Only by Nationalizing the Banks into a Single Central Bank Does Society Obtain the Power to Regulate Its Labor According to a Plan

To Otto Bauer the nationalization of the banks appears the final and decisive step in the carrying through of the socialist nationalization program. If all banks are nationalized and amalgamated into a single central bank, then its administrative board becomes “the supreme economic authority, the chief administrative organ of the whole economy. Only by nationalization of the banks does society obtain the power to regulate its labor according to a plan, and to distribute its resources rationally among the various branches of production, so as to adapt them to the nation’s needs.” Bauer is not discussing the monetary arrangements which will prevail in the socialist commonwealth after the completion of the nationalization of the banks. Like other Marxists he is trying to show how simply and obviously the future socialist order of society will evolve from the conditions prevailing in a developed capitalist economy. “It suffices to transfer to the nation’s representatives the power now exercised by bank shareholders through the Administrative Boards they elect,” in order to socialize the banks and thus to lay the last brick on the edifice of socialism. Bauer leaves his readers completely ignorant of the fact that the nature of the banks is entirely changed in the process of nationalization and amalgamation into one central bank. Once the banks merge into a single bank, their essence is wholly transformed; they are then in a position to issue credit without any limitation.

—Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, trans. S. Adler (1990; repr., Auburn, AL: Ludwig von Mises Institute, 2012), 39.

Under Socialism, A Moneyless (Or “Natural”) Economy Is Supposed to be a Prerequisite for “Just” Distribution

In examining the need and possibility of economic calculation in the different forms of socialist communities, it is natural to start with a study of a socialist society which uses no money, i.e. one with a natural economy as it is sometimes called. The moneyless society is the great ideal of many socialists, and even as late as in February, 1932, the Finance Commissar of the Soviet Union said that the policy of his Finance Department aimed at preparing the day when money “could be relegated to the museums.” . . .


In this connection it should be remembered that in an economy of private enterprise production and distribution take place uno acto, so that distribution automatically results from the individual’s contribution to the process of production, whether it takes the form of mental or physical labour, of special capability or knowledge, or of putting land or other forms of capital at the disposal of production.

In socialist communities production and distribution will be two separate operations, nor will there necessarily be any connection between contribution and remuneration, for the central authority will decide the distribution of income. Many economists maintain that distribution is the chief problem in any socialist society; at any rate it is obviously so in one with a moneyless economy. . . .


It may be mentioned here that this question of just distribution — with which we shall not occupy ourselves when discussing the possibilities of calculation in socialist communities with a monetary economy — is particularly à propos in connection with the moneyless economy, since that is supposed to be a prerequisite for just distribution.

—Trygve J. B. Hoff, Economic Calculation in the Socialist Society, trans. M. A. Michael (London: William Hodge and Company, 1949), 32-34.

Socialism Is Nothing But a Theory of “Just” Distribution; the Socialist Movement Is an Attempt to Achieve This Ideal

On logical grounds, treatment of the problem of income should properly come at the end of any investigation into the life of the socialist community. Production must take place before distribution is possible, therefore, logically the former should be discussed before the latter. But the problem of distribution is so prominent a feature of Socialism as to suggest the earliest possible discussion of the question. For fundamentally, Socialism is nothing but a theory of “just” distribution; the socialist movement is nothing but an attempt to achieve this ideal. All socialist schemes start from the problem of distribution and all come back to it. For Socialism the problem of distribution is the economic problem.

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 131.

Mises Built His Business Cycle Theory on the Currency School’s Doctrines Even Though He Had to Correct Its Many Defects

Throughout his writings, Mises recognized and lauded the lasting contributions of the Currency School to monetary and business cycle theory and policy. In his first complete presentation of the Austrian theory of the business cycle, published in 1928, Mises (2006, pp. 101, 128) stated:

Of all the theories of the trade cycle, only one has achieved and retained the rank of a fully-developed economic doctrine. That is the theory advanced by the Currency School, the theory which traces the cause of changes in business conditions to the phenomenon of circulation credit [that is, the issue of fiduciary media]. . . . Every advance toward explaining business fluctuations to date is due to the Currency School. We are also indebted to this School alone for the ideas responsible for policies aimed at eliminating business fluctuations.  

In his earlier treatise, The Theory of Money and Credit, Mises credited the Currency School as the main inspiration for the development of modern business cycle theory. There Mises (1981, pp. 282–83) commented that the Currency School “propounded a theory, complete in itself, of the value of money and the influence of the granting of credit on the prices of commodities and the rate of interest.” While noting that the school’s doctrines were based on the erroneous value theory of the classical school and a mechanical version of the quantity theory, Mises yet maintained, “Within its own sphere of investigation,” the Currency School “was extremely successful.” “This fact,” he observed, “deserves grateful recognition from those who, coming after it, build upon the foundations it laid.”

