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« Mises Defining Inflation the Monetary Equilibrium Way (in 1951) | Main | Even a Blind Squirrel Occasionally Finds a Nut »


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Sure, the unwinding process is not expensive.
In contrast a central bank which induces over expansion will drag along government and large banks with it, then the unwinding is frightening, and there is a large constituency to slow unwinding down.

Steve, it's futile to try to portray Mises as your fellow free banker. That danger of inflation is lesser in free banking system than in central banking system is an assertion no Austrian economists would deny. It's almost trivial. But, thesis you should advocate in order to make Mises free banker is not that free banking is lesser evil than central banking, but to ascribe to him assertion that fiduciary media emissions do not impose inflationary pressures AT ALL, but help economic system to develop more smoothly than under 100% reserve system. But, you cannot do that, because Mises directly and unequivocally rejected that assertion adn asserts exactly the opposite:

Mises 1: "Fiduciary media are scarcely different in nature from money; a supply of them affects the market in the same way as a supply of money proper; variations in their quantity influence the objective exchange value of money in just the same way as do variations in the quantity of money proper. Hence, they should logically be subjected to the same principles that have been established with regard to money proper; the same attempts should be made in their case as well to eliminate as far as possible human influence on the exchange ratio between money and other economic good. The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion. Now it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issue of fiduciary media. The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in the form of bank balances within the legislative prohibition".

Mises 2: "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".

So, I don't understand why do you stubbornly persist in attempts to portray Mises as fractional reserve free banker, by distorting his views about money and fiduciary media. It was George Selgin, not some crazy "Rothbardian", who said that only reason why Mises at some point supported free banking was that he believed that would lead automatically toward 100% percent gold reserve banking. You are certainly familiar with that fact, so why do you continue to ignore it is beyond me.


I agree with most of what you said above. What Steve Horowitz is clearly correct too though. It seems Mises held different opinions at different times.

(This is maybe like the situation with Ricardo and details of his labour theory of value. His views changed more than once.)

I think though it is quite realistic to portray the Mises who wrote "The Theory of Money and Credit" as a fractional-reserve free-banker. That's the policy he supports in many places in the book. In that book he clearly says that he doesn't think that free banking would lead to 100% reserves.

Nikolaj: can we have a citation please?

Current: If what I say is correct, then Mises was a free banker in 1952, not just in 1912. If he held different positions at different times, there's 40 years of consistency right there. So at best, you're down to about 20 years out of 60. And I get *Human Action*. :)


Thanks for your great contributions, as always.

It would be helpful if you supplied the location of your quotes.

Prof Horwitz,

For Mises to have said that an increase in the fiduciary money supply was not as bad when carried out by a private as by a public bank was not to have said that it wasn’t bad at all.

As for Mises defining inflation not as increase in the supply of money but as a rise in prices:
That’s hard to imagine. Are you sure that he didn't mean that inflation was commonly defined that way, without meaning that it was properly defined that way?

As Rothbard explained:

“Inflation, in recent years, has been generally defined as an increase in prices. This is a highly unsatisfactory definition. Prices are highly complex phenomena, activated by many different causal factors…To lump all of these causes together…glosses over the separate influences, the isolation of which is the goal of science…It is, therefore, highly inexpedient to define inflation as a rise in prices…

Movements in the supply-of-goods and in the demand-for-money schedules are all the results of voluntary changes of preferences on the market. The same is true for increases in the supply of gold and silver. But increases in fiduciary or fiat media are acts of fraudulent intervention in the market, distorting voluntary preferences and the voluntarily determined pattern of income and wealth. Therefore, the most expedient definition of ‘inflation’ is one we have set forth above: an increase in the supply of money beyond any increase in specie.”

Man, Economy, and State, P 877. 8

Inflation of the money supply, by any other name, an increase, enlargement, expansion, or easing of it, is still an inflation of it, and has the same destructive effects whether or not it is followed by prices higher than before. For, as Rothbard pointed out, they are higher than they would have been without the inflation, or “easing,” of the money supply, and.”money could not be pumped into the system to combat a supposed increase in the value of money without distorting the previous exchange values between the various goods."
Rothbard, Man, Economy, and State, P 744

I couldn’t lay my finger on the passage, but Rothbard also points out that, as the inflation, or “easing,” leads the market away from the preferences of the consumers, the depression is the reestablishment of their preferences.

So long as there is any market at all, that can be delayed but not prevented.

As Mises, the real one, you may be sure, put it,
“It is possible by means of an increase in the quantity of money to delay or to interrupt this process of adjustment. It is impossible either to make it superfluous or less painful for those concerned.”

