WEBVTT NOTE German-Language Predecessors of Mises's Monetary Thought 1 00:00:00.000 --> 00:00:02.600 Good afternoon, I'm very honored to have the opportunity 2 00:00:02.600 --> 00:00:04.520 to present my paper about the influence 3 00:00:04.520 --> 00:00:08.240 of the German economists on the first edition 4 00:00:08.240 --> 00:00:10.680 of The Theory of Money and Credit 5 00:00:10.680 --> 00:00:14.480 at the occasion of its 100th anniversary. 6 00:00:14.480 --> 00:00:17.960 In my paper, I'm actually asking two questions, 7 00:00:17.960 --> 00:00:20.380 which the first one will be to what extent 8 00:00:20.380 --> 00:00:22.600 was the first edition of The Theory of Money and Credit 9 00:00:22.600 --> 00:00:25.040 influenced by German economists, 10 00:00:25.040 --> 00:00:27.440 or more basically, what were the main similarities, 11 00:00:27.440 --> 00:00:29.560 what were the main differences? 12 00:00:29.560 --> 00:00:33.080 And after, I hope that I can answer the second question, 13 00:00:33.080 --> 00:00:36.080 which would be, how does it come that the reception 14 00:00:36.080 --> 00:00:39.120 of the first edition in German academia at this time 15 00:00:39.120 --> 00:00:41.780 was so lukewarm or so ambivalent? 16 00:00:42.680 --> 00:00:47.680 So, here to have some quotes on Mises in 1928 17 00:00:48.360 --> 00:00:50.680 in his essay, A Monetary Stabilization, 18 00:00:50.680 --> 00:00:53.520 he wrote, 16 years ago when I presented 19 00:00:53.520 --> 00:00:57.000 the circulation credit theory, I encountered ignorance 20 00:00:57.000 --> 00:00:58.760 and stubborn rejection everywhere. 21 00:00:58.760 --> 00:01:04.760 Here, he only refers to his circulation credit theory, but actually was the case for his whole work. 22 00:01:04.760 --> 00:01:08.760 That's what he's underlining more in his memoirs or notes and recollections, 23 00:01:08.760 --> 00:01:15.760 where he says, as could be expected, my book was rejected summarily by the journals of German social sciences. 24 00:01:15.760 --> 00:01:20.760 So in this paper, we'll proceed as follows. I will do some sort of comparative analysis, 25 00:01:20.760 --> 00:01:23.760 where I will study the four major German economists, 26 00:01:23.760 --> 00:01:53.760 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 27 00:01:53.760 --> 00:01:58.560 and the opposite sides in the central banking versus free banking debate in the 1870s. 28 00:01:59.760 --> 00:02:03.760 So the fields that I'm going to study, origin of money, value of money, quantity of money, 29 00:02:03.760 --> 00:02:06.760 contillon effects, banks of issue and the central banking debate. 30 00:02:07.760 --> 00:02:10.760 So we'll start right away with the first section. 31 00:02:11.760 --> 00:02:19.760 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. 32 00:02:19.760 --> 00:02:21.360 As you can see here in the quotes, 33 00:02:21.360 --> 00:02:24.120 Kniece was perfectly aware that it 34 00:02:24.120 --> 00:02:27.280 is the fruit of indirect exchange, 35 00:02:27.280 --> 00:02:30.720 or more elegantly formulated by Karl-Einrich Rao. 36 00:02:30.720 --> 00:02:33.720 One good, a generally popular sort of the commodity, 37 00:02:33.720 --> 00:02:35.880 not for its direct use, but for the use 38 00:02:35.880 --> 00:02:41.680 to exchange it for another good, would become gradually money. 39 00:02:41.680 --> 00:02:43.320 Wagner had more or less the same opinion. 40 00:02:43.320 --> 00:02:45.720 You have to know that Wagner was a doctorate student of Rao, 41 00:02:45.720 --> 00:02:49.040 and he took over many of his major ideas. 42 00:02:49.040 --> 00:02:51.560 But I'm not claiming that the Germans were the originators, 43 00:02:51.560 --> 00:02:54.360 but just that they have the same point of view 44 00:02:54.360 --> 00:02:56.800 about this topic. 45 00:02:56.800 --> 00:03:00.640 That's where actually Mises is directly quoting Mises. 