There is no need to stress again here the point that what makes it impossible to lower the rate of interest by means of credit expansion is not merely the external drain. This fundamental issue is dealt with exhaustively in other chapters and sections of this book.31
But there is another important question to be raised.
Let us assume that there exists an international bank issuing fiduciary media the clientele of which is the world’s whole population. It does not matter whether these moneysubstitutes go directly into the cash holdings of the individuals and firms, or are only kept by the various nations’ central banks as reserves against their issuance of national moneysubstitutes. The deciding point is that there is a uniform world currency. The national banknotes and checkbook money are redeemable in moneysubstitutes issued by the international bank. The necessity of keeping its national currency at par with the international currency limits the power of every nation’s central banking system to expand credit. But the world bank is restrained only by those factors which limit credit expansion on the part of a single bank operating in an isolated economic system or in the whole world.
We may as well assume that the international bank is not a bank issuing moneysubstitutes a part of which are fiduciary media, but a world authority issuing international fiat money. Gold has been entirely demonetized. The only money in use is that created by the international authority. The international authority is free to increase the quantity of this money provided it does not go so far as to bring about the crack-up boom and the breakdown of the currency.
Then the ideal of the Keynesians is realized. There is an institution operating which can exercise an “expansionist pressure on world trade.” It is free to pour a horn of plenty over the world.
However, the champions of such plans have neglected a fundamental problem, namely, that of the distribution of the additional quantities of this credit money or of this paper money.
Let us assume that the international authority increases the amount of its issuance by a definite sum, all of which goes to one country, Ruritania. The final result of this inflationary action will be a rise in prices of commodities and services all over the world. But while this process is going on, the conditions of the citizens of various countries are affected in a different way. The Ruritanians are the first group blessed by the additional manna. They have more money in their pockets while the rest of the world’s inhabitants have not yet got a share of the new money. They can bid higher prices, while the others cannot. Therefore the Ruritanians withdraw more goods from the world market than they did before. The non-Ruritanians are forced to restrict their consumption because they cannot compete with the higher prices paid by the Ruritanians. While the process of adjusting prices to the altered money relation is still in progress, the Ruritanians are in an advantageous position against the non-Ruritanians. When the process finally comes to an end, the Ruritanians have been enriched at the expense of the non-Ruritanians.
The main problem in such expansionist ventures is the proportion according to which the additional money is to be allotted to the various nations. Each nation will be eager to advocate a mode of distribution which will give it the greatest possible share in the additional currency. The industrially backward nations of the East will, for instance, probably recommend equal distribution per capita of population, a mode which would obviously favor them at the expense of the industrially advanced nations. Whatever mode may be adopted, all nations would be dissatisfied and would complain of unfair treatment. Serious conflicts would ensue and would disrupt the whole scheme.
It would be irrelevant to object that this problem did not play an important role in the negotiations which preceded the establishment of the International Monetary Fund and that it was easy to reach an agreement concerning the use of the Fund’s resources. The Bretton Woods Conference was held under very particular circumstances. Most of the participating nations were at that time entirely dependent on the benevolence of the United States. They would have been doomed if the United States had stopped fighting for their freedom and aiding them materially by lend-lease. The government of the United States, on the other hand, looked upon the monetary agreement as a scheme for a disguised continuation of lend-lease after the cessation of hostilities. The United States was ready to give and the other participants—especially those of the European countries, most of them at that time still entirely occupied by the German armies, and those of the Asiatic countries—were ready to take whatever was offered to them. The problems involved will become discernible as soon as the wartime attitude in the United States toward financial and trade matters is replaced by a more realistic mentality.
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1. The theory of monetary calculation does not belong to the theory of indirect exchange. It is a part of the general theory of praxeology.
2. Cf. above, p. 203. Important contributions to the history and terminology of this doctrine are provided by Hayek, Prices and Production (rev. ed. London, 1935, PP. I ff 129 ff.
3. Cf. Mises, The Theory of Money and Credit, trans. by H. E. Batson (London and New York, 1934), pp. 34–37.
4. Money can be in the process of transportation, it can travel in trains, ships, or planes from one place to another. But it is in this case, too, always subject to somebody’s control.
5. Cf. Carl Mender’s books Grundsätze der Volkswirtschaftslehre (Vienna, 1871). pp. 250 ff.; ibid. (2d ed. Vienna, 1923), pp. 241 ff.; Untersuchungen über die Methode der Sozialwissenschaften (Leipzig, 1883), pp. 171 ff.
6. Cf. Menger, Untersuchungen, I.e., p. 178.
7. The problems of money exclusively dedicated to the service of a medium of exchange and not fit to render any other services on account of which it would be demanded are dealt with below in section 9.
