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2. Monetary Stabilization and Cyclical Policy (1928)

In recent years the problems of monetary and banking policy have been approached more and more with a view to both stabilizing the value of the monetary unit and eliminating fluctuations in the economy. Thanks to serious attempts at explaining and publicizing these most difficult economic problems, they have become familiar to almost everyone. It may perhaps be appropriate to speak of fashions in economics, and it is undoubtedly the “fashion” today to establish institutions for the study of business trends.

This has certain advantages. Careful attention to these problems has eliminated some of the conflicting doctrines which had handicapped economics. There is only one theory of monetary value today—the Quantity Theory. There is also only one trade cycle theory—the Circulation Credit Theory, developed out of the Currency Theory and usually called the “Monetary Theory of the Trade Cycle.” These theories, of course, are no longer what they were in the days of Ricardo and Lord Overstone. They have been revised and made consistent with modern subjective economics. Yet the basic principle remains the same. The underlying thesis has merely been elaborated upon. So despite all its defects, which are now recognized, due credit should be given the Currency School for its achievement.

In this connection, just as in all other aspects of economics, it becomes apparent that scientific development goes steadily forward. Every single step in the development of a doctrine is necessary. No intellectual effort applied to these problems is in vain. A continuous, unbroken line of scientific progress runs from the Classical authors down to the modern writers. The accomplishment of Gossen, Menger, Walras, and Jevons, in overcoming the apparent antinomy of value during the third quarter of the last century, permits us to divide the history of economics into two large subdivisions—the Classical, and the Modern or Subjective. Still it should be remembered that the contributions of the Classical School have not lost all value. They live on in modern science and continue to be effective.

Whenever an economic problem is to be seriously considered, it is necessary to expose the violent rejection of economics which is carried on everywhere for political reasons, especially on German soil. Nothing concerning the problems involved in either the creation of the purchasing power of money or economic fluctuations can be learned from Historicism or Nominalism. Adherents of the Historical-Empirical-Realistic School and of Institutionalism either say nothing at all about these problems, or else they depend on the very same methodological and theoretical grounds which they otherwise oppose. The Banking Theory, until very recently certainly the leading doctrine, at least in Germany, has been justifiably rejected. Hardly anyone who wishes to be taken seriously dares to set forth the doctrine of the elasticity of the circulation of fiduciary media—its principal thesis and cornerstone.1

However, the popularity attained by the two political problems of stabilization—the value of the monetary unit and fiduciary media—also brings with it serious disadvantages. The popularization of a theory always contains a threat of distorting it, if not of actually demolishing its very essence. Thus the results expected of measures proposed for stabilizing the value of the monetary unit and eliminating business fluctuations have been very much overrated. This danger, especially in Germany, should not be underestimated. During the last ten years, the systematic neglect of the problems of economic theory has meant that no attention has been paid to accomplishments abroad. Nor has any benefit been derived from the experiences of other countries.

The fact is ignored that proposals for the creation of a monetary unit with “stable value” have already had a hundred year history. Also ignored is the fact that an attempt to eliminate economic crises was made more than eighty years ago—in England—through Peel's Bank Act (1844). It is not necessary to put all these proposals into practice to see their inherent difficulties. However, it is simply inexcusable that so little attention has been given during recent generations to the understanding gained, or which might have been gained if men had not been so blind, concerning monetary policy and fiduciary media.

Current proposals for a monetary unit of “stable value” and for a nonfluctuating economy are, without doubt, more refined than were the first attempts of this kind. They take into consideration many of the less important objections raised against earlier projects. However, the basic shortcomings, which are necessarily inherent in all such schemes, cannot be overcome. As a result, the high hopes for the proposed reforms must be frustrated.

If we are to clarify the possible significance—for economic science, public policy and individual action—of the cyclical studies and price statistics so widely and avidly pursued today, they must be thoroughly and critically analyzed. This can, by no means, be limited to considering cyclical changes only. “A theory of crises,” as Böhm-Bawerk said,

can never be an inquiry into just one single phase of economic phenomena. If it is to be more than an amateurish absurdity, such an inquiry must be the last, or the next to last, chapter of a written or unwritten economic system. In other words, it is the final fruit of knowledge of all economic events and their interconnected relationships.2

Only on the basis of a comprehensive theory of indirect exchange, i.e., a theory of money and banking, can a trade cycle theory be erected. This is still frequently ignored. Cyclical theories are carelessly drawn up and cyclical policies are even more carelessly put into operation. Many a person believes himself competent to pass judgment, orally and in writing, on the problem of the formulation of monetary value and the rate of interest. If given the opportunity—as legislator or manager of a country's monetary and banking policy—he feels called upon to enact radical measures without having any clear idea of their consequences. Yet, nowhere is more foresight and caution necessary than precisely in this area of economic knowledge and policy. For the superficiality and carelessness, with which social problems are wont to be handled, soon misfire if applied in this field. Only by serious thought, directed at understanding the interrelationship of all market phenomena, can the problems we face here be satisfactorily solved.

  • 1. Sixteen years ago when I presented the circulation credit theory of the crisis in the first German edition of my book on The Theory of Money and Credit (1912); [English editions, New London, Conn.: Yale University Press, 1953; Indianapolis, Ind.: Liberty Classics, 1980], I encountered ignorance and stubborn rejection everywhere, especially in Germany. The reviewer for Schmoller's Yearbook [Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft] declared: “The conclusions of the entire work [are] simply not discussable.” The reviewer for Conrad's Yearbook [Jahrbuch für Nationalökonomie und Statistik] stated: “Hypothetically, the author's arguments should not be described as completely wrong; they are at least coherent.” But his final judgment was “to reject it anyhow.” Anyone who follows current developments in economic literature closely, however, knows that things have changed basically since then. The doctrine which was ridiculed once is widely accepted today.
  • 2. Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung VII, p. 132.