Mike Gardner
Research Essay
Ludwig von Mises
Contrasting Ludwig von Mises’ Theory of Money and Credit Against The German Super Inflation of The 1920’s
Life in Europe in the early 1900’s was great. The Industrial Revolution had taken many people’s dreams and made them true. But war would soon take this all down, and would turn one countries’ economy into a horrible lifestyle for many. In Germany, it would effect every single person.
Throughout history, there has always been a place and a need for a way to barter, or exchange goods and services. As we have seen through history, people gain more and more intelligence and wisdom on how to make these transactions flow better. In the year of 1912, a man by the name of Ludwig von Mises created a theory to better enhance these transactions, in which he called the Theory of Money and Credit.
Ludwig von Mises, a great and science-changing economist, would help people figure out how and why the economy works how it does, and why we cannot try and change an entire countries’ economy overnight. His theory of money and credit would explain it all, and hopefully this paper will help explain to you what has taught so many others. The main point that will be discussed through this paper will be how Ludwig von Mises transformed the social science of economics by way of his theory of money and credit.
In the early 1920’s, a great super inflation occurred in Germany. The inflation rate was rising as fast as they could print the money, and wives of the printing press workers would come get stacks of money just to buy a loaf of bread. The exchange rate before the inflation was 8 marks to the dollar, and only three years later it was up to 4.2 trillion Marks per Dollar! Now people would have to wonder why someone would try and do this, but know one could figure it out; except for Ludwig von Mises. With this, I will show you even how prompt and true he was in knowing that a country would do this, even though he had thought of this theory before this inflation in Germany took place:
“I have come to realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a reformer, but only became the historian of decline.” (Butler, 322)
Von Mises knew that the countries’ leaders were thinking like classical economists, that being that the wealth of a nation is the amount of money that the one particular nation has. Now, he knew that this was wrong, and he wanted others to better understand why this theory and way of thinking does not work. This is why he came up with his theory of money and credit.
Life today would not be as we know it if it was not for his explanation. He taught many people, as he was a professor in Austria for many years. Two of his students went on to become some of the most well known economists of the modern day, coming up with theories of their own and helping advance the science. If it weren’t for von Mises, economies across the world would be vastly different from their current state, probably even our own.
Anyways, his theory of money and credit explains the nature, function, and value of money, as well as how it should be contained in banks with concerns to interest, credit, and inflation across economies. Ludwig von Mises’ works came along in the “Austrian School” of economics, and in turn he created his own school and methods. It would come at a time that was poised at overthrowing the classical school, and its main point was that the individual, not the business, who became the fundamental building block for an economy.
Now, first off we would ask how could Ludwig von Mises come up with a theory that would help revolutionize the entire economic thought. The answer is not that simple, but explainable. He realized how the classical school was wrong with their ideas and ways of transferring, collecting, and storing money, not only for banks but for governments as well. And soon he figured out a method and idea that would drastically change economics, and that was his theory of money and credit.
The reason that his theory is so vitally important to economics, although it is know longer used, is that it was a transfer point from the classical way of thinking, to the modern day economic way of thinking. His theory would hold true to many events, and one event in particular would be that of the great super inflation of the 1920’s in Germany.
To give you a little back ground on the great super inflation, Germany’s head economic leaders thought that it would be a good idea to continually print out money, thinking that it would help make their country rich and prosperous. Well, in turn it destroyed the economy, because it took their Mark, which at the time one American dollar was equal to about eight Marks, and after three years of this continually printing money, turned the economy into a disaster. One American dollar after only THREE years was worth 4.2 TRILLION Marks! Now just imagine having to carry around a truckload of money just to go grocery shopping at the local store. It would be absurd.
von Mises explains how this would happen if different events were to occur. His points are key and vital to economics, and this disaster in Germany proves it. He tells us that you can not just raise the amount of money in one’s country because of credit monies. This is credit money, which is money that isn’t really there; it is basically like an IOU. This is basically what Germany was doing without even knowing it. They were creating money that in the end meant absolutely nothing, and here is one of von Mises’ statements that proved that:
“The social demand for money in the narrower sense is no longer the sum of the individual demands for money in the narrower sense, and the social demand for money in the broader sense is by no means the sum of the individual demands for money in the broader sense.” (von Mises, 133)
Ludwig von Mises is key to the social science of economics because of his theory. He would predict this event that happened in Germany before it would even happen. He said that a great catastrophe would occur if a country would raise their exchange rates. What they did went all against his ideas, and they were basing their mindsets on the Classical Economic School of thinking, which again is the more money one country has, the wealthier the nation is.
When Germany’s economists set out their plan to print out more money, they were in hopes of helping the economy grow and prosper, due to it’s loss during World War I. Although they did rebuild everything astonishingly fast, they eventually ruined their international economy because first off, who would want to invest in a country that just went to war with the world? And secondly, who would want to invest money in a country that had inflation rates going through the roof everyday for ten years?
Ludwig von Mises would again help explain why this kind of inflation rate would ruin a country, and how it would be horrible for an economy. He says that inflation will first off, slowly, but in Germany’s case quickly, ruin the economy by having people make the same wages, but prices will rise. This would make people able to buy less and less of what they need, and in turn ruin people, which would ruin a country.
Throughout the history of economics, only very few people have been able to bring about concepts that would indeed change the course of history; von Mises being one of those people. Without the help of Ludwig von Mises and his explanations as to what went wrong and how to prevent such disasters, life today would not exist as we know it. His theory of money and credit helped pave way for a new breed of economic thinkers, and he would come to help the entire scene of economics. His theory would come to help all businesses and people alike as soon as he printed his ideas, and life as we new it changed overnight.
Bibliography
von Mises, Ludwig. Money, Method, and the Market Process. Massachusetts: Kluwer, 1990.
von Mises, Ludwig. The Theory of Money and Credit. New York: Irvington-On-Hudson, 1971.
Bellofiore, Ricardo. Between Wicksell and Hayek. Malden: October 1998. Vol. 57, Iss. 4; p. 531.
Mulligan, Robert. Spontaneously Evolved Social Order Versus Positive Legislation in English Constitutional History. Kluwer: March 2004. Vol. 17, Iss. 1; p. 41.
Butler, Eamonn. Ludwig von Mises. London: Gower, 1988.
Smith, Matthew. On Interest and Profit: Thomas Tooke’s Major Legacy to Economics. Oxford: Aug. 1, 2006. Vol. 25, Iss. 1; p. 1.
Ebeling, Richard. Selected Writings of Ludwig von Mises. Indiana: Liberty Fund, 2000.
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