Appendices

As, in my opinion, the objections raised to my Volkswirtschaftliche Theorie des Bankkredits can, with the same justification, be raised against Keynes’ work, excerpts of two of these criticisms, namely, one by Professor Howard S. Ellis and one by Professor Gottfried von Haberler, are reprinted in the following pages. Both criticisms give a good summary of the contents of my book, thus enabling the reader to compare them with Keynes’ work.

There is also reprinted in the following pages an article “The Gold Exchange Paradox” which I was reluctant to include in the main part of the book because it deals with a situation no longer existent. On the other hand, I thought it should be reprinted because certain conclusions arrived at in the article, namely, the incompatibility of internal inflation and external currency stabilization, can be applied to the problems of today.

There follows for readers interested in my earlier work a table of contents of my two books Geld und Kredit (1924) and Geld und Kredit, Neue Folge (1929).

Finally, I have added a list of those of my articles written after 1929 which have not been included in the present book because they are not of interest to the American reader of today. One of the articles mentioned, namely, “Deficit Spending and Private Enterprise,” a lecture delivered at Harvard University and reprinted in the U. S. Chamber of Commerce Bulletin No. 8, has not been included in order to avoid certain repetitions.

I

Excerpt from Howard S. Ellis, German Monetary Theory, 1905-1933, Harvard University Press, 1934, 1937, Chapter XVIII, “The Schumpeter-Hahn Type of Cycle Theory” (pp. 327-34).

HAHN’S THEORY OF PRODUCTIVE CREDIT

The enthusiastic popular reception accorded Hahn has already been the occasion for comment; but The Economic Theory of Bank Credit in particular enjoys such wide recognition that academic economists, somewhat grudgingly,¹ have had to take cognizance of its claims. Indeed, as Haberler remarks, there has grown up of late a sort of separate Hahn literature; scarcely a work can be published in the field of money and credit without a fairly exhaustive critique of his doctrines.²

The necessary foundation for a theory of business cycles, says Hahn, is a correct apprehension of the nature and functions of credit in the economic process. In Germany the conventional view nowadays represents credit as a store of permanent or temporary savings deposited with the banks by the public.³ Classical economists made no mistake in tracing down every credit to abstinence, at a time when the volume of currency was definitely limited. Today the quantity theory does indeed take account of elastic bank credit, but the tradition is still preserved that credit originates in saving. Not primary but created deposits are the basic phenomenon. No longer are banks merely offices for borrowing and lending money, but dealers in “credit” in the literal sense of “confidence”; and interest, from being at one time a payment for saving, has become a price paid for confidence.⁴

In the sphere of goods this change signifies that “capital formation is not the consequence of saving but of the extension of credit.”⁵ This follows from the logical primacy of demand over actual production, a primacy concealed by the temporal precedence of the latter before the former. The real prerequisite for the appearance of a capital good is effective entrepreneurial demand, which credit extension brings into being.⁶ It is not asserted that lending itself actually produces goods, but that it induces an increase in production through a change in distribution. How this transpires will appear from consequences attending a bank rate lower than the expected yield of capital goods, arising either from an absolute reduction of the former while the latter remains constant, or from a rise of the latter with bank rates unchanged.⁷

Lower interest charges reduce costs to all entrepreneurs operating upon credit, not merely those to the producers of durable goods.⁸ As a result all production expands, competition for labor and raw material grows more intense, and there appears at first that strictly inverse correlation of prices and discount rates described by the quantity theory. But in the modern industrial system, the introduction of labor-saving technique set over against a virtually constant volume of capital has resulted in an underlying tendency for interest to rise and wages to fall.⁹ The marginal laborer has passed over into the extra-marginal “not-laborer,” choosing to subsist entirely upon his rentes. Consequently an expansion of credit operates, on the one hand, through rising wages to draw into active employment many members of this reserve army, including women and children, and thus to induce a fuller utilization of existing plant capacity; and on the other, through rising prices, to transfer income from the fixed salary and rentier group to entrepreneurs. The stream of goods is both broadened and lengthened: more of everything is produced and more capitalistic, more roundabout methods are employed. Not saving but altered distribution produces these results—distribution changed “interpersonally” by the forced rise of wages and fall of interest, and “intertemporally,” by the forced deflection of goods out of present consumption. “Credit produces goods out of nothing, in that, without it, they would not have been produced.”¹⁰

A by-product of this expansion of production may be¹¹ a rise of prices for consumers’ relatively to producers’ goods. But the expansion could persist as long as new credit drew additional labor power into production.¹² Experience shows, however, that ordinarily before this point is reached the rising conjuncture is broken off by a universal glut. How can this be accounted for? Simply by the fact that in the period of high earnings the laborer, having a fairly fixed standard of living, saves instead of spending his income; “circulating deposits metamorphose into savings accounts”; and the disappearance of this demand precipitates a fall in prices, production, and employment.¹³ But a way lies open to the state to prevent this termination of the boom either by continued interest reductions through the central bank, enabling the producer to hold his finished products, or by removing the interest burden entirely through the purchase and storage of the goods on government account.¹⁴ “. . . theoretically, at any rate, the assumption of the possibility of a ‘perpetual boom’ does not belong to the realm of Utopia.”¹⁵ Whether or not to purchase greater and greater production by expropriating the salaried and rentier classes is a question belonging not to economics but to politics.

The course of Hahn’s original argument, culminating in a supposed dethronement of frugality and an apotheosis of credit creation, has evoked emphatic denial at every stage. Aside from the identification of capital and money markets and a tendency, decried by Hayek,¹⁶ to recognize no more ultimate determinant of interest than bank liquidity, Hahn proves to be particularly vulnerable in arguing that capital originates in fundamentally different ways in a cash economy and in a cashless economy. As Neisser, Mannstaedt, and Haberler observe, the difference between the two systems is purely a matter of payment technique: bank deposits function just as money does, and in both cases interest is paid for the surrender of purchasing power, not, as Hahn would have it, for the cession of money in the earlier and for “confidence in the modern system.¹⁷ To go below the merely superficial phenomena of credit and cash exchange media, we must agree with Lampe that it is quite as possible for coinage in a cash economy to make purchasing power available without saving as for credit creation to accomplish the same end in a bank deposit regime.¹⁸ By consequence, if capital comes into being in another way in the latter than in the former, it will have to be on other grounds than merely the creation of new purchasing power.