46 00:03:00.640 --> 00:03:03.920 Where Mises is directly quoting Kniece in his first edition 47 00:03:03.920 --> 00:03:06.960 is the topic on hoarding, where Kniece would say, 48 00:03:06.960 --> 00:03:09.000 OK, hoarding is an artificial problem, 49 00:03:09.000 --> 00:03:12.000 because money can never lie idle. 50 00:03:12.000 --> 00:03:16.480 So that's actually the origin in Kyle Kniece's work. 51 00:03:16.480 --> 00:03:20.180 If you go further to the value of money discussion, 52 00:03:20.180 --> 00:03:26.080 actually, Rao already in 1826, he formulated some sort of, 53 00:03:26.080 --> 00:03:28.600 that we should regress in time, at the time when 54 00:03:28.600 --> 00:03:31.920 a commodity, at the time when the money used 55 00:03:31.920 --> 00:03:35.040 to be a commodity, and we should trace back to the value 56 00:03:35.040 --> 00:03:38.400 it had when it was still used as a normal commodity. 57 00:03:38.400 --> 00:03:41.880 The views were shared by Kniece and Wagner, 58 00:03:41.880 --> 00:03:45.060 and actually, all the main components 59 00:03:45.060 --> 00:03:57.060 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. 60 00:03:57.060 --> 00:04:06.060 And similarly, Wagner and Kniez were perfectly aware as well that both the industrial employment and the monetary employment determined the value of money. 61 00:04:06.060 --> 00:04:11.960 Here additionally, again, for the convention by the law that all the German historicists just thought, 62 00:04:11.960 --> 00:04:14.560 okay, the state can decree what is money and what not. 63 00:04:14.560 --> 00:04:19.660 Knies would say, no, a government authority cannot attribute a value to anything 64 00:04:19.660 --> 00:04:24.160 which is not already accepted by the individual actors in the economy. 65 00:04:24.160 --> 00:04:28.560 And then he would make the comparison, a government authority could also declare, 66 00:04:28.560 --> 00:04:31.360 okay, two pounds or six pounds and so on. 67 00:04:31.360 --> 00:04:43.360 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. 68 00:04:43.360 --> 00:04:52.360 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. 69 00:04:52.360 --> 00:05:00.360 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. 70 00:05:00.360 --> 00:05:30.360 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 71 00:05:30.360 --> 00:05:35.520 Wagner here, assumed the wheat prices increased due to a bad harvest, what should we do? 72 00:05:35.520 --> 00:05:41.880 Increase the money supply or he, Wagner would be in opposition to what was put forward by 73 00:05:41.880 --> 00:05:47.000 the currency school, okay, if the money supply increases, commercial activity increases and 74 00:05:47.000 --> 00:05:49.400 that's why prices increase. 75 00:05:49.400 --> 00:05:54.920 But there was no clear statement about which a quantity of money would be socially optimal. 76 00:05:54.920 --> 00:05:59.980 That's a complete contradict, completely the opposite with Mises who already in 1912 would 77 00:05:59.980 --> 00:06:05.820 claim okay every amount of money is basically socially optimal but but I will 78 00:06:05.820 --> 00:06:09.540 not talk too much about it because Guido Hülsmann will talk about this topic as 79 00:06:09.540 --> 00:06:12.980 well he already made had some reservations about this topic in the 80 00:06:12.980 --> 00:06:17.540 first edition he would say okay a claim at some places there can be a lack of 81 00:06:17.540 --> 00:06:22.500 fiduciary media and the quantity of money needed can depend on the degree of 82 00:06:22.500 --> 00:06:27.060 modernization and seasons and so on which would not be the case in the second 83 00:06:27.060 --> 00:06:29.580 Edition, or less the case. 84 00:06:32.180 --> 00:06:36.940 When we look at the topic of the Cantillon effects, 85 00:06:36.940 --> 00:06:41.100 Rao also knew that an increase of the quantity of money 86 00:06:41.100 --> 00:06:44.140 can disturb the economy. 87 00:06:44.140 --> 00:06:47.500 And obviously, it will arrive at several places. 88 00:06:47.500 --> 00:06:49.820 And there will be winners and losers, and especially 89 00:06:49.820 --> 00:06:51.420 creditors. 90 00:06:51.420 --> 00:06:53.620 While this topic has also been treated, for instance, 91 00:06:53.620 --> 00:06:55.460 by Jean Boudin, that the creditors are always the big 92 00:06:55.460 --> 00:06:56.900 losers. 93 00:06:56.900 --> 00:06:59.260 Here, what is interesting, that Knies argues as well, 94 00:06:59.260 --> 00:07:02.100 okay, what is the main problem? 