Mises was clueless about the effects of devaluation

Over at the Ludwig von Mises Institute’s website they have reproduced a comment from good old Ludwig von Mises on The Objectives of Currency Devaluation” from Human Action. I love Human Action and there is no doubt Ludwig von Mises was a great economist, but to be frank when it comes to the issue of devaluation he was basically clueless. Sorry guys – his views on this issue are not too impressive.

He mentions five reasons why policy makers might favour “devaluation”:

  • To preserve the height of nominal wage rates or even to create the conditions required for their further increase, while real wage rates should rather sink
  • To make commodity prices, especially the prices of farm products, rise in terms of domestic money or, at least, to check their further drop
  • To favor the debtors at the expense of the creditors
  • To encourage exports and to reduce imports
  • To attract more foreign tourists and to make it more expensive (in terms of domestic money) for the country’s own citizens to visit foreign countries

It might be that this is what motivates policy makers to devalue the currency, but he forgets the real reason why it might make perfectly good sense to allow the currency to weaken. If monetary policy has caused nominal GDP to collapse as was the case during the Great Depression (or during the the Great Recession!) then a policy of devaluation is of course the policy to pursue. Hence, von Mises totally fails to understand the monetary implications of devaluation.

The core of von Mises’ lack to understand of the monetary impact of devaluation is that he – like Rothbard – has a very hard time differentiating between good and bad deflation. George Selgin has a great discussion of von Mises’ view of deflation in his 1990 paper “Ludwig von Mises and the Case for Gold”. George goes out of the way to explain that von Mises really did understand the difference between good and bad deflation and that given his views he should really have supported a monetary policy regime (rather than the gold standard) that ensures stabilisation of nominal spending (M*V). The paradox is of course that you can interpret von Mises in this way, but why would he then be so outspoken against devaluation? In my view von Mises did not fully appreciate that there is good and bad devaluation – so it is no surprise that his modern day internet supporters (of the populist kind…) is so in love with the gold standard. By the way the kind of arguments von Mises has against devaluation and in favour of the gold standard are very similar to the arguments of the most outspoken proponents of the euro today. Yes, the logic of a common currency and the gold standard is exactly the same.

I never understood people who support free markets could also be in favour of fixing the price of the currency – to me that makes absolutely no sense. Milton Friedman of course reached the same conclusion and more important Friedman realised that if you try to peg your currency at an unsustainable level then policy makers will try to pursue interventionist policies to maintain this peg. Capital restrictions and protectionism are the children of pegged exchange rates. Just ask Douglas Irwin.

Further reading:

My recent post on the monetary effects of devaluation: Exchange rates and monetary policy – it’s not about competitiveness: Some Argentine lessons

My posts on Milton Friedman’s view of exchange rate policy:

Milton Friedman on exchange rate policy #1
Milton Friedman on exchange rate policy #2
Milton Friedman on exchange rate policy #3
Milton Friedman on exchange rate policy #4
Milton Friedman on exchange rate policy #5
Milton Friedman on exchange rate policy #6


UPDATE:  disagrees with me on this issue. Read his comment here. What I regret the most about the comments above is not that I have been a bit too hard on Mises, but rather that my representation of George Selgin’s views on the issue. While I do not think my representation of what George said in his 1999 paper is wrong I do admit that I could have expressed his position more clearly.

By the way I have noticed that when I verbally insult people – living or dead – then it clearly increases the traffic on my blog. So if I wanted to maximize “clicks” I would insult a lot more people. However, I do not like that kind of debate so I promise to try to stay civil and polite – also to people with whom I disagree. Using words like “clueless” in the headline might not live up to that criteria, but I will admit that I have been greatly frustrated by the arguments made by “internet Austrians” recently (And once again I am not talking about what we could call the GMU Austrians…).

Leave a comment


  1. Anonymous

     /  March 2, 2012

    Try Part 4 of Mises’s “the Theory of Money and Credit” (while the rest of the book was written in 1912, that part was written in 1952; found online here http://blog.mises.org/4048/theory-of-money-and-credit-pdf/) and from Part V to the end of Hans Sennholz’s “the Age of Inflation”–particularly the section “floating exchange rates are disruptive (unsure if available online). Of course, feel free to read the entire books, but those are the relevant sections.