That the existing volume of bank deposits originates preponderately from loans is of course a far cry from the proposition that capital formation proceeds from credit creation and not from saving. It is not surprising, therefore, to find that Hahn tries to support the latter notion by some other argument than this flimsy confusion. Demand, he says, precedes production. But the really surprising thing is that this homely truth, equally valid for cash and credit economies, should somehow demonstrate that capital formation does not nowadays proceed from saving. Probably, as Lampe suggests, Hahn has unwittingly fallen victim to an ambiguity in his term “demand.” If demand be interpreted as applying to the products of a capital instrument, it is of course apparent that the instrument would not be produced unless such a demand were expected. On the other hand, without demand in another sense, that is, actually available purchasing power in the form of a bank deposit, the entrepreneur could not undertake production at all. But Hahn, who says his proposition pertains to the first sort of demand, actually applies it also to the second, i.e., he assumes that whenever a bank extends credit to a customer, a sure market must exist for the capital good and its products. Of course, even if every bank loan did result in economically useful capital-good formation, it would not be true that “no capital good can be produced without credit creation,” as Hahn states literally,¹⁹ unless, furthermore, no new capital were produced on the basis of bank loans of accumulated savings. It is not necessary to argue against this absurd proposition inasmuch as Hahn himself blows hot and cold within the confines of a single paragraph. Admitting that current production proceeds out of “a certain stock of goods produced in the past capable of covering the need for nourishment, clothing, and shelter,” he concludes, “If this certain stock is present, then the founding of new enterprises is independent of the supply of capital!” ²⁰ Indeed, far from supporting the earlier dictum that capital formation is solely the product of credit creation, Hahn’s description of the period of rising conjuncture indicates at the utmost that new credit increases the quantity of capital, and even then he concedes that this does not invariably transpire. And so the thesis of a totally new origin of capital is abandoned by the author himself.

The theory of business cycles, based upon the more modest claim of a productive effect of expanding bank credit, has been most adversely criticized at three points: the course of wages relative to prices during the upswing, the cause of crises, and the final outcome of the whole evolution. Hahn, it will be remembered, relies upon mounting wage rates to activate the industrial reserve army during boom times. To object, as Haberler does, that this contradicts his admission that consumption goods are enhanced in price does not dispose of the matter,²¹ because Hahn argues that through the competitive tendency of prices toward cost, consumption costs are indeed raised by the increase of nominal wages, but this is partly offset by the low interest charges which generated the upward movement.²² On purely a priori grounds one might agree with Lampe that forced saving imposed merely upon the small class of non-laboring and non-entrepreneurial rentiers would scarcely support an increase of real income for the whole wage-earning population.²³ Or again, simply deductively, one may object that Hahn has given to laborers the conjunctural gains which were supposed to be in the hands of entrepreneurs, supplying the motivating factor in the whole upward movement. But the most effective answer would be Burchardt’s appeal to the fact that real wages lag,²⁴ if economists could be more certain that the statistical evidence is clearly in this direction. If Hahn had not relied upon a strictly rationalistic calculus to account for the existence of the reserve army in the first place—that technical progress so raises interest rates as to induce the rentier to prefer idleness—and had instead attributed ordinary unemployment to economic friction and inertia, he might more easily have accounted for increased employment and output attending falling real wages in the period of recovery. But unless real wages actually decline, the amount of forced saving would not be such as to lend much color to Hahn’s expectation of a substantial increase in capital.

Furthermore, if forced saving supplies the driving power to a period of industrial expansion, why should not the voluntary savings of laborers, which Hahn supposes on the increase in the late stages of boom times, support the expansion indefinitely? It is enigmatic why he should believe that banks allow savings deposits to pile up without investing them, when the universal characteristic of the system according to his account is extending more credit than it receives.²⁵ This version of the overinvestment theory, it will be observed, rests not upon the fading out of forced saving, but upon the (altogether improbable) growth of hoards.

No single feature of the entire structure has occasioned a more general outcry than Hahn’s suggestion that proper authoritarian measures at the time of impending crisis might support a “perpetual high conjuncture.” It scarcely requires an academic economist²⁶ to point out that either continued injections of credit at progressively lower interest charges or the purchase and storage of unmarketable products by the state would signify a nationalizing of industry, and that even such drastic measures would only intensify the final debacle, the more the longer they persisted.²⁷ Far from leading to a progressive diversion of resources into capital form, as Lampe suggests,²⁸ such policies mean outright and violent inflation, and the disappearance of all accumulation.

Finally the question presents itself whether, aside from such attempts to protract the boom indefinitely, artificial credit creation attending the ordinary cycle leaves society at the end better provided with usable capital. The answer naturally varies from the enthusiastic affirmative of Hahn’s own followers to the categoric denials of the Vienna school. Midway lie the appraisals of the majority of special Hahn critics whom we have just mentioned. While maintaining that credit extension per se means only capital displacement, Diehl concedes that it may lead to an increase of capital formation, depending upon the success of the ventures it fosters.²⁹ Lampe, as we have seen, proposes the same test. Considerably more skeptical is Haberler,³⁰ for whom the “spark of truth” in the doctrine of the productive effect of “inflationary” credit is first, that it prevents declining prices in a progressive society, and secondly, that it overcomes the frictional resistance of an indolent entrepreneurial community. But the new undertakings called into being by inflation would not persist longer, with the return of interest to its natural level, than the life of their fixed capital equipment. Mannstaedt concludes that in a free exchange economy where banks exercise control only through prices, any policy may be thwarted by a tendency for the public to react upon these prices negatively; in other words, though banks may give an initial impulse toward the liberation of productive factors through credit creation, ultimate success depends on the public’s voluntary continuance of the additional saving.³¹ This is practically what Lampe and Diehl have said: the answer depends on whether the ventures based upon forced saving succeed. It is certainly not a foregone conclusion, as Hahn assumes, that even while the artificial depression of interest persists, the new produce will cover interest and depreciation costs, nor pro tanto that this will be the case if the cessation of the forcing is accompanied by a sag in the magnitude of saved income.