8. The present writer first developed this regression theorem of purchasing power in the first edition of his book Theory of Money and Credit, published in 1912 (pp. 97–123 of the English-language translation). His theorem has been criticized from various points of view. Some of the objections raised, especially those by B. M. Anderson in his thoughtful book The Value of Money, first published in 1917 (cf. pp. 100 ff. of the 1936 edition), deserve a very careful examination. The importance of the problems involved makes it necessary to weight also the objections of H. Ellis (German Monetary Theory 1905–1933 [Cambridge, 1934], pp. 77 ff.). In the text above, all objections raised are particularized and critically examined.
9. Cf. Mises, Theory of Money and Credit, pp. 140–142.
10. Cf. above, pp. 249–250.
11. Cf. below, Chapter XX.
12. Such an attempt was made by Greidanus, The Value of Money (London, 1932), pp. 197 ff.
13. About the relations of the market rate of interest and changes in purchasing power, of. below, Chapter XX.
14. Cf. below, pp. 561–562.
15. Cf. below, pp. 545–562.
16. It is furthermore immaterial whether or not the laws assign to the moneysubstitutes legal tender quality. If these things are really dealt with by people as moneysubstitutes and are therefore moneysubstitutes and equal in purchasing power to the respective amount of money, the only effect of the legal tender quality is to prevent malicious people from resorting to chicanery for the mere sake of annoying their fellow men. If, however, the things concerned are not moneysubstitutes and are traded at a discount below their face value, the assignment of legal tender quality is tantamount to an authoritarian price ceiling, the fixing of a maximum price for gold and foreign exchange and of a minimum price for the things which are no longer moneysubstitutes but either credit money or fiat money. Then the effects appear which Gresham’s Law describes.
17. The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle. Of course, if the additional amount issued is not
large, neither are the inevitable effects of the expansion.
18. Vera C. Smith has not paid due attention to this primordial fact in her meritorious book The Rationale of Central Banking (London, 1936), pp. 157fif.
19. Cf. Cernuschi, Contre le billet de banque (Paris, 1860), p. 55.
20. Very often the legal tender quality had been granted to these banknotes at a time when they still were moneysubstitutes and as such equal to money in their exchange value. At that time the decree had no catallactic importance. Now it becomes important because the market no longer considers them moneysubstitutes.
21. For a more elaborate analysis, see below, pp. 536–545.
22. See below, pp. 780–783.
23. For instance, demand deposits not subject to check.
24. All this refers to European conditions. American conditions differ only technically, but not economically. However, the hot-money problem is not an American problem, as there is, under the present state of affairs, no country which a capitalist could deem a safer refuge than the United States.
25. Cf. the critical study of Marianne von Herzfeld, “Die Geschichte als Funktion der Geldbewegung,” Archiv fuer Sozialwissenschaft, LVI, 654–686, and the writings quoted in this study.
26. Cf. below, pp. 538–542.
27. Quoted from: International Clearing Union, Text of a Paper Containing Proposals by British Experts for an International Clearing Union, April 8, 1943 (published by British Information Services, an Agency of the British Government), p. 12.
28. Lord Keynes in the speech delivered before the House of Lords, May 23. 1944.
29. T. E. Gregory, The Gold Standard and Its Future (3d ed. London, 1934), pp. 22 ff.
30. Cf. below, Chapters XXVII-XXXI.
31. Cf. above, pp. 438–439, and below, pp. 547–583.
XVIII. ACTION IN THE PASSING OF TIME
1. Perspective in the Valuation of Time Periods
ACTING man distinguishes the time before satisfaction of a want is attained and the time for which the satisfaction continues.
Action always aims at the removal of future uneasiness, be it only the future of the impending instant. Between the setting in of action and the attainment of the end sought there always elapses a fraction of time, viz., the maturing time in which the seed sown by the action grows to maturity. The most obvious example is provided by agriculture. Between the tilling of the soil and the ripening of the fruit there passes a considerable period of time. Another example is the improvement of the quality of wine by aging. In some cases, however, the maturing time is so short that ordinary speech may assert that the success appears instantly.
As far as action requires the employment of labor, it is concerned with the working time. The performance of every kind of labor absorbs time. In some cases the working time is so short that people say the performance requires no time at all.
Only in rare cases does a simple, indivisible and nonrepeated act suffice to attain the end aimed at. As a rule what separates the actor from the goal of his endeavors is more than one step only. He must make many steps. And every further step to be added to those previously made raises anew the question whether or not he should continue marching toward the goal once chosen. Most goals are so far away that only determined persistence leads to them. Persevering action, unflinchingly directed to the end sought, is needed in order to succeed. The total expenditure of time required, i.e., working time plus maturing time, may be called the period of production. The period of production is long in some cases and short in other cases. It is sometimes so short that it can be entirely neglected in practice.
