WEBVTT NOTE The Currency-Banking Dispute in the Early Writings of Mises and his Contemporaries 1 00:00:00.000 --> 00:00:30.000 In one of the previous sessions, Amadeus talked about the German predecessors to the Theory of Money and Credit, and my topic runs partly parallel to that because I'll be saying some things about Mises' British precursors in the currency school and also their banking school opponents and how the dispute between the two groups framed discussions in monetary theory in Mises' early days between Mises and his contemporaries. There's some overlap between my topic and Dr. Salerno's, so I hope that he won't steal too many of my ideas, 2 00:00:30.000 --> 00:00:34.560 We'll try at least try to minimize the redundancies. 3 00:00:34.560 --> 00:00:38.160 So I'll just say some things about the broader points of the currency banking controversy 4 00:00:38.160 --> 00:00:44.000 and what it was all about, and also say something about how it influenced later economists. 5 00:00:44.000 --> 00:00:50.000 The currency banking dispute was very important in its day, but in the 20th century the issues 6 00:00:50.000 --> 00:00:55.040 fell out of fashion in many discussions of monetary theory and policy, with the exception 7 00:00:55.040 --> 00:00:56.680 of some history of thought studies. 8 00:00:56.680 --> 00:01:00.920 But in the last few decades there's been a revival of interests in the topic by historians 9 00:01:00.920 --> 00:01:06.880 of thought, among them some Austrians, and so the literature is growing once again. 10 00:01:06.880 --> 00:01:12.080 The dispute itself lasted from roughly the 1820s to the mid-1860s when it sort of petered 11 00:01:12.080 --> 00:01:16.400 out, although it is worth noting that what is called the currency banking controversy 12 00:01:16.400 --> 00:01:21.360 is really a continuation of a previous dispute, the so-called bullionist controversy of the 13 00:01:21.360 --> 00:01:25.640 late 18th and early 19th centuries. 14 00:01:25.640 --> 00:01:32.100 After the Bank of England resumed payments in 1821, after almost 25 years of suspension 15 00:01:32.100 --> 00:01:37.800 of payments, bank panics and crises continued to be a problem in Britain, and so attention 16 00:01:37.800 --> 00:01:43.160 was intensely focused on problems relating to how to manage a mixed currency and avoid 17 00:01:43.160 --> 00:01:50.380 the depreciation of the currency, losses of gold to foreign countries and financial crises. 18 00:01:50.380 --> 00:01:55.480 As a starting point for discussing the issues, both the so-called currency and banking camps 19 00:01:55.480 --> 00:01:58.480 and perhaps favored convertibility of the currency. 20 00:01:58.480 --> 00:02:03.480 But all sorts of questions remained about exactly how to manage such a currency 21 00:02:03.480 --> 00:02:08.480 and what effect credit issues had on the market and furthermore what sort of limitations the market, 22 00:02:08.480 --> 00:02:11.480 especially the loan market, placed on credit expansion. 23 00:02:11.480 --> 00:02:17.480 And so this was a central issue around which the debate revolved. 24 00:02:17.480 --> 00:02:23.480 After Peel's Act of 1844, when it appeared that the currency principle had proven a failure, 25 00:02:23.480 --> 00:02:28.160 School and its influence fell into decline. To some extent, the same was also true of 26 00:02:28.160 --> 00:02:33.000 the Orthodox Banking School as well, although Mill continued to be a late supporter of parts 27 00:02:33.000 --> 00:02:37.520 of the doctrine. And the Banking School survived in at least one other important respect as 28 00:02:37.520 --> 00:02:43.500 well, which I'll mention in a moment. But about 50 years after the initial British 29 00:02:43.500 --> 00:02:47.920 currency and banking schools had their primary debates, a new generation of economists took 30 00:02:47.920 --> 00:02:52.920 interest in the same problems. In a very short period of time in Vienna, three young economists 31 00:02:52.920 --> 00:02:56.920 published books, each especially interested in money and banking. 32 00:02:56.920 --> 00:03:00.920 Rudolf Hilferding's Finance Capital in 1910, Joseph Schumpeter's 33 00:03:00.920 --> 00:03:04.920 Theory of Economic Development in 1911, and of course Mises' Theory of Money and Credit in 1912. 34 00:03:04.920 --> 00:03:08.920 And to some extent these three books can be read as a reopening 35 00:03:08.920 --> 00:03:12.920 of the British debate. The great difference, however, being that 36 00:03:12.920 --> 00:03:16.920 between the original conflict and the later one, two important events 37 00:03:16.920 --> 00:03:20.920 had happened in economic theory, Karl Marx and the Marginal Revolution. 