Since the appearance of the first and second editions of the Volkswirtschaftliche Theorie, Hahn has abated his radicalism at certain points and at others altered the supporting argument. Most noteworthy is the disappearance of the idea of maintaining a “perpetual boom.” Although proposals to overcome glutted markets by state assumption of interest changes or by inflation were repeated as late as 1926³² their omission in Hahn’s widely read contribution to the Handwörterbuch on “Kredit”³³ is a matter of general comment. In the third and completely revised edition of his magnum opus,³⁴ Hahn retains nearly all of the catchwords around which the underlying theory was originally developed. But there are some very significant departures. Although we still read that “every increase of credit increases goods through a change in their distribution,” we discover also that even aside from such debacles as the German inflation, the stimulating effect of credit sometimes proves to be quite short-lived.³⁵ Credit expansion now becomes an “essential condition” for the development of cycles, not the unique cause.³⁶ But most notably, the explanation of crises from laborers’ savings, or rather hoards, disappears completely. There is some evidence that the reason is an uncertainty on Hahn’s part as to whether real wages advance as much above the standard of living as he had imagined in boom times.³⁷ Be that as it may, crises occur simply because a time must “necessarily” come when the stimulus of conjunctural gains to entrepreneurs has exhausted itself.³⁸ Although he continually lays great stress upon “intertemporal and interpersonal changes in distribution” wrought by artificially low bank rates, Hahn does not recognize that this distortion of productive factors into the capital category can itself account for a breakdown. In this he resembles Schumpeter, and it may be ventured that the failure to perceive the dangers of overinvestment accounts for the sanguine attitude of both writers toward the outcome of credit inflation.

A section on Hahn should not close without reference, at least, to his study of German bank series over the period 1900-13.³⁹ Here Hahn writes as a practical banker, and the analysis has been widely recommended. From the angle of the history of German theory, however, the early and more radical writings of Hahn are more significant, presenting a bold thesis ⁴⁰ which gives rise to an equally bold antithesis on the part of the Vienna group.

¹ E.g., Friedrich A. Hayek, Geldtheorie und Konjunkturtheorie, Vienna, 1929, p. 84.

²Cf. Gottfried Haberler’s review, Archiv 56, p. 803. Hahn himself gives three or four pages of references upon his doctrines in the third edition of his opus, Tübingen, 1930, pp. xiv-xvi.

³ L. Albert Hahn, Volkswirtschaftliche Theorie des Bankkredits, 1st ed., Tübingen, 1920, p. 6; 2nd ed., Tübingen, 1924, p. 6. Until the concluding section, page references pertain to these two editions, which are identical.

⁴Ibid., p. 51.

⁵Ibid., p. 120. (Italics author’s.)

⁶Ibid., p. 121.

⁷Ibid., pp. 131-132.

⁸Ibid., p. 130.

⁹Ibid., p. 139.

¹⁰Ibid., p. 141.

¹¹Sic, ibid., p. 133. Hahn does not seem to appreciate that his previous reasoning calls for “must,” and so this sentence is merely a parenthetical observation.

¹²Ibid., p. 145.

¹³Ibid., p. 148.

¹⁴Ibid., p. 151.

¹⁵Ibid., p. 159.

¹⁶Konjunkturtheorie, pp. 103-104.

¹⁷ Neisser, Tauschwert, pp. 70-71; Heinrich Mannstaedt, Ein kritischer Beitrag zur Theorie des Bankkredits, Jena, 1927, pp. 13-15; Haberler, Archiv 56, p. 814.

¹⁸ Adolf Lampe, Zur Theorie des Sparprozesses und der Kreditschöpfung, Jena, 1926, pp. 134-135.

¹⁹Volkswirtschaftliche Theorie, p. 121. “Ohne Krediteinräumung” might be ambiguous were it not for the previous statement “Krediteinräumung ist also Schaffung kaufkräftiger Nachfrage” (ibid., p. 120. Italics mine).

²⁰Ibid., p. 142. (Italics mine.)

²¹Archiv 56, p. 817.

²²Volkswirtschaftliche Theorie, p. 137.

²³Sparprozess, p. 161.

²⁴ Fritz Burchardt, “Entwicklungsgeschichte der monetären Konjunkturtheorie,” Welt. Arch. 28, p. 131.

²⁵ An objection levied by Burchardt, loc. cit., and by Haberler, Archiv 56, p. 818.

²⁶ Diehl, Theoretische Nationalökonomie, III, 582.

²⁷Cf. Wilhelm Röpke, “Kredit und Konjunktur,” Jhrb. für N. & S. 126, p. 263.

²⁸Sparprozess, pp. 152-158.

²⁹Theoretische Nationalökonomie, III, 571.

³⁰Archiv 56, pp. 817-818.

³¹Kritischer Beitrag, pp. 30-31.

³² According to Diehl, in Hahn’s article “Krisenbekämpfung durch Diskontpolitik und Kreditkontrolle,” Soziale Praxis 37, p. 931.

³³Hdwb. der Staats., 4th ed., Jena, 1923, V, 944-953.

³⁴Volkswirtschaftliche Theorie des Bankkredits, 3rd ed., Tübingen, 1930.

³⁵Ibid., pp. 125, 152,

³⁶Ibid., p. 154,

³⁷Ibid., pp. 119, 123-124. The increase of labor supply is sometimes made to turn merely upon the “illusion of a constant value of money.”

³⁸Ibid., p. 146.

³⁹ “Zur Frage des volkswirtschaftlichen Erkenntisinhalts der Bankbilanzziffern,” Geld und Kredit, Neue Folge, Tübingen, 1929, pp. 149-189.

⁴⁰ An illustration of the “idiot fringe” which all theories possess is afforded by Hans Honegger’s Der schöpferische Kredit, Jena, 1929. Capital is necessary to production only when it has to be pledged as collateral for a loan. So long as confidence persists, there is no limit to the profitable extension of bank credit. The entire pamphlet is a panegyric to “creative credit.”

