The Theory of Money and Credit - Ludwig von Mises [199]
These absurd doctrines greatly impressed ignorant politicians and demagogues when they were blended with nationalist slogans. What prevents our country from fully enjoying the advantages of a low-interest-rate policy, says the economic isolationist, is its adherence to the gold standard. Our central bank is forced to keep its rate of discount at a height that corresponds to conditions on the international money market and to the discount rates of foreign central banks. Otherwise "speculators" would withdraw funds from our country for short-term investment abroad and the resulting outflow of gold would make the gold reserves of our central bank drop below the legal ratio. If our central bank were not obliged to redeem its banknotes in gold, no such withdrawal of gold could occur and there would be no necessity for it to adjust the height of the money rate to the situation of the international money market, dominated by the world-embracing gold monopoly.
The most amazing fact about this argument is that it was raised precisely in debtor countries for which the operation of the international money and capital market meant an inflow of foreign funds and consequently the appearance of a tendency toward a drop in interest rates. It was popular in Germany and still more in Austria in the 1870s and 80s, but it was hardly ever seriously mentioned in those years in England or in the Netherlands, whose banks and bankers lent amply to Germany and Austria. It was advanced in England only after World War I, when Great Britain's position as the world's banking center had been lost.
Of course, the argument itself is untenable. The inevitable eventual failure of any attempt at credit expansion is not caused by the international intertwinement of the lending business. It is the outcome of the fact that it is impossible to substitute fiat money and a bank's circulation credit for nonexisting capital goods. Credit expansion initially can produce a boom. But such a boom is bound to end in a slump, in a depression. What bring about the recurrence of periods of economic crises are precisely the reiterated attempts of governments and banks supervised by them to expand credit in order to make business good by cheap interest rates. [7]
3 The Full-Employment Doctrine
The inflationist or expansionist doctrine is presented in several varieties. But its essential content remains always the same.
The oldest and most naive version is that of the allegedly insufficient supply of money. Business is bad, says the grocer, because my customers or prospective customers do not have enough money to expand their purchases. So far he is right. But when he adds that what is needed to render his business more prosperous is to increase the quantity of money in circulation, he is mistaken. What he really has in mind is an increase of the amount of money in the pockets of his customers and prospective customers while the amount of money in the hands of other people remains unchanged. He asks for a specific kind of inflation; namely, an inflation in which the additional new money first flows into the cash holdings of a definite group of people, his customers, and thus permits him to reap inflation gains. Of course, everybody who advocates inflation does it because he infers that he will belong to those who are favored by the fact that the prices of the commodities and services they sell will rise at an earlier date and to a higher point than the prices of those commodities and services they buy. Nobody advocates an inflation in which he would be on the losing side.
This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptiste Say. In our day it has been revived by Lord Keynes, and under the name of full-employment