Human Action, P 431

Mr. Woolsey wrote:

"I favor monetary institutions where the nominal quantity of money adjusts enough to meet the demand to hold money with nominal income growing at 3%. One reason is to avoid making every nominal contract a speculation on fluctuations in the demand to hold money."

But after the market had factored the 3% inflation into its calculations, it'd be right back where it started, with all the same speculations, and further complicated by the inflation.

You couldn’t stabilize the value of money without also stabilizing the value of everything bought and sold against it. So it wouldn't be enough to pump a little money into the system. You would need all-around price control.

The uncertainty of the future and speculative nature of all human action is a fact of life, and cannot be eliminated without eliminating human action and life itself.

Steve: "If what I say is correct, then Mises was a free banker in 1952, not just in 1912. If he held different positions at different times, there's 40 years of consistency right there. So at best, you're down to about 20 years out of 60. And I get *Human Action*."

No. The quote Nicolaj gives beginning "Fiduciary media are scarcely different in nature from money" is from the conclusion of _first_ edition of TTOMAC from 1912. Mises says something different in the 1924 edition. He quote the conclusions of the 1912 edition, but not to make that point about fiduciary media (at least that's my interpretation).

The other quote "The notion of “normal” credit expansion is absurd" is from Human Action.

So, you get some of Mises early and later writings, and so do the Rothbardians.


first citation is from "Theory of money and credit", first edition 1912, when Mises' enthusiasm for free banking was on its heights (TMC, pp.407-408). The second one is from Human Action, (1998), p. 442.

Additionally, in "Return to sound money" from 1951 Mises repeats:

"The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance. No bank must be permitted to expand the total amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash deposits in legal-tender banknotes from the public or by receiving a check payable by another domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day of the reform" (p. 448).

"Rigid 100% reserve" does not sound as an expression of great enthusiasm for fractional reserve banking to me. :)

I have always thought that the proper admonition to those who are "demanding" to hold more cash balances than the present supply of proper money can accommodate is: "Either go into the export business or the gold mining business!"

I have also read enough Mises to conclude that his view of free banking throughout his writings is consistent with his favorable quotation of Cernuschi in Human Action: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer." (As expanded and conditioned by Mises' surrounding commentary.) See p. 446 of the online pdf version.


The passage you cite is in part 4 of TTOMAC. In it Mises is describing the path back to sound money.

In it, sometime before the part you cite he says "Sound money still means to-day what it meant in the nineteenth
century: the gold standard." (p.438 TTOMAC). Mises says similar things several times. Now, the 19th century gold standard used fractional reserves.

Mises doesn't indicate if the passage you refer to on p.438 is meant as a permanent policy prescription, or as a way of transferring to the gold standard. That is, a temporary policy prescription. In part 4 of TTOMAC which was written in 1952 Mises nowhere mentions that things that he wrote in 1924 are wrong.

My view is that Mises changed his mind on this issue many times. When he wrote TTOMAC 1st edition he was against fiduciary media, when he wrote TTOMAC 2nd edition he was for it. When he wrote Human Action he was against it. Then as Steve describes he changed his opinion again in "Marxism Unmasked". I didn't know he did that until Steve wrote this post, though I'd noticed the other changes. Anyway, it's all very confusing.

However, I agree with Mises in TTOMAC 2nd edition and with Steve Horowitz, I think monetary equilibrium is the best policy.

Nikolaj: I will respond to the 1951 quote and the TTOMAC quote in a new post in a little bit.


Mises in the passage 1 I cited in my first comment criticizes 19th century gold standard for excluding credit from 100% gold backing:

"Now it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issue of fiduciary media. The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in the form of bank balances within the legislative prohibition".

So, although he generally supported gold standard of 19th century, he nevertheless criticized exclusion of credit from 100% gold reserve requirement in that regime. So, he was clearly against the fiduciary media as unfortunate residue of inflationist Banking School policy within the 19th century gold standard regime.

Citation from TTOMC was actually from 1954 edition, where Mises cited first edition's conclusion against fiduciary media, as a final word in that regard.

This Mises pal sure was very confused.

It is nice to get some of this cleared up, esp. from the perspective of the history of thought.

But outside of that, I don't think it really matters whether monetary equilibrium theory is consistent with Mises or not. Either the concept helps us make sense of money's impact on the cycle or it doesn't. That's what we should be discussing, unless we're all content being historians of thought.

(I, by the way, am also an historian of thought.)

Hey Steve,

I'm actually trying to be all things to all people on this sensitive topic--I think that you could have (what you, Selgin, and White mean by) FRB in a libertarian world without it being fraudulent, but I think in practice market forces would yield something closer to what the hard-money Rothbardians are saying is the only just outcome.

