Monetary Theory Cycle Theory And The Rate Of Interest

Mises' first book was The Theory of Money and Credit (1912). In addressing the field of monetary theory in that work, Mises applied die principles of the Austrian School as developed particularly by Menger and by Bohm-Bawerk—but in ways which went beyond die positions taken by his teachers. In Mises' own words: "The systems of Menger and Bdhm-Bawerk were no longer wholly satisfactory to me. I was ready to proceed further on the road these old masters had discovered. But I could not use their treatment of those problems with which the monetary theorist must begin" (nr, $6). Mises' 1912 book followed some six years of study by Mises of monetary, currency, and banking issues, and had been preceded by several journal articles dealing with these topics. These topics were to take up a good deal of Mises' professional attention in the coming decades, and to result in several shorter, German-language works published in the twenties.1 Mises returned, finally, to these same theoretical and applied issues in his 1949 Human Action (following on a similar treatment in his 1940 NationalSkonomie.)

In this chapter, we will attempt to outline Mises' contributions to monetary theory. We will also examine Mises' important role in developing what came to be known as the Austrian Theory of the Trade Cycle. (Mises' work in this regard was in fact first put forward in the concluding chapters of his 1912 book on monetary theory, as an aspect of the advanced theory of money.) We will conclude with a brief survey of Mises' views on the nature of capital and interest (topics which, in Mises' overall system of economics, had at least tangential relevance to his views on die theory of the trade cycle).

A. MONETARY THEORY

At the time of his 1912 book, much of Mises' monetary theory must have seemed novel, if not revolutionary. And if, as we shall see, his ideas required him to reject certain positions taken by his Austrian mentors, they constituted even more radical departures from the doctrines that were then dominant in the German monetary literature. In Mises' own retrospective account of the strongly negative reception accorded to his book in Germany, one can sense the defiant pride that Mises took in having decisively undermined the monetary doctrines generally accepted at the time of his youthful effort. "Men Such as Knapp,

Bendixen, Liefmann, Diehl, Adolf Wagner and Bortkiewicz," Mises wrote in 1940, "who then were celebrated in Germany as 'monetary theorists' are no longer considered authorities." Clearly it was Mises' book which contributed significantly to the change in professional opinions. So successful was the book in this regard, indeed, that certain key elements in Mises' approach no longer appear today as fresh and as original as they must have appeared in 1912 and in die immediately following years. A fair treatment of Mises' contributions to economics must not, however, ignore the degree to which they pioneered in changing die climate of professional opinion—even to die point where they may seem, to today's readers, to be comfortably familiar.

The Radical Character of Mises'Approach

Mises has given us his own retrospective (1940) assessment of the radical purpose of his 1912 book. "According to prevailing opinion at that time, die theory of money could be dearly separated from die total structure of economic problems...; in a certain respect it was an independent discipline It was my intention to reveal this position as erroneous and restore the theory of money to its appropriate position as an integral part of die science of economics" (nr, 56).

To achieve this objective, Mises found it necessary to attack several strands of the conventional monetary-theoretic wisdom of his time. These included: (a) the dominant view that the

Austrian theory of marginal utility was inapplicable to the theory of the value of money; (b) the dominant view that money can be treated as "neutral" (i.e., that changes in the supply of money lead to changes in the purchasing power of money, but do not generate significant substantive changes in the ("teal") structure of an economy; (c) the view (dominant in the German literature) that the state (i.e., die government) fills a role, in regard to the economic functions of money, categorically different from its role in regard to commercial transactions generally.

While each of these strands of then-conventional wisdom relates to a separate and distinct aspect of monetary theory, Mises* strongly dissenting positions on all three derived from a single taproot: his conviction that monetary theory must be recognized "as an integral pan of die science of economics."

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