Mises, however, did not allow his admiration for the Currency School to blind him to the two key errors it committed. In fact he was eager to expose and correct these errors because they were the reason that the currency principle failed on the policy level when it was implemented in Great Britain by the Bank Act of 1844, more popularly known as Peel’s Act. The first error was an analytical one. Unlike the opposing and inflationist Banking School, the Currency School failed to recognize that bank deposits were perfectly interchangeable with bank notes in exchange and, as such, were part of the money supply. Consequently, the currency principle’s rigid restriction on the creation of fiduciary media was tragically weakened because Peel’s Act applied only to bank notes, while banks were left free to create new, unbacked demand deposits ad libitum.

The second, practical flaw in the program of the Currency School was its insistence that power to enforce the currency principle be centralized in a bank with monopolistic legal privileges—in this case the Bank of England. Th is quasi-central bank, in which most of the system’s gold reserves were held, would then have the means and the power to enforce the currency principle for the banking system as a whole. In effect, the authors of Peel’s Act unwittingly created the template for the modern inflationary and crisis-prone monetary and financial system. In the modern system, a central bank such as the Fed is legally empowered to issue its own fiat notes and deposits which serve as the reserves for the commercial banks. The commercial banks, in turn, are permitted to create fiduciary media by pyramiding their own bank deposits on these Fed liabilities.

—Joseph T. Salerno, “Ludwig von Mises as Currency School Free Banker,” in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 103-104.

The Link Between Central Banking and the Abandonment of Commodity Money Is Worth Stressing

The establishment of fiat money, in turn, means unlimited scope for a privileged bank to further abuse its powers in pursuit of narrow political and financial ends. Such was, broadly speaking, the history of the growth of central banks and fiat money throughout much of the world during the present century. This history has set the stage for price level, interest rate, and exchange rate movements such as were never seen under the gold standard. These fluctuations have spelled doom to thousands of private banks. The link between central banking and the abandonment of commodity money is particularly worth stressing, because so many past economists wrongly perceived central banks as devices for securing monetary stability. The evidence presented here suggests, on the contrary, that central banking is incompatible with monetary stability. Free banking grounded in strict rules of contract and bankruptcy law would have provided a much stronger bulwark against the flood of paper money.

—George Selgin, “Are Banking Crises Free-Market Phenomena?” Critical Review: A Journal of Politics and Society 8, no. 4 (Fall 1994): 603.

Under “Bagehotian” Free Banking, Numerous Competing Banks Issue Notes Redeemable in “Outside” Money Like Gold

The need for various kinds of legislative interference in banking, and for legislation establishing central banks in particular, has been taken for granted by most monetary writers at least since the passage of the English Bank Act of 1844. Peel’s Act eventually guaranteed the Bank of England a complete monopoly of paper currency in Great Britain, effectively ending the monetary controversies of preceding decades with a verdict in favor of a (rule-bound) central bank. Yet a few stalwarts continued to insist upon the theoretical superiority of free banking, where numerous banks of issue are “regulated” by competitive pressures only. One of them was Walter Bagehot who, while editor of The Economist in 1873, published his highly influential book on Lombard Street. Bagehot viewed free banking as an ideal that was both more stable and more “natural” than central banking. In contrast, he viewed the concentration of legal privileges in the Bank of England of his day as both unnatural and dangerous to economic stability. When it came to offering practical advice, however, Bagehot did not propose taking away the Bank’s special privileges: that, he said, would be like proposing a “revolution,” and just as fruitless. Instead, Bagehot hoped that the Bank could be persuaded to manage its affairs in a manner more conducive to the avoidance of financial crises (and, by implication, less conducive to maximizing the Bank’s profits).

In presenting his case for free banking, Goodhart draws heavily on Bagehot’s particular vision of a free-banking system. Although Goodhart also refers to works by Benjamin Klein and Friedrich Hayek, these have to do with hypothetical arrangements involving competing private issuers of irredeemable fiat money, which are a far cry from free banking in its conventional and traditional (Bagehotian) meaning. In a traditional free-banking system, rival banks issue notes redeemable in some “outside” money, like gold, that none of them can create.

—George Selgin, “The Rationalization of Central Banks,” Critical Review 7, nos. 2-3 (1993): 337.