II

Translation of Gottfried Haberler, Albert Hahn’s Volkswirtschaftliche Theorie des Bankkredits (Archiv für Sozialwissenschaft und Sozialpolitik, 1927, vol. 57, pp. 803 ff.)*

Undoubtedly Albert Hahn deserves a prominent place in the history of the most recent German monetary theory. His complaint that science has not heeded his book (p. ix, preface to the second edition) would not be valid now. One could practically say that of late a Hahn literature has developed, inasmuch as scarcely a book is published today on money and credit that does not discuss Hahn’s teachings at length. His theory is indeed worthy of the greatest attention. For in the field of credit and banking it revolutionizes the accepted views based upon the classical economists. Starting from Schumpeter’s ideas, but making them more radical and extreme, Hahn has very skillfully and in an original manner taken up a case before the forum of science that one had been accustomed to consider completely settled (although the ideas still haunted popular economics). With splendid dialectic which handles in masterly fashion all the weapons in the arsenal of modern theory, Hahn attempts to rehabilitate completely the capital and credit theory associated with the names of Law and Macleod. He heads his book with the following quotation from Macleod: “A bank is not an institution to receive and to lend money, but an institution to create credit.”

The second part of the book, entitled “The World of Credit and Goods,” discusses the productive effects of credit. According to Hahn, to these teachings, whether or not they emanate from natural or monetary-economic ideas, and whatever concept of capital they may have, “the opinion is peculiar that the amount of credit available in the economy and therewith also . . . as a matter of principle the interest rate . . . depend upon the goods existing at any time and created in the preceding production period. . . . It will be the main object of what follows to prove the fallacy of this concept” (109).¹

Hahn begins his positive statements with this sentence: “Capital formation is not a consequence of saving, but of granting credit. Granting credit is primary to the production of capital” (120). This statement seems indeed to contradict every principle of economics. However, we should never let Hahn confuse us with his paradoxical expressions. Essentially at least the second sentence, that granting credit is primary to the production of capital, is nothing but a not very apt expression for a self-evident matter. Let us not forget that we still talk of an economy depleted of cash. Hahn says correctly that the production of capital is merely a part of the production of goods. “Granting credit, however, means granting purchasing power” (120). The introduction of a production process is therefore accomplished in an economy depleted of cash in such a way that funds are placed at the disposal of the entrepreneur—regardless of their origin or whether they can be increased at will—thus enabling him “to buy machinery, etc., to pay wages, in other words, to develop demand for the means of production” (120). Before starting a production process, one must have the money necessary to acquire the needed means of production unless one already possesses them, which happens so seldom in a modern economy that one can neglect the possibility. Since in an economy depleted of cash these funds are in the form of bank credit, one may say that granting credit—that is, granting a banking account—is primary to the production of capital.

Whereas this sentence is obvious and self-evident, Hahn’s further statement—that the adoption of more devious ways of production is entirely independent of building up savings—is quite objectionable. We, on the contrary, are of the opinion that it makes a fundamental difference whether the credit to purchase means of production originates in savings or has to be created ad hoc (inflationary credit); in the latter case, reactions ensue that considerably limit the expansion of production. It is embarrassing to be called on to demonstrate constantly such well-known facts. However, we should not shirk the trouble inasmuch as in these quite vulnerable statements of Hahn there is a spark of truth that should be salvaged.

Through pages 122-52 Hahn depicts the course of a credit inflation, i.e., of a credit expansion that goes beyond the savings base. Its survey is difficult because Hahn fails to describe the process step by step chronologically as it happens, but dissects the problem into several not too well-chosen subquestions: 1. Effects of credit on the composition of goods (should be “on the composition of the stock of goods of a nation”); 2. Effects on the prices of goods; 3. Effects on the quantity of goods; 4. Influence on capital and national wealth.

Reduction of the interest rate leads to credit expansion. Thus unprofitable new enterprises and investments become profitable. Longer production detours are taken and “the composition of the goods of a nation changes . . . so that there are fewer perishable and more durable goods, more capital equipment and semifinished goods” (129). However, credit expansion has yet another effect. “Production detours naturally cause a temporary, but quite noticeable, scarcity of goods for current consumption, for which the future alone compensates” (130). Moreover, granting credit brings a general price increase which is stronger the longer the production detours introduced.

While at the time of the classical economists a price increase was the sole effect of credit expansion, nowadays it increases production also—for two reasons: 1. “The techniques were so primitive . . . that increased demand for goods could be satisfied only if labor too was proportionately increased” (130), while today’s techniques allow a definitely greater production from an insignificant addition of labor. The second reason is to be found in the fact that nowadays there is “an immense pool of unemployed, part-time employed, and persons who can be induced to work harder” (136), whereas at the time of the classical economists the entire population almost without exception was always at work in production. Thus Hahn makes the daring statement: “The establishment of new producing enterprises does not depend upon a more or a less large reserve of capital; therefore the adoption of new production detours can never be hindered by a lack of capital, because the necessary capital can always be produced by credit. . . . As long as its other prerequisites were met by the nature of the country,² production has never been hindered by lack of essential factories or tools. If there were no factories, they . . . were simply built” (142). Once again, however, Hahn qualifies his statement. “Of course, no factories could have been built unless means of subsistence for the workmen during construction as well as the necessary tools had existed.” This, however, would be no impediment. “No doubt, the present stands on the shoulders of the past in that the people participating in the production process . . . cannot eat, clothe themselves, work . . . or have a roof over their heads unless in the past a certain stock of goods has been created. However, if this certain stock of goods . . . exists[!], the creation of new enterprises is independent of the capital reserve” (152). After having clearly demonstrated that a reserve of capital is entirely superfluous for the establishment of new enterprises, Hahn completes his exposition by explaining: “For an increase of enterprises does not presume the existence of a bigger stock of capital. The size of capital stocks does not determine whether more or less labor is employed” (142).

In reply it may be objected that the length of a production detour depends upon the existing stock of the means of subsistence, nay, is practically proportional to the size of the stock of goods, because obviously one thousand laborers require more clothes, food, and living quarters than one hundred men, and because after all it makes a difference whether they have to live on them a month, a year, or two years. One cannot brush this consideration aside with the remark that “if worst comes to worst, the price of current goods will rise” (142). Nor can the following sentence be deemed a satisfactory explanation: “The size of the capital stock does not determine whether the labor force can be employed to a smaller or greater extent. A nation working intensely does not necessarily require more food, clothes, or living quarters than a partly employed nation” (142-43).

