraged by governments and public opinion. Mises suggests that under a system of 'bank freedom' (free banking) without government privileges or central bank bailouts, banks would be forced to exercise extreme caution, thereby preventing the massive credit expansions that lead to crises. He critiques the historical shift toward central banking and the practice of intervening to save failing banks, which removes the market's natural check on reckless expansion. [Modern Business Cycle Policy and the Circulation Credit Theory]: Mises argues that modern business cycle policy is rooted in the circulation credit theory, which identifies the divergence between the market interest rate and the natural rate as the cause of economic fluctuations. He distinguishes between two modern approaches: one seeking to stabilize the purchasing power of money and another, similar to the old Currency School, focused on crisis prevention by countering both monetary and credit inflation. He emphasizes that while theoretical understanding has advanced since the Currency School through the work of Wicksell and others, the fundamental policy prescription remains the same: preventing the artificial depression of interest rates through credit expansion. [The Harvard Barometer and Statistical Methods in Cycle Research]: This section evaluates the use of statistical methods and 'business cycle barometers,' specifically the Harvard method, in economic forecasting. Mises acknowledges that these tools provide empirical verification for the circulation credit theory by showing the relationship between stock, commodity, and money markets. However, he warns that these barometers do not provide an exact basis for central bank decisions, as the data is subject to interpretation and cannot precisely determine the timing or magnitude of necessary interest rate adjustments to prevent malinvestment. [The Ideology of Credit Expansion and Central Bank Discretion]: Mises critiques the prevailing ideology that views credit expansion as a tool for economic stimulus. He explains that central banks often hesitate to raise interest rates during an upswing due to political pressure and the fear of stifling 'natural' prosperity. This delay allows for capital malinvestment. He argues that true stability requires renouncing the artificial stimulation of business through banking measures and suggests that while total banking freedom might be the ideal solution, it is currently politically unfeasible. [International Cooperation and Control of the Money Market]: Mises discusses the dangers of international central bank cooperation, which he fears might be used to coordinate credit expansion and remove the 'brake' provided by gold outflows. He also critiques the concept of 'mastering the money market,' arguing that central banks use this power to pursue inflationary policies while trying to suppress the resulting symptoms, such as stock market booms or capital flight. He maintains that such interventions only delay and ultimately worsen the inevitable crisis. [Business Forecasting for the Merchant and the Limits of Policy]: Mises examines the utility of business cycle forecasting for individual merchants. He argues that while statistical data is useful, it cannot replace the entrepreneurial judgment required to predict the exact timing of a market turn. He notes that if a crisis were perfectly predictable by all, it would occur immediately. He also references Herbert Spencer to illustrate that long-term historical foresight does not necessarily translate into successful short-term financial speculation. [Conclusion: Goals and Means of Future Business Cycle Policy]: In the concluding section, Mises proposes a return to the principles of the Currency School, expanded to include bank deposits (fiduciary media). He advocates for a 100% metallic reserve requirement for any new circulation credit to prevent future crises. He critiques Keynesian ideas of autonomous national price stabilization, arguing they lead to international conflict and trade distortions. Mises concludes that the only way to mitigate the business cycle is to abandon the illusion that bank-technical measures can artificially lower interest rates and create lasting prosperity without a subsequent crash.
The title page and detailed table of contents for Mises's 1928 work on monetary stabilization and cycle policy. It outlines the structure of the book, covering the problem of purchasing power, the gold standard, Fisher's stabilization plan, and circulation credit theory.
Read full textMises introduces the current state of economic science, noting the popularity of business cycle research. He argues that modern subjectivist economics has successfully integrated and built upon classical foundations, specifically the quantity theory and circulation credit theory. He criticizes the 'Banking School' and historical-institutionalist approaches, asserting that a sound theory of the trade cycle must be rooted in a comprehensive system of indirect exchange.