  2. Anonymous…

    Let me quote Lee Kelly:

    “Austrians regularly respond to disagree with, ‘you mustn’t have read , or you would definitely agree with me about everything.’ Then they say, ‘don’t worry, I’ll summarise that 500 page book for you in a few paragraphs to get you up to speed, and I’ll do it while insulting your intelligence and integrity.’ When this tactic does not get immediate results, the typical reaction is something like ‘how can you deny the apodictic certainty of my arguments!? You no longer even have an excuse and, therefore, must be evil.'”


    By the way I read Money and Credit, but still fail to see that von Mises really understood the difference between good and bad deflation – or at least if he did his policy conclusions are totally off. Concerning Sennholz “floating exchange rates are disruptive”?? What can I say – it is nonsense and is as idiotic as saying changes in stock prices are disruptive.

  3. MarkV

     /  March 2, 2012

    Mises didn’t “not understand the difference between good and bad deflation.” What the author of the column doesn’t understand, is that deflation, or any other economic phenomenon, is not “good” or “bad” in itself, but depends on your economic status. If you are a creditor or a saver, deflation (general decrease in the price level i.e. increase in the purchasing power of the currency) is a good thing, because the money you will have or receive in the future will be able to buy more goods. Conversely if you are a debtor, deflation is a bad thing, because to discharge your debt you will have to give up more purchasing power in the future than you originally received. The idea that deflation (or inflation) are objectively good or bad is nonsense because it ignores the differing status of the various people involved. Every trade has two parties. Ignoring the point of view of one of the parties when evaluating the combined result of the trade is one of the most basic errors you in economics.

  4. MarkV,

    I am sorry to say it but you seem to make the “most basic errors in economics” yourself. The ideal monetary standard should not distort relative prices. The gold standard does not fulfill that criteria. A productivity norm as suggested by Selgin (or Hayek for that matter) on the other hand does not distort relative price. A NGDP level targeting is of course a variation of the productivity norm.

    Lets assume a positive supply shock hit the economy – for example a drop in oil prices. If you have a productivity norm you would allow for prices to drop. However, under a gold standard you would expand the money base – as a positive supply shock would increase currency inflow – and thereby push up all other prices. Hence, you would distort relative prices – all other prices increases relative to oil prices. It is a gold standard does not ensure neutrality in the market place.

  5. Rob

     /  March 2, 2012

    “If monetary policy has caused nominal GDP to collapse as was the case during the Great Depression (or during the the Great Recession!) then a policy of devaluation is of course the policy to pursue”

    I have seen a few articles on devaluation in the past few days and wanted to ask for clarification on something. I understand that when NGDP is off target MMist would recommend expanding the money supply to bring it back up. If this caused some inflation that was greater than that of other countries then this might cause a devaluation. if however all other CBs expanded the money supply at the same time (in response to a global fall in NGDP) then the money supply could expand without necessarily affecting exchange rates.

    So my question is : When MMist talk about devaluation do they just mean the process of allowing the exchange rate to adjust to its correct market value after NGDP has brought back to trend and the money supply to its equilibrium level, or something more than that?

    The reason I ask is that sometimes it seems they are referring to a special goal of devaluation as an end in itself which I find a little confusing.

  6. Rob, good point.

    There is of course a difference between devaluations and letting the currency depreciate in terms of how you implement the policy. But your example is good if all countries try to devalue at the same time what is then the impact? That is effectively a competitive devaluation. That will as you say have the impact of increasing the money supply – and that would exactly be what we would like to see if we where in a situation with “bad deflation”. The goal of devaluation is to end the bad deflation – it is not an end in itself to weaken the currency.

    My post on devaluation and competitiveness explains that. See link in this post.

  7. I haven’t read the specific book of Mises, but I think it is more correctly to say that Austrians in generally want to “denationalize” money and the result would afterwards possible be something like gold standard, because “gold is real money” or “the first choice of money was gold” (the last argument according to Mises). It is of course better that fluctuations are caused by changes in markets than by governments.

    But I guess it depends on what we mean by “austrians”. Austrians disagree alot on this issue as you know: Rothbard wants to abolish everything else than 100% reserve banks, while Hayek is in favour of a total free banking system.