However, still other far-reaching considerations are against Hahn’s thesis. First, it is very doubtful that a modern economy actually has at its disposal a tremendous labor reserve and that through credit inflation a significant proportion of this reserve can be employed. Hahn is of the opinion that higher wages spur people to work harder. They do not always do so. His statement that real wages rise, by the way, strikingly contradicts his former statement about the scarcity of current goods. Does he think that the scarcity affects only capitalists and rentiers? It is also possible that on higher wages one can retire sooner or be satisfied with an eight-hour working day while formerly one deemed a nine-hour day necessary. It may indeed be correct that rentiers and persons on fixed salaries are prompted to work because their incomes have been reduced by the rise in living costs, but not until prices have risen considerably. Then all the disadvantages of inflation emerge—Hahn does not even mention them—disadvantages that might curtail production more than taking new workers into the production process would further it. At present, since the great inflationary period, there is no excuse for neglecting the devastating economic consequences of monetary depreciation (which need not be discussed further). The important difference is simply that a production expansion financed by savings does not lead to price increases and thus no such countereffects are brought about. Hahn barely touches the decisive question how it actually happens that enterprises not profitable before credit inflation become profitable afterward and are able to remain in existence. The truth is that enterprises based upon inflationary credit can survive only as long as credit inflation continues. As soon as credit expansion stops and the rate of interest returns to its natural level they lose the basis of their profitability; they may still go on until their fixed capital is used up, then disappear. However, if credit continues to be created in order to keep these undertakings alive artificially, it would naturally bring about a progressive monetary depreciation which would eventually lead to a complete disorganization of the economy—how, does not have to be explained nowadays.

One can think of only two situations in which through credit inflation a permanent incorporation of new enterprises into the production process of an economy is conceivable: 1. If the sole effect of a credit inflation in an expanding economy (Hahn mentions this situation in passing but fails to recognize its special feature) is to arrest a necessary price decline, no countereffects are created that otherwise would destroy the profitability of the new enterprise. 2. If improvements in production methods that are profitable in themselves cannot be introduced because of “frictions” such as indolence or lack of entrepreneurial spirit, they can be forced by inflationary bank credit. As they are profitable and not introduced merely on account of temporary difficulties, such new undertakings survive even after credit inflation has been discontinued.

This is the spark of truth in the doctrine of the productive effects of inflationary credit. The second instance may be quite important in practice, even though compared with savings activity it hardly matters. When we discuss savings we do not have in mind only the little fellow’s bank account; the big bank, too, saves by not distributing part of its profits in the form of dividends, and applying it to productive use.

In Hahn’s system savings not only do not stimulate, but, on the contrary, impede production. According to him, there is only one limit to the beneficial effect of credit expansion on production: “When new credit cannot put new labor into the service of production,” a further expansion of credit does not effect further production increases (145). If, as experience teaches us, this limit is never reached, but a recession starts before full employment is attained, the cause can be found in the fact that consumption does not follow the increased production. This again is the result of the savings activity. “Checking accounts are transformed into savings accounts, are consolidated (i.e., stay in the account), and no longer create demand in the market for goods. Therefore, as production no longer meets a corresponding consumption, the flow of goods begins to stop” (147-48).

There are two weighty arguments against this theory: 1. Funds one desires to save are not hoarded—even in an economy without cash—but are “invested” (for instance, in stocks), because of the higher rate of interest, so that respending takes place automatically. Consequently, there is no lack, but merely displacement of demand. 2. Hahn himself keeps emphasizing that banks “regularly grant more credit than flows to them in the form of savings” (e.g., p. 63). Nevertheless, from his viewpoint he is right in wanting to fight economic crises by the vigorous creation of credit, ultimately for the account of the government (155).

However, it is entirely inconceivable how Hahn can maintain that inflationary credit spurs savings activity, that “savings increase not only pro rata with the credit granted but overproportionately” (153). Would a credit expansion which, according to Hahn, first raises prices, and secondly reduces the supply of current goods, induce people to limit consumption voluntarily still more than they are forced to already by higher prices, and to undergo willingly the inflation losses by not spending the depreciating currency?

^* All italics are Haberler’s. Numbers in parentheses after quotations refer to pages in Hahn’s book.

¹ The reader must believe us when we say that the passages are quoted word for word, and have not been taken out of their context in order to distort the author’s views.

² This condition must be interpreted restrictively according to the sense of the sentence.

III

The Gold Exchange Paradox*

The views most commonly held in the present discussion on the problem of stabilization may be summarized as follows: Advocates of stabilization argue that the disturbances and divergences to which the world economy is subject today are attributable primarily to the fact that the exchanges are not stable; those who oppose the idea of stabilization consider the causal sequence to be in the very opposite direction, urging that the first step to take is to bring about a rough equalization of the divergent elements, notably the difference in the purchasing power parity between different countries. They assert that a stabilization, if at all desirable, should be the final phase of a kind of experimental period during which one must needs have restored rational purchasing-power parity conditions, whereas the advocates of stabilization desire forthwith the binding of the exchange ratios as a prerequisite if the purchasing power parity is to be restored, which, however, they do not consider to be in itself absolutely essential. “When the Council of the B.I.S. contemplate (as in their last report) a return to a regime of fixed gold parities, they are living in an unreal world, a fool’s world!” In this recent utterance of Keynes¹ the views of the opposition reach their highest pitch of intensity.

Even if, like the author of these lines, one accepts the arguments of the antistabilizationists, one must nevertheless admit that the English economists in particular have on one point thoroughly misjudged the situation. Assuming that what they consider to be common sense will obviously appear to be so too in the eyes of others, they have for some time past been forecasting an early devaluation of the gold currencies. This has not yet taken place, however, and, at any rate as far as Switzerland and Holland are concerned, it is extremely doubtful whether such a step is imminent. Those who entertain a different view on this point underestimate the strength of the antidevaluationist ideas and of tradition in these gold-bloc countries. They forget that in this no less than in other spheres it is not always the logically tenable ideologies that determine the issue.

Whether, however, one believes that the present exchange conditions in the world will be of long or of short duration, these conditions, which have in any case lasted for years, merit theoretical analysis with a view to ascertaining how far those exchanges which are today firmly linked to gold are really to be regarded as gold exchanges in the classical sense of the term.

