Chapter 12, Fresh Start, opens the Part IV of the book titled Mises in His Prime which deals with the period that was both academically productive and rewarding in a number of different respects. Chronologically, the period roughly spans the time after the WWI until Mises moved to Geneva and started lecturing there at the Institute of International Studies in 1934. During that time, in addition to his important position at the Austrian Chamber of Commerce (Kammer) he accepted major responsibilities at the newly created Bureau for Claims Settlements which dealt with questions of reparations and reconstruction after the World War. There Mises was directly and considerably involved in shaping Austria’s economic policy. While working at the Bureau, Mises also met young Friedrich August von Hayek who would later become one of his most important followers. Mises’s academic work was closely connected with the practical problems of economic policy at the time. The post-war problems with inflation meant for him in the first instance a formidable intellectual task to combat numerous pro-inflationist theories of his fellow academics.Chapter 12 might be particularly valuable to those interested in monetary theory and policy. A considerable portion of the chapter is devoted to Mises’s ideas and role in fighting the inflation which would nearly bankrupt Austria.
The chapter also contains a discussion of the gold-exchange standard and Mises’s own proposal in favor of the establishment of a “100% marginal gold standardâ€. The gold-exchange standard was a creation to meet two contrary objectives. First, by relying on gold’s reputation as safeguard against devaluation of money governments hoped not to disappoint the creditors who were cheated as a result of unrestrained inflation to finance war expenditure. Second, since there was virtually no chance to redeem the huge amounts of accumulated war debts at the pre-war gold prices, governments and their central banks sought to circumvent the problem by making those debts redeemable into some foreign currencies, rather than directly into gold. This was to happen through stabilization of exchange rates by means of “coordinatedâ€ actions of all central banks involvement.
The gold-exchange standard is a fraud and is the opposite of an ideal monetary system. The book contains one interesting moment in connection with it. Initially, because of the requirements of the gold-exchange standard Austrian government was forced to cut government expenditures in order to stabilize the exchange rate of the krone. This raised the creditworthiness of Austrian debtors and ensured a large influx of foreign money into the pockets of local governments who immediately increased their expenditures accordingly.
But, of course, even the generous foreign credit could not improve the difficult situation Austria found itself at the height of its economic crisis in 1923. Hyperinflations in Austria, and in a much greater extent in Germany, prompted Mises to think about a serious monetary reform that would put an end to governments’ ability to use the printing press to meet its financial obligations.
The essence of Mises’s plan for a “100% marginal gold standardâ€ consists in the idea that all additional, i.e. marginal, issues of paper money be “covered by gold deposited with the issuing bankâ€. At first, Mises did not think it was necessary for gold to be used in daily transactions, in form of actual gold coins, so as to make the public aware of its actual existence and effect. But later on, in Human Action, he came to recognize that the only way for the gold standard to succeed is that the public directly perceives the benefits of using gold as money, otherwise governments would still be able to follow inflationary practices through the backdoor, as it were, just the way it happened under the various kinds of gold-exchange standard.