An Increase in Supply IS (not ‘causes’) an Increase in Demand for Other Things and Vice Versa

Moving forward a century, the same concept is found in the following passage from one of the most widely used economic texts ever published, in which this principle is stated in very clear terms:

It is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is (not ‘causes’) an increase in demand . . . An increase in the supply of cloth is an increase in the demand for other things; and vice versa, an increase in the supply of anything else may constitute a demand for cloth. What is divided among the members of society is the goods and services produced to satisfy its wants; and the same goods and services are both Supply and Demand. (Clay, [1916] 1924: 242)

The notion of aggregate demand separate from aggregate supply was foreign to pre-Keynesian economic thought. Aggregate demand grows at the same rate and by the same amount as aggregate supply, and will not grow unless supply has grown. It is not, however, just any production that will lead to an increase in aggregate demand. What creates demand is the production of forms of output for which enough buyers can be found whose payments cover in aggregate the entire costs of production.

—Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

The Confused and Contradictory Notion of “Real Costs” Underlies Efforts to Determine Nonmarket Prices

Ludwig von Mises was one of the chief sources for the subjectivist economics expounded at LSE by Hayek, and his work was an influence as well on both Robbins and Thirlby. Mises’ earlier work on the possibility of socialist calculation has been mentioned; some reference must now be made to his treatise, Human Action, published in English in 1949, but based on a work in German published in 1940. In this book, Mises does discuss cost explicitly, even if briefly, and his basic conception is similar to that London conception that is best represented in Thirlby’s work. Generically, ‘‘costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at’’ (p. 97). ‘‘At the bottom of many efforts to determine nonmarket prices is the confused and contradictory notion of real costs. If costs were a real thing, i.e., a quantity independent of personal value judgments and objectively discernible and measureable, it would be possible for a disinterested arbiter to determine their height.... Costs are a phenomenon of valuation. Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied’’ (p. 393).

Mises’ ideas on cost have been further developed by two of his American followers. In his two-volume treatise, Man, Economy, and the State, Murray Rothbard adopts a subjectivist conception of cost that is closely akin to that advanced by G. F. Thirlby. And perhaps the single most satisfactory incorporation of a choice-related notion of cost into a general price-theory context is found in Kirzner’s Market Theory and the Price System.

—James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory, vol. 6 of The Collected Works of James M. Buchanan (Indianapolis: Liberty Fund, 1999), 33-34.

All-Around Price Controls Destroy the Connection between the Production Structure and the Structure of Demand

The imposition of all-around price controls means that the system of production has become completely independent of the preferences of consumers for whose satisfaction production is actually undertaken. The producers can produce anything and the consumers have no choice but to buy it, whatever it is. Accordingly, any change in the production structure that is made or ordered to be made without the help offered by freely floating prices is nothing but a groping in the dark, replacing one arbitrary array of goods offered by another equally arbitrary one. There is simply no connection anymore between the production structure and the structure of demand. On the level of consumer experience this means, as has been described by G. Reisman, “… flooding people with shirts, while making them go barefoot, or inundating them with shoes while making them go shirtless; of giving them enormous quantities of writing paper, but no pens or ink, or vice versa; … indeed of giving them any absurd combination of goods.” But, of course, “… merely giving consumers unbalanced combinations of goods is itself equivalent to a major decline in production, for it represents just as much of a loss in human well-being.” The standard of living does not simply depend on some total physical output of production; it depends much more on the proper distribution or proportioning of the various specific production factors in producing a well-balanced composition of a variety of consumer goods. Universal price controls, as the ‘ultima ratio’ of conservatism, prevent such a well-proportioned composition from being brought about. Order and stability are only seemingly created; in truth they are a means of creating allocational chaos and arbitrariness, and thereby drastically reduce the general standard of living.

—Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Auburn, AL: Ludwig von Mises Institute, 2010), 103-104.

History Is Largely a History of Inflation, Engineered by Governments for the Gain of Governments

When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them. This can be explained only by the myth (that the government prerogative was necessary) becoming so firmly established that it did not occur even to the professional students of these matters (for a long time including the present writer!) ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.

We cannot trace the details of the nefarious activities of rulers in monopolising money beyond the time of the Greek philosopher Diogenes who is reported, as early as the fourth century BC, to have called money the politicians’ game of dice. But from Roman times to the 17th century, when paper money in various forms begins to be significant, the history of coinage is an almost uninterrupted story of debasements or the continuous reduction of the metallic content of the coins and a corresponding increase in all commodity prices.

