Final Phases
The process of driving notes out of service as money can take place either relatively slowly or abruptly in a panic, perhaps in days or even hours. If the change takes place slowly that means trade is shifting, step by step, to the general use of another medium of exchange in place of the notes. This practice of making and settling domestic transactions in foreign money or in gold, which has already reached substantial proportions in many branches of business, is being increasingly adopted. As a result, to the extent that individuals shift more and more of their cash holdings from German marks to foreign money, still more foreign exchange enters the country. As a result of the growing demand for foreign money, various kinds of foreign exchange, equivalent to a part of the value of the goods shipped abroad, are imported instead of commodities. Gradually, there is accumulated within the country a supply of foreign moneys. This substantially softens the effects of the final breakdown of the domestic paper standard. Then, if foreign exchange is demanded even in small transactions, if, as a result, even wages must be paid in foreign exchange, at first in part and then in full, if finally even the government recognizes that it must do the same when levying taxes and paying its officials, then the sums of foreign money needed for these purposes are, for the most part, already available within the country. The situation, which emerges then from the collapse of the government’s currency, does not necessitate barter, the cumbersome direct exchange of commodities against commodities. Foreign money from various sources then performs the service of money, even if somewhat unsatisfactorily.
Not only do incontrovertible theoretical considerations lead to this hypothesis. So does the experience of history with currency breakdowns. With reference to the collapse of the “Continental Currency” in the rebellious American colonies (1781), Horace White says: “As soon as paper was dead, hard money sprang to life, and was abundant for all purposes. Much had been hoarded and much more had been brought in by the French and English armies and navies. It was so plentiful that foreign exchange fell to a discount.”5
In 1796, the value of French territorial mandats fell to zero. Louis Adolphe Thiers commented on the situation as follows:
Nobody traded except for metallic money. The specie, which people had believed hoarded or exported abroad, found its way back into circulation. That which had been hidden appeared. That which had left France returned. The southern provinces were full of piasters, which came from Spain, drawn across the border by the need for them. Gold and silver, like all commodities, go wherever demand calls them. An increased demand raises what is offered for them to the point that attracts a sufficient quantity to satisfy the need. People were still being swindled by being paid in mandats, because the laws, giving legal tender value to paper money, permitted people to use it for the satisfaction of written obligations. But few dared to do this and all new agreements were made in metallic money. In all markets, one saw only gold or silver. The workers were also paid in this manner. One would have said there was no longer any paper in France. The mandats were then found only in the hands of speculators, who received them from the government and resold them to the buyers of national lands. In this way, the financial crisis, although still existing for the state, had almost ended for private persons.6
7. Greater Importance of Money to a Modern Economy
Of course, one must be careful not to draw a parallel between the effects of the catastrophe, toward which our money is racing headlong on a collision course, with the consequences of the two events described above. In 1781, the United States was a predominantly agricultural country. In 1796, France was also at a much lower stage in the economic development of the division of labor and use of money and, thus, in cash and credit transactions. In an industrial country, such as Germany, the consequences of a monetary collapse must be entirely different from those in lands where a large part of the population remains submerged in primitive economic conditions.
Things will necessarily be much worse if the breakdown of the paper money does not take place step by step, but comes, as now seems likely, all of a sudden in panic. The supplies within the country of gold and silver money and of foreign notes are insignificant. The practice, pursued so eagerly during the war, of concentrating domestic stocks of gold in the central banks and the restrictions, for many years placed on trade in foreign moneys, have operated so that the total supplies of hoarded good money have long been insufficient to permit a smooth development of monetary circulation during the early days and weeks after the collapse of the paper note standard. Some time must elapse before the amount of foreign money needed in domestic trade is obtained by the sale of stocks and commodities, by raising credit, and by withdrawing balances from abroad. In the meantime, people will have to make out with various kinds of emergency money tokens.
Precisely at the moment when all savers and pensioners are most severely affected by the complete depreciation of the notes, and when the government’s entire financial and economic policy must undergo a radical transformation, as a result of being denied access to the printing press, technical difficulties will emerge in conducting trade and making payments. It will become immediately obvious that these difficulties must seriously aggravate the unrest of the people. Still, there is no point in describing the specific details of such a catastrophe. They should only be referred to in order to show that inflation is not a policy that can be carried on forever. The printing presses must be shut down in time, because a dreadful catastrophe awaits if their operations go on to the end. No one can say how far we still are from such a finish.
It is immaterial whether the continuation of inflation is considered desirable or merely not harmful. It is immaterial whether inflation is looked on as an evil, although perhaps a lesser evil in view of other possibilities. Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.
The Emancipation of Monetary Value from the Influence of Government
1. Stop Presses and Credit Expansion
The first condition of any monetary reform is to halt the printing presses. Germany must refrain from financing government deficits by issuing notes, directly or indirectly. The Reichsbank [Germany’s central bank from 1875 until shortly after World War II] must not further expand its notes in circulation. Reichsbank deposits should be opened and increased, only upon the transfer of already existing Reichsbank accounts, or in exchange for payment in notes, or other domestic or foreign money. The Reichsbank should grant credits only to the extent that funds are available—from its own reserves and from other resources put at its disposal by creditors. It should not create credit to increase the amount of its notes, not covered by gold or foreign money, or to raise the sum of its outstanding liabilities. Should it release any gold or foreign money from its reserves, then it must reduce to that same extent the circulation of its notes or the use of its obligations in transfers.1
Absolutely no evasions of these conditions should be tolerated. However, it might be possible to permit a limited increase—for two or three weeks at a time—only to facilitate clearings at the end of quarters, especially at the close of September and December. This additional circulation credit introduced into the economy, above the otherwise strictly-adhered-to limits, should be statistically moderate and generally precisely prescribed by law.
There can be no doubt but that this would bring