In light of your posts from Mises, I don't think they are a smoking gun. I'm not saying I've read a ton of this recently and am offering an opinion on what Mises believed on this point, but I'm just saying, a Rothbardian could (I think) coherently say:

"No, Mises wasn't saying FRB was legit, he was just saying, in a truly competitive banking system, it would be kept under control. Just like shoplifting is a crime, but we wouldn't have to worry about it in a free market, even without government courts. The stores would adjust to minimize the theft. So shoplifting isn't a crippling problem for free-market convenience stores, just like fractional-reserve banking isn't a crippling problem for free-market banking. But they're both still crimes, of course."

Can you demonstrate that the above interpretation of Mises is untenable?

I wish I could agree that the passage Steve cites from Mises agrees with my own thinking. But in equating "credit expansion" with bankers' lending more than they receive in deposits, Mises begs the question, or rather two questions: First, how can any single banker in a competitive system lend more than the bankers' prior receipts? (A bank seeking to maintain, say, 10% reserves, lends $90 for every $100 of net deposit receipts. Second, in what sense can aggregate bank credit expansion be said to exceed prior deposits (savings) unless the expansion exceeds the limits of growth in nominal demand for real balances of bank-issued money?

The fact of the matter is that Mises' various claims concerning the desirable limits of bank credit expansion are neither consistent with one another nor consistently coherent. For that reason there's no point trying to settle the current debate on the subject by appeal to his authority, even assuming that such appeals can ever settle anything.

By the way: (1) I never claimed that Mises held the view that free banking would entirely eliminate fiduciary media. Mises did at one point claim that free banking would put strict limits on fiduciary issues, but he never suggested that it would result in 100-percent reserve banking; (2) I'm unaware of Mises' having ever claimed that fractional reserve banking was a "crime." That claim is a Rothbardian twist--and, in my opinion, utterly untenable. And yes, I am perfectly aware of De Soto's elaborate defense of the opposite view. I urge anyone who has swallowed it to seek immediate treatment in the shape of a review of Macleod's History of Banking, which anticipates and thoroughly refutes De Soto's errors.


On page 407-409 of TTOMAC Mises quotes from the first edition of that book. However, he disagrees with the anti-fiduciary-media view of the first edition elsewhere. As Steve mentions in his further post this is in a discussion about policy proposals. The context of the quote is to demonstrate for the reader that Mises had understood in 1912 that problems were ahead and had suggested politically possible solutions.

If you read Part three chapter IV Mises talks at length about fiduciary media. In that discussion he supports fiduciary issue. This is the central discussion of the issue in the book.


Just a quick comment on the appeal to authority. My purpose here was not so much to say the free bankers can appeal to Mises's authority, but to say that the 100% reserve folks should not be. I'm perfectly comfortable with my phrasing at the end of the most recent post:

"there remains significant evidence that Mises was both adopting a monetary equilibrium approach to inflation and that he did not object to the creation of fiduciary media in a world where government central banks and other interventions were absent and competition among banks, who were subject to the same rules as all other business, was present."

"There remains significant evidence" simply reiterates that there's evidence on both sides, which is the position I've always maintained. It's the 100% reserve folks that seem to be denying that, or at least claiming it stopped after 1912. The point of all of this is to say that the ambiguity or confusion was there through and past Human Action.

In the language of sports, I'm happy to play for a tie.


I think George's point that Mises never discussed fractional reserves as a crime is the response to your argument. I think it's a much more plausible reading of Mises that he believed that in a world of government intervention in banking, fiduciary media (fract. res.) could be a significant problem. Therefore, in such a world, we should prevent the issuance of fiduciary media as much as possible.

But in a world where government is out of the picture, then fiduciary media are largely fine b/c Mises rightly understood the way in which competition would discipline the creation of fiduciary media to only the quantity that the public was willing to hold. I see no other way to read the passages about free banking and the idea that banks should be treated just like other businesses.

Again, Mises's objections to fiduciary media were almost always in the context of state involvement in banking.

I say "almost always" because as I note in my prior comment, I think there are places it's not so clear. Neither side can claim Mises is totally on their side. But to argue that Mises was a Rothbardian-style 100% reserve guy seems totally at odds with the text, particularly if one is going to invoke crime/fraud arguments. As George said, that view is the Rothbardian twist.

I propose a rule that anyone not mentally acute enough to recognize the difference between Horwitz and Horowitz (or between Stephan and Stephen) be banned from polite society.

Oops, I'd never noticed the difference.

Stephan: On this as well as some musical issues, you and I are in complete agreement! :)


you said in previous comment:

“I never claimed that Mises held the view that free banking would entirely eliminate fiduciary media. Mises did at one point claim that free banking would put strict limits on fiduciary issues, but he never suggested that it would result in 100-percent reserve banking;”

In “The theory of free banking” (p. 62) you said:

“ Mises’s support for free banking is based in part on his agreement with Cernuschi, who (along with Modeste) believed that freedom of note issue would automatically lead to 100 percent reserve banking;”

So, I would appreciate if you would be so kind to correct publicly here the incorrect information you provided in previous comment about this, and to explain to Steve that my referencing your work as support for my claim that Mises believed that free banking would automatically lead to 100% reserve banking, was correct and justified.

