Mises on the State Theory of Money (1912)

Mises path-breaking book The Theory of Money and Credit was first published in German 100 years ago in 1912. It became a foundation stone in the emerging “Austrian” theory of money and later to the Austrian Theory of the Trade Cycle which was developed by Mises, Friedrich Hayek and others. Mises’ innovation in “Money and Credit” was to apply the subjectivist theory of value and price to money and banking which led to a number of important insights such as the fact that money emerges spontaneously out of economic activity without any need for intervention by the state.

In an Appendix to the book Mises devotes a short essay to the historical view which he opposed, namely “The State Theory of Money”, from which this quotation comes. Much of what Mises wrote in 1912 was prescient in a way he could not have conceived of at the time. He was about to live through one of the greatest inflationary periods in history brought about by the massive debts and expenditures caused by the demands of fighting the World War and the crude attempts to pay off these debts after the conflict ended by dramatically expanding the supply of money, especially in Weimar Germany in 1923. Mises played an important policy role in Austria during this period thus adding practical experience to his deep theoretical insights.