Among the gold currencies, those which are subject to exchange control and only thereby maintain their old or a more or less reduced parity have no doubt shown the greatest changes. It is a moot question whether these exchanges are still to be regarded, even in the less strict sense of the term, as gold exchanges. On this point the views of the country concerned and those of foreign countries mostly differ. Perhaps these currencies might conveniently be termed formal gold currencies, seeing that the exchange rate, which is fixed officially in relation to other exchanges, is essentially of only formal significance. For the foreign exchange cannot freely be obtained at the official rate for the purpose of adjusting items either in the trade balance or in the balance of payments in general. Debt and interest payments as well as capital transfers to abroad are prohibited or regulated in some way or other. Foreign exchange to finance imports is not sold at the official rate on a scale sufficient to meet every demand but is rationed, while for the exports-exchange it is in reality not the official rate but, thanks to subsidies and premiums, a lower rate that applies. Thus, the official rate is not the price at which an adjustment is effected between supply and demand, the “parity” rate becoming in actual fact a purely formal one. It is difficult therefore to understand why any such rate is maintained at all. However, we shall not discuss that aspect of the matter here.

To the monetary theorist the real gold exchanges that still exist are of far greater interest. For, however paradoxical it may sound, it may well be asked, even in regard to them, whether they are still gold exchanges in the traditional sense.

Opinions on the essential nature of the gold exchanges are as widely divergent as most economic doctrines. Few perhaps will contradict the statement that Ricardo’s views, as propounded in those passages of his works in which he deals as an exponent of the quantity theory with monetary and banking problems,² are to be regarded as the best thought out and still the most widely held in the world today. We shall only mention en passant here the fact that in other passages ³ he bases the value of gold and money on the amount of labor they contain, a theory which is untenable and in conflict with the theory just mentioned.

In the view of Ricardo as an exponent of the quantity theory, the essence and aim of a gold exchange is to maintain the purchasing power of the domestic currency in relation to foreign gold currencies. To him a gold currency is an international currency—and this not so much for the reason that one can buy for it anywhere in the world as because its mechanism guarantees that one can buy as much for it at home as abroad. To him it is the currency that possesses an internationally anchored purchasing power. The mechanism that guarantees its safe anchorage works, as everyone knows, in the following manner: If, in consequence of the increasing abundance of money, or, as it would nowadays be expressed, in consequence of an expansion of credit, the prices in a country begin to rise, the exports will go down and the imports will increase. In order to cover the deficit in the trade balance, gold will flow out of the country. This will contract the gold-exporting country’s quantity of money, or credit, so that prices will fall, while the gold balances abroad will increase, with the effect of raising prices there. The process goes on in this manner until the purchasing power parity—as Ricardo would say were he to use our present-day form of expression—has been restored.

A gold standard in Ricardo’s view—and indeed in any common-sense view—is a standard subject to the following rules: both at home and abroad gold can freely be sold and bought at a fixed price. If the domestic price level rises, then gold as the cheapest export commodity is shipped abroad. This process lets loose forces which tend to deflation in the home country and to inflation abroad. This is the sole purpose that gold serves: by being transferred from one country to another it exercises internationally a stabilizing effect on the value of money.

The question whether the present gold-bloc currencies are still gold currencies in the classical sense may thus be reduced to the question whether the “rules of the game” are still being followed.

Hitherto the central banks of the gold-bloc countries have redeemed their notes with gold or gold exchanges on anyone’s demand. Consequently the gold-bloc exchanges have so far never fallen to any appreciable extent below the gold export point. Therefore there seems to be little reason to doubt that the rules just quoted are actually being followed. If, however, we look more closely into the circumstances under which the export of gold takes place, we find that, as soon as it assumes substantial proportions, this export principally meets the demand for gold which arises when people begin to lose confidence in their own currency. The function of gold exports has chiefly been to finance the flight of capital to gold or to other exchanges that are to be had for gold. This, however, is a purpose that Ricardo (for instance) never even thought of and which indeed can hardly be regarded as legitimate. On the other hand, as regards the export of gold for the purpose of adjusting differences in purchasing power, it is certainly true that gold is sometimes exported to finance deficits in the trade balance. But these deficits are never anything like proportionate to the difference in purchasing power. By means of a complicated and refined system of tariffs and quotas—compared with which the erstwhile high-tariff countries now seem like a free-trade paradise—such imports are excluded as would otherwise inundate the country owing to the difference in purchasing power, and deficits in the trade balance and in the balance of payment are prevented. The rules of the gold exchanges have not been suspended. But this is true only in a very formal sense; for the chief contestants in the game are never able to insist on the rules’ being respected. By taking measures in the sphere of trade policy, measures in that of gold policy can be avoided.

The domestic price level is maintained by keeping out a one-sided flow of imports—in protection of home enterprise, which would otherwise find it impossible to compete with the cheaper import goods. For if the prices at home were on a level with those abroad there would be no need for import restrictions. At the same time, however, the “gold automatism” that is the true purpose of every gold exchange is put out of function. As nevertheless the gold exchange is maintained, it is possible to observe as in many other spheres of social life the following very interesting phenomenon: What was originally a means becomes an end in itself and the original aim is no longer sought after—indeed in the present connection it is directly counteracted. But this involves the transition of the gold currency from an international exchange to a national one. Without transferring both his capital and himself abroad the citizen cannot use his gold for making purchases on the world market in conformity with its international purchasing power; he is prevented from doing so by import prohibitions and quota systems. He can disburse his gold only by converting it into the local currency—i.e., on the basis of the essentially lower domestic purchasing power. Out of this arises a paradoxical situation: The gold in the countries of the gold bloc possesses its full international purchasing power only in the hands of those who go to countries with a sterling or dollar exchange, not in the hands of those who remain at home. It may be said, therefore, that the gold exchange for the maintenance of which so many sacrifices are made in the countries of the gold bloc is there subject to a system of control which theoretically, in spite of all disparities as regards practical consequences, differs only quantitatively, not qualitatively, from the control exercised in countries with an exchange control system. These gold exchanges, then, may perhaps be termed denatured gold exchanges.

