Monetary theory and policy: the difficult relationship of Menger’s theory of money and his positions on currency reform and monetary policy

Abstract

The contribution attempts an evaluation of Menger’s theory of money by comparison of his Geld-article (1892/1909) with his statements in the context of the introduction of the gold standard in the Austro-Hungarian monarchy in 1892. In the first place, this concerns the goal of constancy of the value of money, but also his theory of money under uncertainty, his attitude towards the banking system, and other issues. The contribution also discusses the fundamental political dimension of pursuance of monetary policy goals and the anti-interventionist orientation of the economic liberalism of the representatives of later generations of the Austrian School.

Keywords:

• Carl Menger
• theory of money
• currency reform
• monetary policy
• economic liberalism

JEL CLASSIFICATION:

• B13
• E50
• N13

Acknowledgements

The author expresses his thanks for comments to the participants of the conference Carl Menger One century later (Nice, December 2021), and to two anonymous referees.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The English translation of citations from Menger’s article mostly follows the translation by M. Streissler an L. B. Yeager in Latzer and Schmitz (2002).

2 “Neutralize”, the term I prefer as translation of the German word “aufheben”, is different from that used in the translation of Menger’s article available in Latzer and Schmitz (2002, 70), where “aufzuheben” is translated by “cancel out”. In the following text, also “neutralize” is occasionally used for Menger’s “aufheben”. Campagnolo, in his translation of the French version of Menger’s article, also uses “neutralize” (Menger 1909 [2005], 258).

3 Together with the army and the ministry of foreign affairs the A-HB was one of the few joint institutions of the double monarchy.

4 On the development of the Austrian currency system of monetary policy, see Kamitz 1949, 128ff; März and Socher 1973, 337ff, 351ff.

5 For a survey of discussions among members of the enquete commission see Mataja (1893).

6 More precisely, circulating state notes of 1fl denomination lost legal tender status after 1899. State notes of higher denomination were replaced by fully covered bank notes and silver coins and ceased to be legal tender in 1903. For details see Fellner (1911, 125ff).

7 Jankovich 1913.

8 The same kind of criticism was made by the economist Max Wirth who argued that the Bank should have been willing to sell gold instead of defending its reserves in the same manner as “the dragon defended the Nibelung hoard” (Wirth 1894, 86).

9 A translation of the report of the currency commission appeared in the Quarterly Journal of Economics under the title “The Gold Standard in Austria” in 1893.

10 For references and more details see Chaloupek (2021, 34ffd).

11 “Die Bank muss die Vorsehung der Bevölkerung sein“ (Menger 1892c, 250, see Menger 1889, 10).

12 He does not mention that this would have to be enforced by the state.

13 In his Investigations Menger mentions “Law“as another example of social institutions which, after having emerged as a result of spontaneous forces, are taken under state control at a later stage of development. (Menger 1985 [1881], 223f)

14 There is a parallel for Menger’s argument about an institution whose evolution originates from spontaneous forces, but from some point onwards transform into co-evolution driven by market and state, in his comments on the formation of cartels and their official sanctioning through special laws. The movement towards cartelization was a dominant feature of industry in Germany and Austria in the decades before World War I. Austria was the first country on the continent to pass a cartel law in 1897. Menger emphasizes that cartels “have arisen from the needs of industrial and commercial businesses. They are a correlate of the structure of today’s economy.” Menger hopes that remedies against detrimental effects of cartelization might come from within the movement, while state regulations (via cartel legislation) “will not go beyond formal organization of associations and preventive measures against abuse of import duties for cartel purposes” (Menger 1905, VIIf).

15 In his statements before the enquete commission Menger emphasizes that the function of paper money issuing banks has changed considerably, compared to 20 or 30 years ago. Greater transparency has minimized the risk of bank runs, while banks now play an important role as “regulators of international monetary relations” (Menger 1892c, 250).

16 Such claims regarding Menger have be denied in general by Böhm (1985).