    But an interesting post as always! You and Selgin of course have a very valid point when you suggest that NGDP targeting indeed is very Austrian because a monetary system should avoid changing relative prices. Actually I think Mises in some article/book uses this as argument against printing money.

    • Mikael,

      I agree we should be careful when we use the term “Austrian”. The gold standard was not a Free Banking system and in my view it is in no way given that a Free Banking system would be based on gold – and certainly not a 100% reserve banking system as Rothbard imagines.

      To me a totally Free Market monetary system should be “neutral” and not distort relative prices – only NGDP targeting and Free Banking achieve that – inflation targeting, price level targeting, the gold standard and fixed exchange rates all distort relative prices unless there are never supply shocks.

      • I totally agree. It is just something that the three “Austrian heros” (Rothbard, Mises and Hayek) diagree on, but Mises argues that eventually the money would be based on gold (I don’t agree).

        But one thing still hits me (and I guess it may be due to the fact that I don’t have read Selgin yet. But it is on my to do list): How will you secure NGDP targeting in a free banking system?

        But again, you are absolutely right. It hits me after I have been introduced to NGDP targeting than even though Austrians theory on money is nice (I mean they know that the typically keynesian “the nominal interest rate is the oppurtunity cost of holding money” and stuff like that are basically wrong and that disturbing relative prices are bad), they do not consider a NGDP monetary framework. Or, of course except from Hayek.

      • Mikael,

        In theory, a free banking would tend to stabilise NGDP as a byproduct of profit maximising behaviour by money issuers. Basically, surpluses and shortages of money are profit-making opportunities which will quickly be exploited in a competitive market. The overall effect will be to prevent shifts in the general level of prices that do not have their origins in fundamental changes in productivity, and that more or less amounts to something like NGDP targeting.

        There are a few complications, and it certainly wouldn’t be perfect, but then neither will a central bank NGDP target–perfect is not an available option. In any case, for some, the appeal of market monetarism and its emphasis on NGDP targeting is partly about getting the central bank to emulate what a free market in money and banking should look like. Of course, that leads to the obvious question: why have the central bank emulate such a system and not just have the system itself? To which my I respond: EXACTLY!

  8. MarkV,

    It’s not obvious that, for example, creditors benefit from unexpected deflation. It’s true, of course, that creditors are paid back in money that is worth more, in real terms, than they had expected. However, if creditors were only interested in higher returns, then why not just invest in higher yielding assets to begin with? The answer is that creditors are also concerned with risk. The implicit assumption in the general proposition that creditors benefit from deflation is that risk remains constant (or, at least, its increase is less costly than the benefit of higher real returns).

    If deflation is spurred not by increasing productivity but falling aggregate nominal income, then nominally fixed debts must be repaid from a shrinking pool of earnings. In general, this unexpectedly increases the chances that debtors will default on their loans and, therefore, exposes creditors to more risk than they had bargained for. Whether a particular creditor benefits from deflation, then, depends on which debtors are hit hardest, how much prices have fallen for the goods that creditors want to buy, and whether the benefits of higher real returns are worth the extra risk. Given these circumstances, there isn’t, of course, going to be any hard and fast rule that applies to every creditor–some will benefit from deflation and others will suffer.

    In fact, we have good reason to think that deflation spurred by falling aggregate nominal income will be, on average, bad for both creditors and debtors. It seems highly unlikely that an unexpected shift in portfolios toward more risky assets should coincide with a general shift in preferences for such assets. In fact, any shift in preferences during a fall in aggregate nominal income is likely to be toward safer assets. That is, just as people want to hold lower yielding and safer assets, their actual portfolios will be getting higher yielding and riskier because of deflation.

    Once the deflation runs its course until the general level of prices reaches its new equilibrium, default-risk should fall as debtors as lower prices make it easier for debtors to finance their debt repayments. However, in general, debtors are still stuck paying-off fixed nominal debts from a small pool of aggregate nominal income. Ultimately, this is why it’s desirable, though not always practicable, for the unit of account to have a stable value.

