Key Arguments

• Weber describes interests pushing for a reversal of pre‑war stabilisation policy: 'But there were strong interests that sought to reverse the policy, seeking a monetary policy that 1. lowered the international exchange rate of the domestic currency, so as to favour exporters, and which, 2. by increasing the issue of money by freely coining silver in addition to gold (which should have meant instead of gold), and even in some cases by deliberately issuing paper money, bringing about a fall in the relation of money to domestic goods and so raising the (nominal) money price of domestic goods, which is the same thing.'
• He summarises the intended effect and names it: 'The objective here was to improve the profitability of those manufactured goods since the increase in their price, denominated in the nominal domestic currency, would probably be the most immediate consequence of the increase in the domestic money supply, and so of its fall in price in terms of the exchange rate. The intended process is called “inflation.”103'
• He notes that the significance of such processes is debated but asserts that cheapening and increased production of precious metals tends to raise prices: 'it is very probable that any form of monetary regime in which there is a very marked cheapening and increase in the production of precious metals (or where such metal has been seized as booty) will be characterised by a noticeable tendency towards a rise in prices, at least for some products, perhaps to a different degree for all, in those areas using precious metal as a currency.'
• He then describes wartime paper issues: 'it is an undoubted fact 2. that monetary administrations in areas with an independent paper money [currency] will in times of great financial hardship (especially in time of war) as a rule orient their issue of money solely to the financial needs of waging war.'
• He observes that even fixed‑currency or restricted‑metal systems adopt pure paper regimes under wartime: 'It is likewise clear that in such times, countries with a fixed currency regime or with restricted metallic money not only suspend the redemption of their paper circulating medium—which does not necessarily lead to a lasting shift in the currency—but also, by following a purely financial wartime policy of issuing paper money, adopt a purely paper currency.'
• The result is that metallic money becomes subsidiary and disappears from circulation: 'Here metallic money becomes subsidiary, since its premium in relation to the nominal paper money is ignored and can only be valorised for nonmonetary purposes, so it disappears from circulation.'
• He concludes that unlimited paper issuance produces 'colossal' inflation: 'Finally, it is plain that where there is such a transition to a pure paper currency and unlimited issue of paper money, there is colossal inflation, with all its consequences.'
• Weber contrasts this with the limited inflationary potential under free commercial metals. Under heading A he states: 'So long as there is a free commercial metallic money, the possibility of “inflation” is very limited:' and specifies: mechanically, 'simply by virtue of the fact that the quantity of the precious metal used for monetary purposes has a degree of elasticity, but is ultimately strictly limited;', and economically, 'normally by the fact that the creation of money is effected only on the initiative of private interested parties, so that any interest in minting coin is oriented to the need to make payments in a market-oriented economy.'
• He notes that metallic inflation is only possible through transforming restricted metallic currency into free commercial money, and prolonged credit expansion is limited by the issuing bank’s concern for solvency: 'Inflation is then only possible through the transformation of former metallic restricted currency (e.g., today, silver coin in a country on the gold standard) into a free commercial money, but here generally only if production of the restricted metal becomes much cheaper and is increased. 4. Inflation with a circulating medium is only conceivable as a long-term gradual expansion of circulation through the extension of credit, which offers some elasticity, but ultimately this is strictly limited by the regard an issuing bank has for its solvency.'
• Under B he claims that with independent paper currency, the problem is the amplification of inflation’s consequences and the tendency of administrations to continue it: 'Once an independent paper currency exists, the prospect is perhaps not so much one of inflation—for during wartime nearly all countries adopt a paper currency—but that instead the developing consequences of inflation become noticeably greater. The pressure of financial difficulties and, together with other costs, the demands for increased wages and salaries resulting from inflationary price increases, promote very tangibly the tendency of the financial administration to propel inflation onwards even without any very compelling cause and despite its capacity to avoid such difficulties through severe measures.'
• He notes that lytric policy can become consciously inflationary, not only in crises: 'Hence, monetary (lytric) policy can therefore, and especially where there is a supplementary restricted metallic currency or a paper currency, be a policy of inflation.104 This has long been the case during quite normal times in countries, like America, that have very little engagement with international exchange rates, without there being any kind of financial motive.'
• He adds that after the war some countries 'allowed themselves to succumb to inflation in the means of payment used in wartime.', indicating path dependence.
• Finally, he clarifies his use of the term inflation as denoting 'a special way of creating purchasing power by specific interested parties.'

Source Quotes

If, however, change was wanted (in countries with a restricted or paper currency), then mostly this change involved a gradual rise in the foreign exchange value of currency, and so was oriented to the fixed-value regimes of the largest trading areas. But there were strong interests that sought to reverse the policy, seeking a monetary policy that 1. lowered the international exchange rate of the domestic currency, so as to favour exporters, and which, 2. by increasing the issue of money by freely coining silver in addition to gold (which should have meant instead of gold), and even in some cases by deliberately issuing paper money, bringing about a fall in the relation of money to domestic goods and so raising the (nominal) money price of domestic goods, which is the same thing. The objective here was to improve the profitability of those manufactured goods since the increase in their price, denominated in the nominal domestic currency, would probably be the most immediate consequence of the increase in the domestic money supply, and so of its fall in price in terms of the exchange rate.