If the above reasoning is correct, it means that there are at present in the world two gold-exchange spheres, the French-Netherlands-Swiss and the British-American. (I here leave out of account the fact that the Bank of England, while it buys and sells gold, lets the buying and selling prices fluctuate within certain limits.) Between those spheres with a devalued and those with a nondevalued gold exchange there are differences in purchasing power, but these differences cannot be adjusted owing to difficulties being placed in the way of intercourse. The most striking peculiarity about this state of affairs is a tendency of the two spheres to adopt an increasingly strong autarchic attitude towards each other. For it is possible by means of a quota system to reduce imports but not to increase exports, since you can prevent the citizens of your own country from buying cheaply abroad but you cannot compel the foreigner to buy in a dear market. Likewise, for the same reason any attempt to bring exports up to a level with imports by means of reciprocal trade treaties is bound to fail. A policy aiming at an artificial restriction of a country’s imports, or else at making them by means of reciprocal agreements dependent upon the willingness of foreign countries to accept whatever that country wishes to export, may, on the whole (apart from certain exceptional cases), possibly succeed in preventing changes in the net result of the trade balance but is bound at the same time to force the trade turnover down to an ever lower and lower level. It is, however, of interest to note that the autarchic tendencies cannot go beyond certain limits. As soon as it is realized that the situation means ruin to all those branches of industry which are producing for visible or invisible export, it becomes necessary to subsidize that export. Indeed, in the non-devalued countries the export industries are now largely working with the aid of export premiums, while on behalf of those export industries which are not yet subsidized similar schemes have been drawn up which by force of circumstances will no doubt have to be put into practice. Ultimately, of course, these subsidies have to be paid for by the public in the form of increased taxes or enhanced prices. From the point of view of the consumers, therefore, the system acts as a devaluation, and it does in fact represent an indirect devaluation.

To the important question how long a system of this kind can be kept going it may be replied that theoretically there is no reason, from the purely technical point of view of the exchange problem, why such a system must break down. But from the practical and the political points of view the matter naturally becomes more complicated: The permanent depression which the system must for many reasons necessarily and unavoidably involve gives rise to factors of social tension whose scope is often underestimated. The perhaps not inevitable, but in any case possible, consequences of such tension have lately become apparent in France: Instead of the theoretically correct, but for reasons of practical politics Utopian, way out through price and budgetary deflation, which Laval wished to follow, the opposite extreme, price and budgetary inflation for the sake of “creating work,” is more and more insisted upon. This leads—the road via devaluation being blocked by obstacles of an internal politicopsychological nature—to what is from the point of view of monetary theory the most paradoxical of all demands, the demand for “an expansion of credit without devaluation.” But any such policy is bound to result, vis-à-vis abroad, in differences in purchasing power, the consequences of which cannot any longer be counteracted by the present system of trade restrictions. After some time it is bound, owing to the trade balance becoming more and more adverse, to lead to a heavy drainage of gold, even if, contrary to expectation, the authorities should succeed, by “creating an atmosphere of confidence,” in preventing the balance of payments from becoming increasingly unfavorable through the flight of capital. If they continue to pursue this policy, it will inevitably lead to exchange control—or devaluation. It is, however, the same with devaluation as with the Sibylline Books—the longer the delay the higher the price owing to the destruction of existing values. And yet, if devaluation is adopted at all, it will be adopted only at the very last moment. For the creditors make the currency laws, whereas the debtors do not always bring about a revolution, although they sometimes do. This no doubt explains why history can hardly produce a single instance in which the policy of the opposite extreme—the policy of adjustment and deflation, such as Laval tried to pursue—has ever been carried to a successful conclusion.

As regards Switzerland and Holland, there can be no doubt that a change in the policy of those two countries—if at all likely—is possible only under far more severe economic pressure than they are being subjected to at the present time.

The gold exchange which the United States has introduced at least temporarily by fixing the buying and selling price of gold at $35 per ounce is likewise more of a paradox than is generally imagined. If we are really to grasp its implications we must first of all distinguish between its effect in relation to the countries of the gold bloc on the one hand and countries possessing a paper currency on the other.

1. As regards the former, it may be said that the fact of the United States’ having reverted to the system of fixed buying and selling prices for gold is of no real practical significance. For the importance of the gold automatism described above can only be a subordinate one. As a matter of fact, an efflux from the United States of such gold as is obtainable at a fixed price with the object of preventing a decline in the purchasing power of the dollar is quite out of the question, because at the new parity the dollar has a far higher purchasing power than the gold-bloc currencies have, and, unless a violent inflation in the United States is conceivable, this higher purchasing power will undoubtedly last for years. On the other hand gold automatism does not work in the contrary direction either. In the gold-bloc countries there can be no drainage of gold to the United States, with a resultant lowering of prices in those countries, because such a movement of gold is rendered impossible by their tariff and quota systems. Consequently, the true aim of the gold exchange—the adjustment of the international purchasing power differences—will not be achieved in the intercourse between the United States and the countries of the gold bloc. The fixed price of gold in the United States is of practical importance only in that a Frenchman, for instance, who desires to transfer his capital to the United States procures the dollar, via gold, at a price that is far too low in proportion to its purchasing power. He pays only 16 francs for the dollar instead of 26 francs as he did before the devaluation in the United States. This, however, is a factor that, from the American point of view, can hardly be of any decisive importance. The gold-bloc country may of course find these gold movements, caused by transfer of capital to that country in which the purchasing power is greatest, a problem, for such movements cannot be stopped by quotas and tariff regulations—as is the case with transfers of capital effected in the ordinary course of trade-but only by exchange control.

2. Seeing that the countries of the gold bloc are nowadays merely small islands in a sea of devaluation, it is in practice, of course, a far more important question how the new American gold currency functions vis-à-vis the paper currencies. If we regard without prejudice the function of the new dollar exchange, especially vis-à-vis the pound sterling, we shall find to our surprise that it depends primarily on the Bank of England whether the gold automatism is to come into play, whereas the American exchange authorities have no influence whatsoever in the matter. We might perhaps, therefore, call it a casual gold exchange, seeing that from the American point of view it is actually a matter of chance whether it functions as a gold exchange or not. It will be so only on condition that the Bank of England, or the British Exchange Equalization Fund, does not allow its own gold price to fluctuate parallel to the dollar’s movements in relation to the pound. In other words, if in consequence of a tendency to a rise in prices in the United States sterling rises in terms of the dollar, this will lead to an efflux of gold from the United States only when, in order to prevent this tendency from spreading to England, the Bank of England maintains its buying price for gold unchanged or at any rate refrains from lowering it by as much as the dollar falls in terms of the pound. In the event of the opposite tendency in the United States, the contrary will be the case. Only if the price of gold remains absolutely or relatively unchanged does gold fetch the highest price as an article imported into England and cost the lowest price as an article exported from England. Otherwise the pound rises and falls in relation to the dollar without giving rise to such a drainage of gold as would serve to adjust the purchasing power. The British tactics at the moment seem to be to keep the price of gold stabilized within certain limits. Whether there will be any change in this policy in future, when any tendencies to inflation in the United States appear to make it desirable that the sterling-dollar rate should go up, it is impossible to know, any more than we can know whether the contingency we have thus assumed will ever become a reality. In any case it should be clear how comparatively unimportant and incidental is the part played by the American gold as affecting the adjustment of the purchasing-power parity vis-à-vis the countries of the sterling bloc.