  9. Egh! That last paragraph was kind of mangled. Here is what it was meant to say:

    ‘Once the deflation runs its course, i.e. the general level of prices reaches its new equilibrium, default-risk should fall as lower prices for goods and services in general make it easier for debtors to finance their debt repayments from smaller incomes. However, in general, debtors are still stuck with nominally fixed debts that are a higher proportion of aggregate nominal income, and that will tend to increase the risks of such debt. Ultimately, this is why it’s desirable, though not always practicable, for the unit of account to have a stable value.’

  10. @Lee Kelly

    Thank you for your answer – it makes sense.

    • No problem, though it occurs to me now that it was really Lars’s question to answer: sorry Lars!

  11. Benjamin Cole

     /  March 3, 2012

    The gold-voodoo nuts just do not understand paper currency and the money supply. They cannot imagine a useful monetary policy that yes, results in a lower exchange value for paper money.

    But the logical extension of their fixation is that we somehow have to fix the value of money–even as we enjoy a rapidly evolving range of goods and services. Many argue that today’s CPI overstates inflation.

    So, are we trapped forever in trying for a zero CPI, even as the market basket of goods changes beyond recognition? That makes no sense. Ever on knife edge, searching for zero inflation.

    As for the gold standard, that is essentially arguing for a fixed supply of money. The globe, with growing population and growing incomes, would have to sustain permanent deflation if we wanted real economic activity to increase.

    We have seen what even mild deflation does to Japan. It is catastrophic—-real wages down 15 percent, industrial output down 20 percent, property values down 80 percent and the stock market down 75 percent in 20 hers of deflation. Nothing worked like the tight money kooks said it would. Japan is still striking. Ooof.

    In permanent deflation, the incentive is to wait before buying assets or making investments, improving property etc.—in other words, a perma-deflationary recession. In addition, a huge bond-holding class emerges, more interested in continued deflation than real economic growth.

    Really, I don’t care about gold or silver or what currency looks like. I am pragmatic. If a gold standard would work, I would go for that. If mild deflation worked, I would like that. Who cares?—-the goal is real economic growth, not genuflection to gold or nominal price stability.

    What works is Market Monetarism and moderate inflation.

    See the USA 1982-2008, a long period of moderate inflation and solid real economic growth. Compare those results agains the deflationary Japan of the same period.

    It ain’t even close.

    • Benjamin,

      I agree with the thrust of your point, i.e. gold might be good money, but it doesn’t follow good money must be just like gold. However, I have two quibbles:

      (1) Few gold advocates have much time for the CPI. They might refer to it sometimes as a rough measure of inflation, but they’d hardly want to stabilise the CPI and nor would they expect a gold standard to have that consequence.

      (2) Deflation is relatively harmless, and perhaps beneficial, when driven by rising productivity. Deflation is a problem when driven by monetary disequilibrium or, more precisely, an excess demand for money. Talk of what deflation does and doesn’t do without making this distinction is misleading at best.

  12. Benjamin Cole

     /  March 3, 2012


    Thanks for you an interesting reply.

    But—I just don’t care. I would rather run an economy “hot” with a couple percent higher inflation than necessary, to keep people employed, home values solid, business investment justified etc. Error on the side of boom times, I say. Fat City is nice place.

    The shrunken economies promised by monetary asceticism and genuflection to gold are not appealing.

    Gold is a metal. Silver is a metal. Platinum is a metal. Maybe primitives are impressed by gold and baubles, but they are not reasonable monetary platforms for a modern economy.

    People keep saying China will come apart at the seams. I wonder–what if they keep printing money (as they are). People will keep working, and as long as they invest in infrastructure and new plant and equipment….the economy will expand to soak up the money (let’s set aside pollution).

    China has been printing money for 20 years to fantastic effect; Japan has been shrinking its money supply, to rotten result.

    Ben Bernanke should turn the printing press on “high” and go home for a month.

  13. Benjamin Cole

     /  March 3, 2012


    In the USA, the wealthy pay the income tax. We use income taxes to pay down the national debt. Ergo, high inflation would help the wealthy…and QE (buy monetizing the debt) would help them even more.

    They are also a creditor class, of course.

    So, it is a wash, roughly.

    In any event, we must choose the monetary policy that results in the greatest economic growth—not the policy that favors one group or another.

