Some Principles of Monetary Theory From the “German School”

Every student of money, banking, and exchange would do well to study the principles outlined below. They point the way toward an honest and sound system of exchange, and provide guidance to enlightened government officials who seek to enact appropriate legislation. A more complete treatment of the subject, including the Four Law Drafts, with some comments by John Zube, can be found at my main website, – t.h.g.


Sec. John Zube, 35 Oxley St., Berrima, NSW, Australia 2577

Discussion Paper No. 7



Written by Ulrich von Beckerath, 1952. First translated into English & some annotations by John Zube, 1977


Published as part of the PEACE PLANS series No. 40, by John Zube, 35 Oxley St.,

Berrima, NSW Australia 2577.
1.) Inflation and dearness (dearth or high prices) are completely different concepts. Inflation is caused exclusively from the monetary side, dearness exclusively from the goods side.

2.) Deflation and cheapness are completely different concepts. Deflation is caused exclusively from the money side, cheapness exclusively from the goods side.

3.) Price increases must not be mixed up with dearness. Price increases may be due to inflation or they can be caused by a reduction of supply in relation to demand. In the latter case it would be dearness. Price increases may also be due partly to inflation and partly to dearness.

4.) Reduced prices should not be mixed up with cheapness. They might be due to deflation or due to an increase of the goods offered in relation to the demand. In the latter case only would it represent a genuine cheapness. The reduced prices can also be due partly to deflation and partly to a genuine cheapness.

5.) Without legal tender one cannot inflate a currency.

6.) Without the note issue monopoly one cannot cause a deflation.

7.) When under a free market rate (i.e. in the absence of legal tender) an over-issue of a paper money should occur then it would suffer a discount in circulation so that, e.g., a gold coin of 20 marks would come to cost 21 paper marks. But the goods prices would remain unchanged, provided only they are fixed in gold units, e.g. gold marks.

8.) If typified and standardized exchange media are short in circulation (when e.g. during monetary crises factories are short of means of payment for wages) then those concerned; help themselves by issuing emergency money without legal tender – until nowhere in their payment circles does a shortage of the necessary exchange media remain and the public thus begins to refuse to accept the emergency money at the same face value as gold or silver coins. The goods prices would remain unchanged whenever they were determined in gold units (gold marks or grams of fine gold etc.)

9.) When paper money is not redeemable then it will suffice in order to preserve the parity of the paper money with gold to arrange for the acceptance of the paper money like gold money by institutions which sell goods in daily and general demand. (Such institutions are e.g. the taxation department – when it “sells” tax receipts, the railway, the P.O., and shops which owe something to the bank issuing that paper money.

Their indebtedness may arise out of the discounting of sound commercial bills and the corresponding contractual obligation to accept the notes of the bank like gold money.

Naturally, in all such cases, the bank must concede its debtors the right to pay back all their bank debts with that paper money as soon as they receive it, at par, regardless of the exchange rate of the paper money.)

10.) When paper money is funded as under 9) then it can circulate more widely than merely among those who directly claim the cover involved. When the paper money has tax foundation then it will circulate not only among those who just then have to pay taxes. If it has shop foundation (a concept coined by Prof. Rittershausen) then it circulates not only among those who have to buy something from the shops which are under acceptance obligation. When the railway issues money (as in Germany in 1923/4 for several 100 million marks) then it circulates not only among those who just then want to use the railway’s services. The tax foundation imparts to paper money (as apparently Lorenz von Stein found out first) a par value (to gold or silver coin) for an amount equivalent at least to the tax revenue for at least 3 months, even without legal tender.

11.) The unrestricted right of people to refuse to accept any paper money offered (Compare par. 2 of Bismarck’s Bank Act of 1875 and the numerous laws of the confederated German states during the 100 years before this law was passed.) makes every abuse of the right to issue, either by the bureaucracy or private persons, impossible.

12.) Inflation, according to the above, is a condition in monetary transactions where paper money is accepted without limits and at a prescribed value only because legal tender prevails: a coercion which makes it legally impossible to account for depreciation by discount or refusal.

13.) Deflation, according to the above, is a condition in monetary transactions in which there is a shortage in typified and standardized exchange media ( so that workers have to be dismissed because banks cannot or will not advance the means of payment for their wages ) and at the same time, nevertheless, typified and standardized exchange media (e.g. typified clearing cheques and goods warrants etc. 7cannot be issued because a certain authority, e.g. a central bank, has the monopoly for note issues.

14.) Legal tender is the legal prescription for every recipient of monetary payments to accept paper money or inferior coins at a fixed value. This forced exchange rate for general means of circulation, prescribed for every payee, practically for every citizen, must not be mixed up, as happened in Berlin in the discussion of West & East marks, with a fixed or controlled exchange rate for foreign exchange. The word “Zwangskurs” (legal tender) is far older than 100 years and was always used in the way here described, in royal Prussian edicts, in imperial Austrian regulations and even by Marx. Another use of it proves only ignorance of the terminology of economics. Bth.



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