The objective here was to improve the profitability of those manufactured goods since the increase in their price, denominated in the nominal domestic currency, would probably be the most immediate consequence of the increase in the domestic money supply, and so of its fall in price in terms of the exchange rate. The intended process is called “inflation.”103 Now on the one hand, 1. the significance of this is not entirely undisputed, but it is very probable that any form of monetary regime in which there is a very marked cheapening and increase in the production of precious metals (or where such metal has been seized as booty) will be characterised by a noticeable tendency towards a rise in prices, at least for some products, perhaps to a different degree for all, in those areas using precious metal as a currency. On the other hand, it is an undoubted fact 2. that monetary administrations in areas with an independent paper money [currency] will in times of great financial hardship (especially in time of war) as a rule orient their issue of money solely to the financial needs of waging war.

The intended process is called “inflation.”103 Now on the one hand, 1. the significance of this is not entirely undisputed, but it is very probable that any form of monetary regime in which there is a very marked cheapening and increase in the production of precious metals (or where such metal has been seized as booty) will be characterised by a noticeable tendency towards a rise in prices, at least for some products, perhaps to a different degree for all, in those areas using precious metal as a currency. On the other hand, it is an undoubted fact 2. that monetary administrations in areas with an independent paper money [currency] will in times of great financial hardship (especially in time of war) as a rule orient their issue of money solely to the financial needs of waging war. It is likewise clear that in such times, countries with a fixed currency regime or with restricted metallic money not only suspend the redemption of their paper circulating medium—which does not necessarily lead to a lasting shift in the currency—but also, by following a purely financial wartime policy of issuing paper money, adopt a purely paper currency.

Here metallic money becomes subsidiary, since its premium in relation to the nominal paper money is ignored and can only be valorised for nonmonetary purposes, so it disappears from circulation. Finally, it is plain that where there is such a transition to a pure paper currency and unlimited issue of paper money, there is colossal inflation, with all its consequences. Comparing all of these processes and events (1. and 2.), it is apparent that: A.

Comparing all of these processes and events (1. and 2.), it is apparent that: A. So long as there is a free commercial metallic money, the possibility of “inflation” is very limited: 1. “mechanically,” simply by virtue of the fact that the quantity of the precious metal used for monetary purposes has a degree of elasticity, but is ultimately strictly limited; 2. economically, normally by the fact that the creation of money is effected only on the initiative of private interested parties, so that any interest in minting coin is oriented to the need to make payments in a market-oriented economy. 3.

4. Inflation with a circulating medium is only conceivable as a long-term gradual expansion of circulation through the extension of credit, which offers some elasticity, but ultimately this is strictly limited by the regard an issuing bank has for its solvency. Here an acute risk (Chance) of inflation arises only if the bank is in danger of becoming insolvent, and so once again, normally occurs when a paper currency is issued under wartime conditions.

B. Once an independent paper currency exists, the prospect is perhaps not so much one of inflation—for during wartime nearly all countries adopt a paper currency—but that instead the developing consequences of inflation become noticeably greater. The pressure of financial difficulties and, together with other costs, the demands for increased wages and salaries resulting from inflationary price increases, promote very tangibly the tendency of the financial administration to propel inflation onwards even without any very compelling cause and despite its capacity to avoid such difficulties through severe measures.

The difference is certainly only a quantitative one, but nonetheless perceptible—as has been evident for the Entente Powers, Germany, Austria, and Russia. Hence, monetary (lytric) policy can therefore, and especially where there is a supplementary restricted metallic currency or a paper currency, be a policy of inflation.104 This has long been the case during quite normal times in countries, like America, that have very little engagement with international exchange rates, without there being any kind of financial motive. And by force of circumstance, it has today remained the case after the war in not a few of those countries that allowed themselves to succumb to inflation in the means of payment used in wartime.

A theory of inflation will not be developed here. The term is instead always used to denote a special way of creating purchasing power by specific interested parties. I seek only to establish that, while it would seem easier to rationally plan and develop the substantive management of monetary policy with administrative money, and primarily paper money, at the same time this very easily (from the standpoint of exchange rate stabilisation) comes to serve irrational interests.

Key Concepts

• strong interests that sought to reverse the policy, seeking a monetary policy that 1. lowered the international exchange rate of the domestic currency, so as to favour exporters, and which, 2. by increasing the issue of money by freely coining silver in addition to gold (which should have meant instead of gold), and even in some cases by deliberately issuing paper money, bringing about a fall in the relation of money to domestic goods and so raising the (nominal) money price of domestic goods, which is the same thing.
• The intended process is called “inflation.”103
• any form of monetary regime in which there is a very marked cheapening and increase in the production of precious metals (or where such metal has been seized as booty) will be characterised by a noticeable tendency towards a rise in prices
• monetary administrations in areas with an independent paper money [currency] will in times of great financial hardship (especially in time of war) as a rule orient their issue of money solely to the financial needs of waging war.
• where there is such a transition to a pure paper currency and unlimited issue of paper money, there is colossal inflation, with all its consequences.
• So long as there is a free commercial metallic money, the possibility of “inflation” is very limited:
• ultimately this is strictly limited by the regard an issuing bank has for its solvency.
• Once an independent paper currency exists, the prospect is perhaps not so much one of inflation—for during wartime nearly all countries adopt a paper currency—but that instead the developing consequences of inflation become noticeably greater.
• monetary (lytric) policy can therefore, and especially where there is a supplementary restricted metallic currency or a paper currency, be a policy of inflation.
• The term is instead always used to denote a special way of creating purchasing power by specific interested parties.

Context

Later part of §36, where Weber moves from describing stabilisation-oriented monetary policy to inflationary objectives and processes, compares the constraints on inflation under metallic versus paper regimes, highlights wartime dynamics, and characterises inflation as an instrument used by particular interest groups.