On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory

I. Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle

I Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle 1. Currency School’s Contribution “Stabilization” of the purchasing power of the monetary unit would also lead, at the same time, to the ideal of an economy without any changes. In the stationary economy there would be no “ups” and “downs” of business. Then, the sequence of events would flow smoothly and steadily. Then, no unforeseen event would interrupt the provisioning of goods. Then, the acting individual would experience no disillusionment because events did not develop as he had assumed in planning his affairs to meet future demands. First, we have seen that this ideal cannot be realized. Secondly, we have seen that this ideal is generally proposed as a goal only because the problems involved in the formation of purchasing power have not been thought through completely. Finally, we have seen that even if a stationary economy could actually be realized, it would certainly not accomplish what had been expected. yet neither these facts nor the limiting of monetary policy to the maintenance of a “pure” gold standard means that the political slogan, “Eliminate the business cycle,” is without value. It is true that some authors who dealt with these problems had a rather vague idea that the “stabilization of the price level” was the way to attain the goals they set for cyclical policy. yet cyclical policy was not completely spent on fruitless attempts to fix the purchasing power of money. Witness the fact that steps were undertaken to curb the boom through banking policy, and thus to prevent the decline, which inevitably follows the upswing, from going as far as it would if matters were allowed to run their course. These efforts—undertaken with enthusiasm 100 • monetary stabilization and cyclical policy at a time when people did not realize that anything like stabilization of monetary value would ever be conceived of and sought after—led to measures that had far-reaching consequences. We should not forget for a moment the contribution which the Currency School made to the clarification of our problem. Not only did it contribute theoretically and scientifically but it contributed also to practical policy. The recent theoretical treatment of the problem—in the study of events and statistical data and in politics—rests entirely on the accomplishments of the Currency School. We have not surpassed Lord Overstone1 so far as to be justified in disparaging his achievement. Many modern students of cyclical movements are contemptuous of theory—not only of this or that theory but of all theories—and profess to let the facts speak for themselves. The delusion that theory must be distilled from the results of an impartial investigation of facts is more popular in cyclical theory than in any other field of economics. yet, nowhere else is it clearer that there can be no understanding of the facts without theory. Certainly it is no longer necessary to expose once more the errors in logic of the Historical-Empirical-Realistic approach to the “social sciences.” Only recently has this task been most thoroughly undertaken once more by competent scholars. Nevertheless, we continually encounter attempts to deal with the business cycle problem while presumably rejecting theory. In taking this approach one falls prey to a delusion which is incomprehensible . It is assumed that data on economic fluctuations are given clearly, directly and in a way that cannot be disputed. Thus it remains for science merely to interpret these fluctuations—and for the art of politics simply to find ways and means to eliminate them. 2. Early Trade Cycle Theories All business establishments do well at times and badly at others. There are times when the entrepreneur sees his profits increase daily more than he had anticipated and when, emboldened by these “windfalls,” he proceeds to expand his operations. Then, due to an abrupt change 1. [Lord Samuel Jones Loyd Overstone (1796–1883), an early opponent of inconvertible paper money and a leading proponent of the principles of Peel’s Act of 1844 limiting the use of banknotes , intended to eliminate business cycles.—Ed.] stabilization of purchasing power • 101 in conditions, severe disillusionment follows this upswing, serious losses materialize, long established firms collapse, until widespread pessimism sets in which may frequently last for years. Such were the experiences which had already been forced on the attention of the businessman in capitalistic economies, long before discussions of...