Read full textMises discusses the historical development of the concept of purchasing power and the realization that precious metals are not 'value-stable'. He reviews early proposals for a 'tabular standard' for long-term contracts and examines modern 'manipulated' currency plans by Keynes and Irving Fisher, which aim to stabilize the unit of account through government intervention.
Read full textMises analyzes the mechanics of the gold standard and the causes of gold's devaluation since 1896. He argues that the decline in gold's purchasing power was largely driven by deliberate monetary policies—such as the shift to the gold exchange standard (Goldkernwährung) and the promotion of cashless payments—which reduced the global demand for physical gold in favor of fiduciary media.
Read full textThis section examines the extent to which the gold standard can be influenced by policy. Mises argues that while the gold standard is 'manipulable' through changes in national demand or reserve requirements, its primary virtue is that once established, it removes the daily valuation of money from political whims. He also addresses fears of gold scarcity and falling prices.
Read full textMises provides a critique of index numbers and the attempt to measure the 'price level'. From the perspective of subjectivist economics, he argues that the concept of a stable purchasing power is a fiction. He details the arbitrary nature of choosing averages and weighting coefficients, concluding that while index numbers may have pedagogical use during hyperinflation, they lack scientific precision for policy.
Read full textMises critiques Irving Fisher's plan for stabilizing the purchasing power of money through index-based manipulation. He argues that gold's value is superior precisely because it is independent of political influence, whereas a 'manipulated' currency would become a tool for political parties to favor specific groups. Furthermore, Mises highlights the scientific impossibility of a single 'correct' index method and notes that the quantity theory of money does not support a simple proportional relationship between money supply and purchasing power.
Read full textMises examines proposals to replace the gold standard with commodity-based standards for deferred payments. He introduces Fisher's significant contribution regarding the 'price premium' (Kaufkraftveränderungsprämie) in interest rates, explaining how expectations of price changes affect gross interest rates. Mises argues that while short-term credit markets can often account for these changes through price premiums, Fisher's plan remains inadequate for long-term contracts and fails to address the fundamental flaws of index-based calculations.
Read full textThis section details why monetary stabilization via index numbers fails to prevent the social disruptions caused by inflation. Mises explains that changes in the money supply do not affect all prices simultaneously or uniformly (the Cantillon effect). Because new money enters the economy at specific points, it creates shifts in wealth and income between different social groups (e.g., war profiteers vs. public employees) and distorts international trade before the full price adjustment is complete.
Read full textMises distinguishes between changes in purchasing power originating from the 'money side' versus the 'commodity side' (productivity changes). He challenges the notion that maintaining a constant price level is inherently 'just.' If productivity increases, a falling price level allows creditors and fixed-income earners to share in the general progress; forcing prices to stay level via index-based manipulation would effectively redistribute wealth away from them. He attributes the popular desire for stability to a psychological urge for a stationary state and a resistance to the dynamic nature of progress.
Read full textMises traces the evolution of monetary policy from crude debasement to the liberal ideal of the gold standard. He argues that the gold standard's primary virtue was its independence from political interference. He critiques the modern shift toward the 'gold exchange standard' and 'cheap money' policies, which he believes undermined the gold standard's stability. He concludes that while the gold standard is not perfect, chasing the 'chimera' of a perfectly stable index-based currency is a dangerous error that expands government power.
Read full textMises transitions to discussing business cycle policy (Konjunkturpolitik). He critiques purely empirical or psychological explanations of economic crises, asserting that a sound theory is necessary to even identify a 'cycle' within the chaos of market events. He champions the 'Circulation Credit Theory' (monetary theory of the cycle) developed by the Currency School, which identifies the expansion of bank credit as the primary cause of the boom-bust cycle. He argues that all modern attempts to influence the cycle are implicitly based on this theory.
