History of Political Economy 33.3 (2001) 509-516
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Knut Wicksell's "Bank Rate of Interest as the Regulator of Prices"
Edited and translated by Mauro Boianovsky and Hans-Michael Trautwein
(1) The main function of all currency systems is the provision of a standard of value that comes as close as possible to being invariable. This problem is not solved by gold monometallism in its present organization. Bimetallism would not provide any better solution; probably it would do even worse. In order to solve the problem, it is necessary to have a clear idea of the causes that regulate the value of money.
(2) The production (and consumption) of bullion is without doubt the most important determinant of its value in the long run. With regard to the variations of its value within shorter periods—ten, fifteen to twenty, or even more years—however, experience tells us that the conditions of production are of much less importance; in view of the influence of other factors, it would be legitimate to ignore them completely. The variations in prices in the shorter run are most important for the practical course of economic affairs.
(3) The two so-called theories of money: the quantity theory and the Tookean or credit theory. The latter is full of quite relevant observations, mainly, however, of negative character; it does not yield any positive explanation of the issues in question. Whenever they have to deal with actual changes in the general level of commodity prices (and hence, inversely, with the purchasing power or exchange value of money), Tooke and his followers usually refer to a third cause, namely to changes in the production of commodities. This common opinion is, however, either the quantity theory in disguise (a greater volume of trade corresponding to a [End Page 509] relatively unchanged volume of money, instead producing lower prices etc.); or it is logically flawed.
If a single commodity or a group of commodities can be produced “more cheaply”—that is, if the production of each unit of that commodity demands a smaller input of labor or other productive factors—it could indeed be stated that free competition will lead to a lowering of its/their price.
That conclusion is, however, entirely dependent on the assumption that the compensation for labor and other productive factors in the branch in question will sooner or later adjust to the level of wages etc. in all other branches, and therefore, in this process, will remain constant regardless of the progress in production. (Even at this early stage, it would be more correct to say that the general level or (real) wages etc. would rise, even though the rise may be only minimal.)1
However, if all or most commodities are produced with a lower input of labor etc., it is obviously quite wrong to say that the compensation of the productive factors will remain constant. On the contrary, eo ipso it must rise: the level of wages, rents, etc., in terms of commodities necessarily increases under these circumstances (in this context it is not relevant whether or not the rates of increase are more or less equal)—how can anyone be sure then that their value in terms of money will be unchanged? Obviously there is a petitio principii2 here, or recourse is taken, more or less consciously, to the quantity theory.
(4) It is obvious that the validity of the quantity theory then depends on whether the velocity of money can be understood to be a more or less fixed, quasi-inelastic factor. This would indeed be the case under the (however, purely hypothetical) assumption of a pure cash economy, implying that no loans are extended, neither in terms of money nor in commodities, that banks do not exist, etc. In that case people would have to hold cash sufficient to cover their expenditures, in as much as those exceed their simultaneous receipts. The average velocity of money is determined by the size of these cash holdings in proportion to...