Nobody has yet written a full history of these developments. It would indeed be all too monotonous and depressing a story, but I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments—though the gold and silver discoveries in the 16th century had a similar effect. Historians have again and again attempted to justify inflation by claiming that it made possible the great periods of rapid economic progress. They have even produced a series of inflationist theories of history which have, however, been clearly refuted by the evidence: prices in England and the United States were at the end of the period of their most rapid development almost exactly at the same level as two hundred years earlier. But their recurring rediscoverers are usually ignorant of the earlier discussions.

—F. A. Hayek, Denationalisation of Money: The Argument Refined; An Analysis of the Theory and Practice of Concurrent Currencies, 3rd ed., Hobart Paper (Special) 70 (London: Institute of Economic Affairs, 1990), 33-34.

The Anti-Bullionists Wanted an Elastic Money Supply Linked to the Discounting of Bills of Exchange

This elasticity of the money supply was channeled through the bank discount of bills of exchange issued against the increase in the supply of real goods (Torrens 1812, p. 127). Therefore, it was assumed that when discounting those bills, the banking industry was just providing new currency to those individuals who had increased their transactions demand for money to acquire newly produced goods.

This conception of the elasticity of the money supply linked to the discounting of bills of exchange was later known as the Real Bills Doctrine (Mints 1945, p. 25), but its origins can be traced back even before the Bullionist Controversy in the writings of Adam Smith ([1776] 1904, p. 287; Arnon 2011, pp. 40–45). However, Smith’s version of the Real Bills Doctrine presupposed a regime of monetary convertibility and free banking competition that was lacking in the version espoused by the antibullionists: whereas Smith tried to describe a mechanism of self-regulating bank liquidity within an institutional framework characterized by free banking and metallic money, the antibullionists tried to exculpate the monetary policy of the Bank of England of any responsibility for the inflation in England during the Restriction Period (Glasner 1992). The antibullionists’ version of the Real Bills Doctrine was specially problematic because money supply was ultimately not subject to the demand for money but to the demand for credit by those with sufficient collateral, and that demand for credit could endogenously be manipulated by the banking system itself through changes in its discount rate (something that, as we will see, moderate bullionists explicitly criticized).

—Juan Ramón Rallo, “The Issue of Free Banking During the Bullionist Controversy,” Journal of the History of Economic Thought 41, no. 1 (March 2019): 105-106.

The Bank of England Was Blamed by the “Bullionists” for the Restriction Crisis (1797-1821) But Defended by the “Anti-Bullionists”

Before 1800, decades of inconvertible paper money in England would have been considered unthinkable, and so previous monetary theorists had scarcely contemplated or analysed such an economy. But now writers were forced to come to grips with fiat paper, and to propose policies to cope with an unwelcome new era.

The political controversies during the restriction period centred on explaining the price inflation and depreciation and on assessing the role of the Bank of England. The ‘bullionists’ pointed out that the cause of the price inflation, the rise in the price of bullion over par, and the depreciation of the pound was the fiat money expansion. They further maintained that the central role in that inflation was played by the Bank of England, freed of its necessity to redeem in specie. Their opponents, the ‘anti-bullionists’, tried absurdly to absolve the government and its privileged bank of all blame, and to attribute all unwelcome consequences to specific problems in the particular markets involved. Depreciation in foreign exchange was charged to the outflow of bullion caused by excessive imports or by British war expenditures abroad (presumably unrelated to the increased amount of paper pounds or to the lowered purchasing power of the pound). The rise in the price of bullion was supposedly caused by an increased ‘real’ demand for gold or silver (again unrelated to the depreciated paper pound). The increases in domestic prices received less attention from the two sides of the debate, but they were attributed by the anti-bullionists to wartime disruptions and shortages in supply. Any ad hoc cause could be seized upon, so long as the great integrating cause, the expansion of bank credit and paper money, was carefully ignored and let off the hook. In short, the anti-bullionists reverted to mercantilist worry about ad hoc causes and the balance of trade on the market. The previous hard-won analysis of money and overall prices went by the board.

—Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 160-161.

The “Bullionist Controversy” Began in 1797 with a Massive Run on the Banks Followed by a Suspension of Specie Payment

The Bank of England had been the bulwark of the English (and, by serving as bankers’ bank, of the Scottish) banking system since its founding in 1694. The bank was the recipient of an enormous amount of monopoly privilege from the British government. Not only was it the receiver of all public funds, but no other corporate banks were allowed to exist, and no partnerships of more than six partners were allowed to issue bank notes. As a result, by the late eighteenth century, the Bank of England was serving as an inflationary engine of bank deposits and especially of paper money, on top of which a flood of small partnership banks (‘country banks’) were able to pyramid their own notes, using Bank of England notes as their reserve. As if this were not enough privilege, when the bank got into trouble by overinflating, it was permitted to suspend specie payment, that is, refuse to meet its obligation to redeem its notes and deposits in specie. This privilege was granted to the bank several times during the century after it opened its doors. However, each time the suspension, or ‘restriction’ of specie payment lasted only a few years.