It might perhaps be said, then, that the huge stocks of gold in the United States are only of decorative importance. However, one of the primary functions of gold is also, of course, to represent the permanence of value in time and space. On this ancient and apparently eternal question we may venture to make a few brief remarks—merely with reference to the immediate future. The theoretical knowledge that the value of gold depends on the value of money in a far greater degree than vice versa is without doubt fairly common nowadays. For, after all, gold is worth only exactly as much as the price bid in the open market by the highest bidder among the note-issuing banks. Nonetheless, if we dispassionately examine all the relative facts we need not consider the value of gold to be threatened. So long as the overwhelming majority of the governors of the note-issuing banks believe that they are bound to link their currencies to the gold value which they themselves have previously fixed—so that the currencies may, so to speak, drag themselves by their hair out of the quicksand of worthlessness—for just so long will the “gold prejudice” be valid. It need not even be anticipated that the value of gold will go down to any appreciable extent in the near future. In the United States it will only be under very exceptional circumstances that any lowering of the value of gold will be undertaken. Nor is it likely in England that any appreciable reduction in the price of gold will be permitted, seeing that such a step would entail a rise in the sterling rate in terms of the dollar. On the other hand, neither in the United States nor in England is any new increase in the price of gold to be expected. For people have apparently come to realize the following facts, which are really self-evident: A one-sided increase in the value of gold can, as far as the world economy is concerned, lead only to increased tension in the matter of international purchasing-power differences—that is to say, to enhanced difficulties in the way of world trade. And, for the internal economy, an increase along such lines is neither necessary nor sufficient when one wishes to bring about a rise of the domestic price level.

^* Appeared first in Index, Review of Swennska Handelsbanken, 1936. It should not be forgotten that the article deals with the situation after the devaluation of the dollar and the pound in the thirties. At that time the problem was whether gold currencies without currency restrictions, not whether paper currencies with currency restrictions, should be devaluated. However, whether an artificial exchange rate can and should be maintained by trade restrictions, and whether internal inflation is compatible with external stabilization, is the problem of some European countries today as it was in 1936. The article was written in German and translated into English by the editors of Index.

¹ John Maynard Keynes, in Lloyds Bank Monthly Review, No. 68.

² David Ricardo, The High Price of Bullion, London, 1810.

³ David Ricardo, On the Principles of Political Economy and Taxation, London, 1817, Pt. 1, sect. 1.

IV

Table of Contents of Geld und Kredit

Tübingen, 1924

I.	Handelsbilanz—Zahlungsbilanz—Valuta—Güterpreise
	(Archiv für Sozialwissenschaft und Sozialpolitik Bd. 38, H. 3, S. 596 ff.).
II.	Statische und dynamische Wechselkurse
	(Archiv für Sozialwissenschaft und Sozialpolitik Bd. 49, H. 3, S. 761 ff.).
III.	Kredit
	(Handwörterbuch der Staatswissenschaften 1922, Bd. 5, S. 944 ff.).
IV.	Depositenbanken und Spekulationsbanken
	(Archiv für Sozialwissenschaft und Sozialpolitik Bd. 51, H. 1, S. 222 ff.).
V.	Zur Theorie des Geldmarktes
	(Archiv für Sozialwissenschaft und Sozialpolitik Bd. 51, H. 2, S. 289 ff.).
VI.	Zur Frage des sog. “Vertrauens in die Waehrung”
	(Archiv für Sozialwissenschaft und Sozialpolitik Bd. 52, H. 2, S. 289 ff.).

V

Table of Contents of Geld und Kredit, Neue Folge

Tübingen, 1929

I.	Zur Einführung der Rentenmark
II.	Unsere Währungslage im Lichte der Geldtheorie
III.	Bankenliquidität und Reichsbankpolitik
IV.	Goldvorteil und Goldvorurteil
V.	Die Konjunkturlose Wirtschaft
VI.	Schutzzoll und Handelsbilanz
VII.	Die deutsche Währung vor und nach der Stabilisierung
VIII.	“Kapitalmangel”
IX.	Geldflüssigkeit und Konjunktur
X.	Der Steuerabzug vom Kapitalertrag
XI.	Zur Frage des volkswirtschaftlichen Erkenntnisinhalts der Bankbilanzziffern
XII.	Börsenkredite und Industrie
XIII.	Kapital-Zoll. Zum Streit um den Kapitalertragssteuerabzug
XIV.	Warum Erhöhung der Reichsbank-Giroguthaben?
XV.	Kreditprobleme der Gegenwart
XVI.	Aufgaben und Grenzen der Währungspolitik. Eine Kritik der deutschen Währungspolitik seit der Stabilisierung

VI

List of Articles and Pamphlets Published Since the Appearance of Geld und Kredit, Neue Folge, 1929, But Not Included in This Volume

(Articles in dailies are not included)

1. 1st Arbeitslosigkeit unvermeidlich?, Berlin, 1930.

2. Kredit und Krise, Tübingen, 1931.

3. Die “verfügbaren Mittel” der Börse, Zeitschrift für Nationalökonomie, 1935. Bd. 6, H. 5.

4. Geldzins und Effekten-preise, Schweizerische Zeitschrift für Volkswirtschaft und Statistik, 1936. Bd. 72, H. 1.

5. German Experience with Stocks and Inflation (in collaboration with Joseph Soudek), The Bankers Magazine, July, 1942.

6. Idle Money in Stock Markets, Trusts and Estates, May, 1943.

7. Deficit Spending and Private Enterprise, Chamber of Commerce of the United States, 1944, Bulletin 8.