Ludwig von Mises, The Great German Inflation (1932)

Ludwig von Mises’s journal review article examines Frank D. Graham’s Exchange, Prices and Production in Hyper-Inflation: Germany 1920–23 through a larger argument about the practical consequences of economic doctrine. Its three sections move from the intellectual origins of German monetary policy, through Graham’s historical account and the failures of banking and business calculation, to the public’s changing response to depreciation. Mises’s central claim is that Germany’s inflation was neither an inexplicable catastrophe nor principally a deliberate scheme to evade reparations. It followed from monetary theories that prevented officials and the public from understanding the consequences of issuing money.

The German inflation, above all, was the outcome of the monetary and banking theory which for many years had obsessed the men who occupied the chairs of economics at the Universities, the men who governed the financial policy of the Reich, and the editors of the most influential newspapers and periodicals.

The opening section traces this failure to the rejection of the Quantity Theory and the Currency School. Mises attacks Wagner and Lexis for transmitting inadequate accounts of monetary economics, and Knapp and Bendixen for reinforcing doctrines detached from price formation. His criticism of Knapp is particularly conceptual: formally classifying currencies does not explain their purchasing power or establish what governments can accomplish by decree. Behind these monetary errors Mises identifies the statist outlook of Schmoller’s school, which substituted administrative history for theory and treated governmental power as capable of altering economic conditions without binding constraints.

This intellectual genealogy explains why Reichsbank governor Havenstein could regard rising prices and exchange rates as the work of speculators and enemies rather than as consequences of continuous note issuance. Suppression of profiteering consequently appeared to offer a remedy. Mises rejects the foreign suspicion that such policy concealed a calculated project of destruction: his explanation is theoretical ignorance, sustained by a political culture that treated disagreement as disloyalty. His polemic therefore concerns not only mistaken propositions but also the institutions and habits that insulated them from criticism.

The second section welcomes Graham’s book as a reliable narrative in a field Mises considers compromised by prejudice and inadequate theory. Its value lies in documenting events, rather than in discovering economic mechanisms unknown before the German episode.

In judging this valuable book we must bear in mind that all the experience of the German Inflation brought nothing that could puzzle the theoretical economist.

Mises uses Graham’s account of Reichsbank discount rates to expose the difference between nominal interest and the actual burden of repayment. Even seemingly enormous annual rates failed to deter borrowing when the money owed depreciated faster still. Lending intended to relieve a scarcity of credit thus intensified the currency depreciation that generated the scarcity. Private banks likewise financed speculative purchases against collateral, enabling borrowers to acquire assets with money whose repayment cost was rapidly falling. Mises treats the resulting fortunes as products of distorted monetary conditions, not demonstrations of exceptional entrepreneurial ability; he points to subsequent losses and bank failures as evidence against that interpretation.

Business accounting suffered from the same confusion between nominal amounts and economic value. Profits expressed in marks could appear substantial while calculation in a more stable currency revealed a different result.

It took years for German business men to understand that the Mark was no longer a suitable unit for economic calculations.

The replacement of mark accounting by gold accounting marks a decisive stage in Mises’s narrative: depreciation could no longer remain obscured by conventional bookkeeping. He also describes a reversal in socialist explanations. Those who had supported inflation and blamed profiteers for depreciation subsequently accused capitalists of deliberately creating inflation to enrich themselves. For Mises, both explanations displaced monetary causation with accusations against an enemy class.

The final section distinguishes the persistence of official doctrine from the public’s costly acquisition of knowledge. Initially, people accepted and held notes, mistook rising money incomes for real gains, and explained higher prices through wartime scarcity. The delay between new issues and price increases allowed the government to obtain goods and pay salaries. Once people expected continued depreciation, however, holding money itself became costly.

But when money loses purchasing power from day to day its retention involves a loss.

Mises develops this point from money’s function as a readily exchangeable holding that permits convenient future purchases. Inflation undermines that service. Recipients therefore spend immediately, even on goods they do not need; workers’ families hurry to exchange daily wages before their purchasing power falls further. This flight into goods generalizes until the mark breaks down and depreciation outruns additional issuance. The government then loses the financial advantage that inflation initially supplied.

His concluding argument makes expectations and historical memory central to the limits of inflationary finance. A population that remembers monetary collapse will anticipate renewed issuance rather than patiently absorb it. Prices may rise ahead of monetary expansion, leaving the government able to buy less despite printing more. This is a conditional claim about remembered experience, not an assurance that inflation has become permanently impossible. The article’s enduring relevance lies in connecting monetary doctrine, accounting practices, public expectations, and the limits of state power. Its final lesson is that economic theory could have supplied, at far lower cost, knowledge acquired through catastrophe.

But in any case the monetary history of the last three lustrums in Germany and many other European countries proves that no nation can afford to treat Economic Theory with contempt.