95 00:07:02.100 --> 00:07:03.900 The government is the biggest debtor, 96 00:07:03.900 --> 00:07:06.900 and that's why it is accepted. 97 00:07:07.900 --> 00:07:09.860 At the banks, the next chapter, 98 00:07:09.860 --> 00:07:14.540 which is the chapter before the last one, 99 00:07:14.540 --> 00:07:16.860 it's about the banks of issue and fiat money, 100 00:07:16.860 --> 00:07:19.700 and here it is, actually the German, 101 00:07:20.580 --> 00:07:22.900 when we talk about the quantity of money theory, 102 00:07:22.900 --> 00:07:24.900 the Germans were also referring to the case 103 00:07:24.900 --> 00:07:27.700 were actually, we were talking about redeemable money, 104 00:07:27.700 --> 00:07:29.580 not necessarily about fiat money 105 00:07:29.580 --> 00:07:33.820 and unredeemable paper money. 106 00:07:33.820 --> 00:07:35.820 So in this case, they were basically all in favor 107 00:07:35.820 --> 00:07:39.280 of 100% banking, more or less, 108 00:07:39.280 --> 00:07:41.380 and Kniece would say, okay, fiat money 109 00:07:41.380 --> 00:07:43.980 or the perpetual circulation of depreciated money 110 00:07:43.980 --> 00:07:47.100 is one of the biggest plugs in an economy, 111 00:07:47.100 --> 00:07:49.900 and that it was exactly, especially interesting 112 00:07:49.900 --> 00:07:52.020 for the weak, restricted, selfish, 113 00:07:52.020 --> 00:07:54.220 and frivolous statesmen, as he would say. 114 00:07:54.900 --> 00:07:57.540 in 1873. 115 00:07:57.540 --> 00:07:59.580 Wagner, here's the difference. 116 00:07:59.580 --> 00:08:04.140 OK, he was in favor of 100% of banking as well in general. 117 00:08:04.140 --> 00:08:06.500 But he actually makes the argument, 118 00:08:06.500 --> 00:08:08.140 in contrast to the other economists 119 00:08:08.140 --> 00:08:10.380 that I was quoting before, that it 120 00:08:10.380 --> 00:08:13.420 has to be the same for banknotes and deposits. 121 00:08:13.420 --> 00:08:16.020 So an idea that has to be put forward by Mises as well, 122 00:08:16.020 --> 00:08:19.380 Wagner talked about it as well and criticized actually 123 00:08:19.380 --> 00:08:21.300 the currency school for the exact same reason 124 00:08:21.300 --> 00:08:23.620 Mises would criticize them. 125 00:08:23.620 --> 00:08:25.140 and it follows from that as well. 126 00:08:25.140 --> 00:08:26.460 Okay, the physical property of money 127 00:08:26.460 --> 00:08:28.060 doesn't play a major role 128 00:08:29.100 --> 00:08:30.980 and they're only slightly different 129 00:08:31.980 --> 00:08:34.420 which already leads me to my last chapter 130 00:08:34.420 --> 00:08:38.340 which is about the necessity of our central bank. 131 00:08:38.340 --> 00:08:40.340 So I took basically Kniez and Wagner 132 00:08:40.340 --> 00:08:42.180 as they were the major players or supporters 133 00:08:42.180 --> 00:08:44.380 of the opposite sides in this discussion 134 00:08:44.380 --> 00:08:46.740 as already said in the introduction. 135 00:08:46.740 --> 00:08:50.380 And Kniez actually, he would already be aware 136 00:08:50.380 --> 00:08:52.960 of the problems of fiat money and so on. 137 00:08:52.960 --> 00:08:55.400 as he said, okay, it's one of the biggest blocks, 138 00:08:55.400 --> 00:08:58.320 but he still prefers that it's the, 139 00:08:58.320 --> 00:09:00.200 as he says, the issue of fiat money by the state 140 00:09:00.200 --> 00:09:02.880 is substantially unjust, unfair, 141 00:09:02.880 --> 00:09:05.240 but it's still better than private banks 142 00:09:05.240 --> 00:09:06.920 that compete with each other. 143 00:09:06.920 --> 00:09:08.400 And comparing the whole thing, okay, 144 00:09:08.400 --> 00:09:09.960 you would never leave to the market 145 00:09:09.960 --> 00:09:13.000 an establishment of measures or weights. 