In the 1790s, however, a startlingly new epoch began in the history of the British monetary system. In February 1793, a generation of fierce warfare broke out between revolutionary France and the crowned heads of Europe, led by Great Britain. While not exactly continuous, the war lasted, with slight interruptions, until Napoleon was finally defeated in 1815 and the monarchies of Europe reimposed the Bourbon dynasty upon the French nation. This massive war effort meant a rapid escalation of monetary inflation, government spending, and public debt by the British government.

During the 1780s, the inflationary process of bank credit expansion had managed to double the number of country banks in England, totalling nearly 400 by the outbreak of war. The shock of the war led to a massive financial crisis, including runs on the country banks, as well as numerous bankruptcies among banks and financial houses. One-third of the country banks suspended specie payment during 1793.

For a few years, the bank saved itself by pursuing a cautious and conservative policy. But soon, inflationary war finance, the drain of gold abroad in response to higher purchasing power elsewhere, the alarms of war, and the increased demand for gold upon the banks, all combined to precipitate a massive run on banks, including the Bank of England, in February 1797. The country banks suspended specie payments, and the government brought matters to a head by ‘forcing’ the bank to suspend specie payments, a ‘Restriction’ which the Bank of England of course was all too delighted to accept. For the bank could now continue operations, could expand credit, inflate its supply of notes and deposits, and insist that its debtors must repay their loans, while it could avoid the bother of redeeming its own obligations in specie. In effect, bank notes were unofficially legal tender, indeed virtually the only legal tender, and they were made official legal tender in 1812 until the resumption of specie payments in 1821.

—Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 159-160.

Like Keynesian Pyramid-Building and Hole Digging Schemes, Greenbackers Wanted a Canal from New York to San Francisco

Also sympathetic to greenbacks were many manufacturers who desired cheap credit, gold speculators who were betting on higher gold prices, and railroads, which as heavy debtors to their bondholders, realized that inflation benefits debtors by cheapening the dollar whereas it also tends to expropriate creditors by the same token. One of the influential Carey disciples, for example, was the leading railroad promoter, the Pennsylvanian Thomas A. Scott, leading entrepreneur of the Pennsylvania and the Texas and Pacific Railroads.

One of the most flamboyant advocates of greenback inflation in the postwar era was the Wall Street stock speculator Richard Schell. In 1874, Schell became a member of Congress, where he proposed an outrageous pre-Keynesian scheme in the spirit of Keynes’s later dictum that so long as money is spent, it doesn’t matter what the money is spent on, be it pyramid-building or digging holes in the ground.¹³⁵ Schell seriously urged the federal government to dig a canal from New York to San Francisco, financed wholly by the issue of greenbacks. Schell’s enthusiasm was perhaps matched only by that of the notorious railroad speculator and economic adventurer George Francis Train, who called repeatedly for immense issues of greenbacks. Train thundered in 1867:

Give us greenbacks we say, and build cities, plant corn, open coal mines, control railways, launch ships, grow cotton, establish factories, open gold and silver mines, erect rolling mills. . . . Carry my resolution and there is sunshine in the sky.

¹³⁵Thus, Keynes wrote: “‘To dig holes in the ground,’ paid for out of savings will increase, not only employment, but the real national dividend of useful goods and services.”

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 148-150.

Only Free Banking Would Have Rendered the Market Economy Secure Against Crises and Depressions

Mises blamed unwarranted credit expansion on political pressures for cheap money that the central bank failed to resist. As an institutional reform to avoid the problem he favored free banking, a monetary system without a  central bank, although he acknowledged that the spread of central banking throughout Europe in previous decades had made the choice between free banking and central banking one of those “questions that have long been regarded as closed.” Exemplified by Scotland, Sweden, Canada, Switzerland, and other countries in the periods before their central banks were created, free banking meant a system in which decentralized and competitive commercial banks issue the paper currency, tied down by a contractual obligation to redeem their notes for gold or silver coin.

Advocates of free banking argued that competition would prevent all the banks from colluding to expand in concert, and interbank redemption of excess notes or deposits would restrain any smaller set of banks from overexpanding. International redemption would restrain the system as a whole. In his later treatise Human Action Mises wrote along these lines:

Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular — one is tempted to say normal — feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.

—Lawrence H. White, The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years (New York: Cambridge University Press, 2012), 74-75.