that it introduces an incalculable factor into economic activity. Nevertheless, it does not lay the prices of commodities open to violent and sudden changes from the monetary side. The biggest variations in the value of money that we have experienced during the last century have originated not in the circumstances of gold production, but in the policies of governments and banks-of-issue. Dependence of the value of money on the production of gold does at least mean its independence of the politics of the hour The dissociation of the currencies from a definitive and unchangeable gold parity has made the value of money a plaything of politics. Today we see considerations of the value of money driving all other considerations into the background in both domestic and international economic policy. We are not very far now from a state of affairs in which “economic policy” is primarily understood to mean the question of influencing the purchasing power of money. Are we to maintain the present gold content of the currency unit, or are we to go over to a lower gold content? That is the question that forms the principal issue nowadays in the economic policies of all European and American countries. Perhaps we are already in the midst of a race to reduce the gold content of the currency unit with the object of obtaining transitory advantages (which, moreover, are based on self-deception) in the commercial war which the nations of the civilized world have been waging for decades with increasing acrimony, and with disastrous effects upon the welfare of their subjects.
It is an unsatisfactory designation of this state of affairs to call it an emancipation from gold. None of the countries that have “abandoned the gold standard” during the last few years has been able to affect the significance of gold as a medium of exchange either at home or in the world at large. What has occurred has not been a departure from gold, but a departure from the old legal gold parity of the currency unit and, above all, a reduction of the burden of the debtor at the cost of the creditor, even though the principal aim of the measures may have been to secure the greatest possible stability of nominal wages, and sometimes of prices also.
Besides the countries that have debased the gold value of their currencies for the reasons described, there is another group of countries that refuse to acknowledge the depreciation of their money in terms of gold that has followed upon an excessive expansion of the domestic note circulation, and maintain the fiction that their currency units still possess their legal gold value, or at least a gold value in excess of its real level. In order to support this fiction they have issued foreign-exchange regulations which usually require exporters to sell foreign exchange at its legal gold value, that is, at a considerable loss. The fact that the amount of foreign money that is sold to the central banks in such circumstances is greatly diminished can hardly require further elucidation. In this way a “shortage of foreign exchange” (Devisennot) arises in these countries. Foreign exchange is in fact unobtainable at the prescribed price, and the central bank is debarred from recourse to the illicit market in which foreign exchange is dealt in at its proper price because it refuses to pay this price. This “shortage” is then made the excuse for talk about transfer difficulties and for prohibitions of interest and amortization payments to foreign countries. And this has practically brought international credit to a standstill. Interest and amortization are paid on old debts either very unsatisfactorily or not at all, and, as might be expected, new international credit transactions hardly continue to be a subject of serious consideration. We are no longer far removed from a situation in which it will be impossible to lend money abroad because the principle has gradually become accepted that any government is justified in forbidding debt payments to foreign countries at any time on grounds of “foreign-exchange policy.” The real meaning of this foreign-exchange policy is exhaustively discussed in the present book. Here let it merely be pointed out that this policy has much more seriously injured international economic relations during the last three years than protectionism did during the whole of the preceding fifty or sixty years, the measures that were taken during the world war included. This throttling of international credit can hardly be remedied otherwise than by setting aside the principle that it lies within the discretion of every government, by invoking the shortage of foreign exchange that has been caused by its own actions, to stop paying interest to foreign countries and also to prohibit interest and amortization payments on the part of its subjects. The only way in which this can be achieved will be by removing international credit transactions from the influence of national legislatures and creating a special international code for it, guaranteed and really enforced by the League of Nations. Unless these conditions are created, the granting of new international credit will hardly be possible. Since all nations have an equal interest in the restoration of international credit, it may probably be expected that attempts will be made in this direction during the next few years, provided that Europe does not sink any lower through war and revolution. But the monetary system that will constitute the foundation of such future agreements must necessarily be one that is based upon gold. Gold is not an ideal basis for a monetary system. Like all human creations, the gold standard is not free from shortcomings; but in the existing circumstances there is no other way of emancipating the monetary system from the changing influences of party politics and government interference, either in the present or, so far as can be foreseen, in the future. And no monetary system that is not free from these influences will be able to form the basis of credit transactions. Those who blame the gold standard should not forget that it was the gold standard that enabled the civilization of the nineteenth century to spread beyond the old capitalistic countries of Western Europe, and made the wealth of these countries available for the development of the rest of the world. The savings of the few advanced capitalistic countries of a small part of Europe have called into being the modern productive equipment of the whole world. If the debtor countries refuse to pay their existing debts, they certainly ameliorate their immediate situation. But it is very questionable whether they do not at the same time greatly damage their future prospects. It consequently seems misleading in discussions of the currency question to talk of an opposition between the interests of creditor and debtor nations, of those which are well supplied with capital and those which are ill supplied. It is the interests of the poorer countries, who are dependent upon the importation of foreign capital for developing their productive resources, that make the throttling of international credit seem so extremely dangerous.
The dislocation of the monetary and credit system that is nowadays going on everywhere is not due—the fact cannot be repeated too often—to any inadequacy of the gold standard. The thing for which the monetary system of our time is chiefly blamed, the fall in prices during the last five years, is not the fault of the gold standard, but the inevitable and ineluctable consequence of the expansion of credit, which was bound to lead eventually to a collapse. And the thing which is chiefly advocated as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis.
The difficulties of the monetary and credit system are only a part of the great economic difficulties under which the world is at present suffering. It is not only the monetary and credit system that is out of gear, but the whole economic system. For years past, the economic policy of all countries has been in conflict with the principles on which the nineteenth century built up the welfare of the nations. International division of labor is now regarded as an evil, and there is a demand for a return to the autarky of remote antiquity. Every importation of foreign goods is heralded as a misfortune, to be averted at all costs. With prodigious ardour, mighty political parties proclaim the gospel that peace on earth is undesirable and that war alone means progress. They do not content themselves with describing war as a reasonable form of international intercourse, but recommend the employment of force of arms for the suppression of opponents even in the solution of questions of domestic politics. Whereas liberal economic policy took pains to avoid putting obstacles in the way of developments that allotted every branch of production to the locality in which it secured the greatest productivity to labor, nowadays the endeavor to establish enterprises in places where the conditions of production are unfavorable is regarded as a patriotic action that deserves government support. To demand of the monetary and credit system that it should do away with the consequences of such perverse economic policy, is to demand something that is a little unfair.
All proposals that aim to do away with the consequences of perverse economic and financial policy, merely by reforming the monetary and banking system, are