146 00:09:13.000 --> 00:09:15.440 That was his opinion at the time. 147 00:09:16.380 --> 00:09:18.400 But Wagner, to the contrast, he would say, 148 00:09:18.400 --> 00:09:21.880 okay, the freedom of banks is actually a good way 149 00:09:21.880 --> 00:09:28.440 to control the management of those banks and actually he's using statistics of the Scottish 150 00:09:28.440 --> 00:09:33.520 bank system, the free banking system and in England where a more monopolized system was 151 00:09:33.520 --> 00:09:39.440 going on and to compare and say okay the issue of the money in the Scottish bank system was 152 00:09:39.440 --> 00:09:45.280 much less reckless and as long as the notes are redeemable there is no reason that there 153 00:09:45.280 --> 00:10:15.280 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 154 00:10:15.280 --> 00:10:19.040 and so on, that you can afford to have a low reserve. 155 00:10:20.520 --> 00:10:22.420 But what was Mises' stance on it? 156 00:10:22.420 --> 00:10:24.160 I'm just doing some short things. 157 00:10:24.160 --> 00:10:27.960 In the first edition, there were possibilities 158 00:10:27.960 --> 00:10:31.860 to intervene, to have the necessity for central bank, 159 00:10:31.860 --> 00:10:34.320 but Guido Hülsmann will talk about this as well 160 00:10:34.320 --> 00:10:37.120 in his presentation after. 161 00:10:37.120 --> 00:10:38.600 And it's only in the second edition 162 00:10:38.600 --> 00:10:40.160 that he would state things like, 163 00:10:40.160 --> 00:10:42.320 okay, at the time has been a failure, 164 00:10:42.320 --> 00:10:44.400 and that free banking would lead to a stronger 165 00:10:44.400 --> 00:10:46.640 Banking System by Higher Reserves. 166 00:10:47.560 --> 00:10:50.440 And actually, he'd evolved his arguments even further 167 00:10:50.440 --> 00:10:53.880 and then the English edition of 53, 168 00:10:53.880 --> 00:10:56.960 he would add another chapter about this topic. 169 00:10:56.960 --> 00:10:59.480 But arguments are pretty similar to that 170 00:10:59.480 --> 00:11:02.480 that were advanced by Adolf Wagner in the 1850s. 171 00:11:04.420 --> 00:11:06.760 So this leads me to my conclusion. 172 00:11:07.760 --> 00:11:09.560 So the only thing, the purpose, 173 00:11:09.560 --> 00:11:11.380 I'm not saying that there were originators 174 00:11:11.380 --> 00:11:12.860 of all of these ideas, 175 00:11:12.860 --> 00:11:19.740 but that many of these approaches can already be found in the German monetary economists 176 00:11:19.740 --> 00:11:25.640 and that maybe the treatment, because at some time Mises would say, okay, to some extent 177 00:11:25.640 --> 00:11:30.660 everything the German economists, what they published were a huge pile of worthless publications 178 00:11:30.660 --> 00:11:34.900 because everything has already been said in the banking and monetary, banking and currency 179 00:11:34.900 --> 00:11:36.580 debate. 180 00:11:36.580 --> 00:11:42.780 And what I wanted to show that the main difference was exactly that about the quantity of money 181 00:11:42.780 --> 00:11:47.820 Mises was making a big statement by saying, okay, every amount of money can be socially 182 00:11:47.820 --> 00:11:53.100 optimal, which obviously has implications and knowing the political context at the time, 183 00:11:53.100 --> 00:11:59.900 1912, which was only a few years away from the German hyperinflation in 1923. 184 00:11:59.900 --> 00:12:06.460 This would be one of the, it was obviously a not really accepted idea back then. 185 00:12:06.460 --> 00:12:11.580 And what is interesting as well that German economists at the time who were the reviewers 186 00:12:11.580 --> 00:12:14.660 apparently forgot the basics that already have been taught 187 00:12:14.660 --> 00:12:19.460 by those German economists some 40, 50, 60 years ago 188 00:12:19.460 --> 00:12:21.620 and were developing the weakest ideas 189 00:12:21.620 --> 00:12:24.720 about the conventions and so on, in my opinion. 190 00:12:25.620 --> 00:12:28.800 And actually some 10 or 20 years later, 191 00:12:28.800 --> 00:12:31.660 nobody would even talk about their works 192 00:12:31.660 --> 00:12:34.300 and as Mises says for instance in his memoirs, 193 00:12:34.300 --> 00:12:37.860 okay, those reviewers who reviewed me 194 00:12:37.860 --> 00:12:40.860 actually are no longer any monetary authorities 195 00:12:40.860 --> 00:12:43.720 and it's a good thing for him. 196 00:12:46.580 --> 00:12:50.580 So that's about the revival of the second edition of 1924. 197 00:12:50.580 --> 00:12:54.580 So thank you very much for your attention and that's it.