  14. Lee, thanks for answering the questions for me…you do a good job and I know we pretty much agree on these issues;-)

    And Benjamin you are a results man, but I nonetheless think Lee’s comments are correct. Deflation induced by positive productivity growth is good news. Obviously that is not what we are struggling with in Europe or US right now.

  15. Lars, though I welcome your showing me otherwise (as I haven’t looked again at my article), I don’t believe I say there that Mises “should really have supported a monetary policy regime (rather than the gold standard) that ensures stabilisation of nominal spending (M*V).” The thrust of my argument as i recall it was that Mises could have made a better case for gold than he actually did make, but failed to do so because of his exclusive reliance upon upon a-priori arguments.

  16. George, thank you for dropping by.

    Ok, maybe I “oversell” your argument slightly. My point was really that your rightly showed that Mises did indeed differentiate between good and bad deflation, but that he failed to use that in his monetary analysis to make the “right” conclusions regarding monetary policy.

  17. Benjamin Cole

     /  March 3, 2012

    It may be that a true positive deflation is impossible in the real world.

    Of course, we are getting wonderful results in manufacturing productivity, meaning cheaper goods.

    But people have money left over (from cheaper goods) and then bid up other prices, especially prime real estate. Your creature comforts are satisfied, but not the need to live in the best or most fun or hip part of town. (I have not seen this issue of real estate in the CPI tackled. Let us say a city is growing, and housing on the suburbs stays at $100k as new subdivisions are carved out, but in the coveted 10 percent of housing in the center of the city booms. The average cost of housing goes up, even though that reflects growing prosperity and volitional higher living costs).

    In any event, the risks of deflation are far too high–see Japan. I would prefer to stick with the moderate inflation model of the USA from 1982 to 2008, perhaps with slightly stiffer underwriting standards and reserve requirement. Better to run an economy a little hot, with moderate inflation, than risk a Japan-style perma-recession deflation.

  18. Well, since rising productivity tends to increase the demand for money, it’s not like we can entirely separate one from the other. Unexpected deflation always causes some problems, Because it disturbs the unit of economic measurement. The problem is whether we can stabilise the value of money while not provoking monetary disequilibrium. That only seems possible with radical reform to detach the unit of account from the medium of exchange.

  19. KingJecon

     /  November 28, 2020

    There is absolutely no point to this blogpost.

    You have also made certain false claims
    “I never understood people who support free markets could also be in favour of fixing the price of the currency”
    This makes zero sense. Mises supported the notion that inevitably currency will be pegged to an emerging commodity standard of some sort and it isn’t fixed by government at all, instead it is market supplied meaning the market will determine the value of the commodity money.

    A market supplied commodity standard regulates the supply of money in the economy and prevents the need for fixed and fluctuating exchange rates relative to foreign currencies.

  20. KingJecon

     /  November 28, 2020

    “he should really have supported a monetary policy regime (rather than the gold standard) that ensures stabilisation of nominal spending (M*V)”

    Monetarism is one of the most idiotic monetary theories still circulating. Which money supply are we looking to stabilize in order to preserve velocity? M1 M2 M3? Central banks have absolutely no incentive towards any equilibrium market monetarist will point out. Market monetarism cannot explain the occurrence of the most devastating business cycles that were in faced in the 20th century including the great recession. Both the M1 and M2 measures of the money stock YOY changes continued to grow after the 2008 crisis struck supposedly this is the same flawed explanation of the depression that ensued in the 1930s: https://cdn.mises.org/M2MoneyStockPercentage_Chart.jpg

  21. Sergey Fedorov

     /  March 16, 2021

    “I never understood people who support free markets could also be in favour of fixing the price of the currency”

    This is wrong on two accounts: it both misrepresents views of modern proponents of Gold standard (at least within Mises Institute – see, for example, J. Salerno, who specifically addresses the point) and misrepresents Gold standard itself.

    While Mises/Rothbard may or may not be accurate with their views and/or exposition of deflation (personally I favor Selgin’s position here), Gold standard is *not* price fixing. There is no “price of the currency” under Gold standard: currencies are simply units of physical weight of the specie. It is clearly fallacious to argue “why do you fix a price of 10 dollars in terms of dollars” or “why don’t you allow weight of the kilogram to be market-determined”. It is not “price fixing”, it is using consistent definitions/units.

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