"[Credit expansion] means that the banker lends more money to the people than he receives from his depositors."

I don't think I understood the sentence. If a bank that keeps higher than zero reserves (i.e. doesn't lend all the money received from depositors) is not expanding credit, than credit expansion would almost never occur.

However, the well known formula for the monetary multiplier in a competitive environment shows that in this case there would be an infinite amount of money, as every bank would lend all the money received by other banks that had previously lend all their money and so on ad infinitum*.

I can't believe that creating an infinite amount of money by means of monetary multiplication does not result in credit expansion (unless we live in a neutral-money world), although in such a word no banker would be lending "more money to people than he receives from his depositors". But taking Mises's sentence literally it appears he was saying this.

Personally I already noticed that Mises defined inflation the way Prof. Horwitz says, but this in my opinion has no relation whatsoever with the issue of intertemporal (capital) equilibrium, unless one assumes that capital disequilibrium always comes together with monetary equilibrium (constant M*V, or P*Q), which I understand to be the main tenet of monetary disequilibrium theory.

* I'm making some assumptions here.


The notion that the money multiplier implies an infinite quantity of money with a zero reserve ratio only applies when bank reserves have no alternative uses. Usually, reserves serve as currency too, so that with the reserve ratio zero, the money multipier is (1+c)/c If all currency is bank liabilities, then with a gold standard, there are nonmonetary uses of gold. The price of bank money continues to be tied down by redeemability. (A dollar note or check has a market price of a dollar's worth of gold.) The quantity of bank liabilities are limited by the demand to hold him.

The price level depends on the supply and demand for gold for nonmonetary purposes.

I don't think Mises had in mind a zero-reserve scenario. He may have had in mind a zero marginal demand for reserves.

I am really disappointed in Prof. Horwitz, who seems to not fully understand the subject of his own teachings; the micro-foundation of the Austrian Capital Theory. If he did, he would understand that there is no way to expand credit and not distort the interest rates. He is stubbornly insisting on making the same error of the monetarists.

Mises clearly understood this and the attempt to portray Mises as some "free banker" is quite dishonest in my opinion. Saying that there would be a more healthy check on credit expansion in the absent of a central bank is not the same as saying that it is a productive practice that the free market would accept.

I don't think you can talk about interest rates and capital without also talking about the demand to hold bank liabilities because holding them is a form of saving and therefore matters for interest rates.

If people wish to hold more bank liabilities, they are saving more and that is pushing the natural rate down. If the banking system does not respond, it means the market rate is now above the natural rate and problems will emerge. Expanding the supply of bank liabilities to meet a rising demand does not distort interest rates, it *prevents* the separation of the natural and market rates that has been identified as "the" problem since Wicksell.

Not expanding the supply of money is what causes the distortions associated with intertemporal discoordination.

Finally, I have provided extensive textual references for Mises's position. I have also admitted that evidence is not 100% clear, but that the preponderance of it is. Calling it "dishonest" is an ad hominem. (What's my motivation for being dishonest?) If you're that upset, provide me the counter-evidence.

Perhaps “dishonest” was a bit too harsh. There is not point for me to counter with other quotes by Mises that clearly reject your thesis, for there are plenty. Mises wrote many things over his lifetime and I feel that your case for Mises being on your side is weak. But so what? Mises wasn't God.

If I am upset over this issue, it is because of what I feel is a lack of adequate response from you or White or Selgin to the consequences of credit expansion using a micro-analysis, which is after all, the analysis that explains the Austrian business cycle. Too much is being concentrated on the legality aspect of the debate regarding the practice of FRB, but very little on its consequences. Your response to my comment I believe clarifies my point. The demand to hold money is an aggregate or macro analysis, and you do often resort to MV=PQ to expand on your theory even further. We'll, of course, ignore what Mises thought about using such an equation for economic analysis.

Huerta de Soto provides what I believe is a superb critique of Equilibrium theory and the modern Free banking school. In my opinion, his analysis can practically be derived from the economics of Mises himself. Particularly, Human Action. I am referring to part 4 of Chapter 8 in “Money, Bank Credit, and Economic Cycles” 2nd ed. (pp. 675-706). This part specifically talks about the economic consequences of ANY credit expansion. Perhaps I am mistaken and there is a good response by you or someone else to this critique, and I have not encountered it. Maybe my understanding on the matter is not as sufficient as I thought. If so, I hope you can show me the way.

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