The increment in want-satisfaction which the attainment of the end brings about is temporally limited. The result produced extends services only over a period of time which we may call the duration of serviceableness. The duration of serviceableness is shorter with some products and longer with other goods which are commonly called durable goods. Hence acting man must always take into account the period of production and the duration of serviceableness of the product. In estimating the disutility of a project considered he is not only concerned with the expenditure of material factors and labor required, but also with the period of production. In estimating the utility of the expected product he is concerned with the duration of its serviceableness. Of course, the more durable a product is, the greater is the amount of services it renders. But if these services are not cumulatively available on the same date, but extended piecemeal over a certain period of time, the time element, as will be shown, plays a particular role in their evaluation. It makes a difference whether n units of service are rendered on the same date or whether they are stretched over a period of n days in such a way that only one unit is available daily.
It is important to realize that the period of production as well as the duration of serviceableness are categories of human action and not concepts constructed by philosophers, economists, and historians as mental tools for their interpretation of events. They are essential elements present in every act of reasoning that precedes and directs action. It is necessary to stress this point because Böhm-Bawerk, to whom economics owes the discovery of the role played by the period of production, failed to comprehend the difference.
Acting man does not look at his condition with the eyes of a historian. He is not concerned with how the present situation originated. His only concern is to make the best use of the means available today for the best possible removal of future uneasiness. The past does not count for him. He has at his disposal a definite quantity of material factors of production. He does not ask whether these factors are nature-given or the product of production processes accomplished in the past. It does not matter for him how great a quantity of nature-given, i.e., original material factors of production and labor, was expended in their production and how much time these processes of production have absorbed. He values the available means exclusively from the aspect of the services they can render him in his endeavors to make future conditions more satisfactory. The period of production and the duration of serviceableness are for him categories in planning future action, not concepts of academic retrospection and historical research. They play a role in so far as the actor has to choose between periods of production of different length and between the production of more durable and less durable goods.
Action is not concerned with the future in general, but always with a definite and limited fraction of the future. This fraction is limited, on the one side, by the instant in which the action must take place. Where its other end lies depends on the actor’s decision and choice. There are people who are concerned with only the impending instant. There are other people whose provident care stretches far beyond the prospective length of their own life. We may call the fraction of future time for which the actor in a definite action wants to provide in some way and to some extent, the period of provision. In the same way in which acting man chooses among various kinds of want-satisfaction within the same fraction of future time, he chooses also between want-satisfaction in the nearer and in the remoter future. Every choice implies also a choice of a period of provision. In making up his mind how to employ the various means available for the removal of uneasiness, man also determines implicitly the period of provision. In the market economy the demand of the consumers also determines the length of the period of provision.
There are various methods available for a lengthening of the period of provision:
The accumulation of larger stocks of consumers’ goods destined for later consumption.
The production of goods which are more durable.
The production of goods requiring a longer period of production.
The choice of methods of production consuming more time for the production of goods which could also be produced within a shorter period of production.
The first two methods do not require any further comment. The third and the fourth methods must be scrutinized more closely.
It is one of the fundamental data of human life a
nd action that the shortest processes of production, i.e., those with the shortest period of production, do not remove felt uneasiness entirely. If all those goods which these shortest processes can provide are produced, unsatisfied wants remain and incentive to further action is still present. As acting man prefers those processes which, other things being equal, produce the products in the shortest time,1 only such processes are left for further action which consume more time. People embark upon these more timeconsuming processes because they value the increment in satisfaction expected more highly than the disadvantage of waiting longer for their fruits. Böhm-Bawerk speaks of the higher productivity of roundabout ways of production requiring more time. It is more appropriate to speak of the higher physical productivity of production processes requiring more time. The higher productivity of these processes does not always consist in the fact that they produce—with the same quantity of factors of production expended—a greater quantity of products. More often it consists in the fact that they produce products which could not be produced at all in shorter periods of production. These processes are not roundabout processes. They are the shortest and quickest way to the goal chosen. If one wants to catch more fish, there is no other method available than the substitution of fishing with the aid of nets and canoes for fishing without the aid of this equipment. There is no better, shorter, and cheaper method for the production of aspirin known than that adopted by the chemical plants. If one disregards error and ignorance, there cannot be any doubt about the highest productivity and expediency of the processes chosen. If people had not considered them the most direct processes, viz., those leading by the shortest way to the end sought, they would not have adopted them.
The lengthening of the period of provision through the mere accumulation of stocks of consumers’ goods is the outcome of the desire to provide in advance for a longer period of time. The same is valid for the production of goods the durability of which is greater in proportion to the greater expenditure of factors of production required.2 But if temporally remoter goals are aimed at, lengthening of the period of production is a necessary corollary of the venture. The end sought cannot be attained in a shorter period of production.
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