Read full textMises explains the Circulation Credit Theory, distinguishing between 'commodity credit' (backed by savings) and 'circulation credit' (fiduciary media created by banks). He critiques the Banking School's 'needs of trade' doctrine, arguing that banks can artificially lower the money rate of interest below the natural rate, leading to 'forced saving' and a distortion of the production structure. The segment defines money substitutes and explores how credit expansion initially affects the prices of higher-order goods (production goods) before impacting consumer prices.
Read full textThis section details the progression of the trade cycle triggered by bank-induced interest rate suppression. Mises describes how the gap between the natural and money rates of interest leads to over-investment in projects that exceed the available subsistence fund. He explains the role of the 'price premium' in the boom phase and why the expansion must eventually end in a crisis once banks cease further credit expansion or the public loses confidence in the currency's value. The aftermath of the crisis is characterized as a period of liquidation and stagnation where the money rate may temporarily fall below the natural rate due to extreme caution.
Read full textMises argues that the recurring nature of business cycles is not an inherent flaw of capitalism but a result of an 'inflationist ideology' that views low interest rates as a primary goal of economic policy. He contrasts paper money inflation with circulation credit expansion, noting that the latter is systematically encouraged by governments and public opinion. Mises suggests that under a system of 'bank freedom' (free banking) without government privileges or central bank bailouts, banks would be forced to exercise extreme caution, thereby preventing the massive credit expansions that lead to crises. He critiques the historical shift toward central banking and the practice of intervening to save failing banks, which removes the market's natural check on reckless expansion.
Read full textMises argues that modern business cycle policy is rooted in the circulation credit theory, which identifies the divergence between the market interest rate and the natural rate as the cause of economic fluctuations. He distinguishes between two modern approaches: one seeking to stabilize the purchasing power of money and another, similar to the old Currency School, focused on crisis prevention by countering both monetary and credit inflation. He emphasizes that while theoretical understanding has advanced since the Currency School through the work of Wicksell and others, the fundamental policy prescription remains the same: preventing the artificial depression of interest rates through credit expansion.
Read full textThis section evaluates the use of statistical methods and 'business cycle barometers,' specifically the Harvard method, in economic forecasting. Mises acknowledges that these tools provide empirical verification for the circulation credit theory by showing the relationship between stock, commodity, and money markets. However, he warns that these barometers do not provide an exact basis for central bank decisions, as the data is subject to interpretation and cannot precisely determine the timing or magnitude of necessary interest rate adjustments to prevent malinvestment.
Read full textMises critiques the prevailing ideology that views credit expansion as a tool for economic stimulus. He explains that central banks often hesitate to raise interest rates during an upswing due to political pressure and the fear of stifling 'natural' prosperity. This delay allows for capital malinvestment. He argues that true stability requires renouncing the artificial stimulation of business through banking measures and suggests that while total banking freedom might be the ideal solution, it is currently politically unfeasible.
Read full textMises discusses the dangers of international central bank cooperation, which he fears might be used to coordinate credit expansion and remove the 'brake' provided by gold outflows. He also critiques the concept of 'mastering the money market,' arguing that central banks use this power to pursue inflationary policies while trying to suppress the resulting symptoms, such as stock market booms or capital flight. He maintains that such interventions only delay and ultimately worsen the inevitable crisis.
Read full textMises examines the utility of business cycle forecasting for individual merchants. He argues that while statistical data is useful, it cannot replace the entrepreneurial judgment required to predict the exact timing of a market turn. He notes that if a crisis were perfectly predictable by all, it would occur immediately. He also references Herbert Spencer to illustrate that long-term historical foresight does not necessarily translate into successful short-term financial speculation.
Read full textIn the concluding section, Mises proposes a return to the principles of the Currency School, expanded to include bank deposits (fiduciary media). He advocates for a 100% metallic reserve requirement for any new circulation credit to prevent future crises. He critiques Keynesian ideas of autonomous national price stabilization, arguing they lead to international conflict and trade distortions. Mises concludes that the only way to mitigate the business cycle is to abandon the illusion that bank-technical measures can artificially lower interest rates and create lasting prosperity without a subsequent crash.
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