38 00:03:20.920 --> 00:03:26.880 Mises, Schumpeter and Hilferding each represented a kind of economic thinking which had come 39 00:03:26.880 --> 00:03:31.480 into vogue in those decades, but at the same time each was also influenced by the currency 40 00:03:31.480 --> 00:03:39.360 or banking schools. Of course, Mises sided with Menger, Hilferding with Marx, and Schumpeter 41 00:03:39.360 --> 00:03:46.780 with Walras, or Valrav, if you want to get technical about it. This is actually sort 42 00:03:46.780 --> 00:03:50.940 sort of an interesting moment in the history of economic thought because all three were 43 00:03:50.940 --> 00:03:55.320 intimately familiar with the Austrian writings of the period because they were all students 44 00:03:55.320 --> 00:03:59.160 in Boehm-Bawerk's seminar at the University of Vienna and so to some extent their writings 45 00:03:59.160 --> 00:04:04.800 were informed by Boehm-Bawerk despite the fact they represented such different traditions 46 00:04:04.800 --> 00:04:09.100 in economic thought. 47 00:04:09.100 --> 00:04:14.900 But setting that aside, the British debates play a very important role in each of these 48 00:04:14.900 --> 00:04:19.860 major works, and they're a very useful lens, I think, for placing these ideas in context 49 00:04:19.860 --> 00:04:24.300 in the history of economic thought. Understanding the currency in banking schools is especially 50 00:04:24.300 --> 00:04:28.660 necessary to appreciate the legacy and importance of the theory of money and credit because 51 00:04:28.660 --> 00:04:35.660 to a large extent, Mises considered this debate to be the event in 19th century monetary economics. 52 00:04:37.020 --> 00:04:40.180 Throughout his career, he comes back to it again and again in reference to both theory 53 00:04:40.180 --> 00:04:43.960 Theory and Policy. 54 00:04:43.960 --> 00:04:47.680 When I mention the relationship of Mises to the currency school, I refer mostly to the 55 00:04:47.680 --> 00:04:51.360 currency theory of credit expansion and the trade cycle. 56 00:04:51.360 --> 00:04:54.620 Mises himself always said, for example, in the second edition of The Theory of Money 57 00:04:54.620 --> 00:04:58.480 and Credit, that his ideas about the trade cycle were just a continuation of the currency 58 00:04:58.480 --> 00:04:59.480 school tradition. 59 00:04:59.480 --> 00:05:04.680 In fact, because Mises' business cycle theory has its roots in classical economics, some 60 00:05:04.680 --> 00:05:08.680 economists have even argued that there is nothing particularly Austrian about the so-called 61 00:05:08.680 --> 00:05:11.280 and the Old Austrian Theory of the Business Cycle. 62 00:05:11.280 --> 00:05:15.120 But I'll have something to say about that in a minute. 63 00:05:15.120 --> 00:05:17.560 So for some particulars of the debate, 64 00:05:17.560 --> 00:05:19.360 the currency school, which was essentially 65 00:05:19.360 --> 00:05:22.000 a hard money school of the 19th century Britain, 66 00:05:22.000 --> 00:05:23.520 was defined by its support of what 67 00:05:23.520 --> 00:05:25.480 is called the currency principle. 68 00:05:25.480 --> 00:05:28.040 The currency principle states that the money supply 69 00:05:28.040 --> 00:05:30.260 under a regime of mixed currency, that 70 00:05:30.260 --> 00:05:32.960 is a currency of both gold and convertible paper, 71 00:05:32.960 --> 00:05:35.100 should expand and contract precisely as it would 72 00:05:35.100 --> 00:05:37.540 if the supply were purely metallic. 73 00:05:37.540 --> 00:05:43.060 So if paper does not conform to what would be the fluctuations of metal, then so much the worse for paper. 74 00:05:43.060 --> 00:05:48.660 Any attempt to extend the circulation beyond the supply of a purely metallic system 75 00:05:48.660 --> 00:05:53.060 would result in depreciating currency and gold drains to other countries. 76 00:05:53.060 --> 00:06:00.700 In practice, this required a monetary policy where new issues of paper from banks would have to be fully backed by metal. 77 00:06:00.700 --> 00:06:05.300 So that's a brief summary of the unifying principle of the currency school, but I'm actually going to focus 78 00:06:05.300 --> 00:06:08.540 I'll focus less on the currency aspects because I think Dr. Salerno was going to talk more 79 00:06:08.540 --> 00:06:09.540 about that. 80 00:06:09.540 --> 00:06:15.460 And I'll focus instead on Mises' criticism of the opponents of the currency school. 81 00:06:15.460 --> 00:06:19.140 The currency school was opposed by the so-called banking school, which is usually associated 82 00:06:19.140 --> 00:06:24.180 with Thomas Hooke, John Fullerton, James Wilson, and later, and to a lesser extent, John Stuart 83 00:06:24.180 --> 00:06:25.860 Mill. 84 00:06:25.860 --> 00:06:30.660 The key proposition of the banking school was that convertibility, and only convertibility, 85 00:06:30.660 --> 00:06:35.260 was necessary to safeguard against excessive issues of bank credit. 86 00:06:35.260 --> 00:06:40.980 Given convertibility, it was simply impossible for banks to issue notes excessively, and 87 00:06:40.980 --> 00:06:42.660 thus depreciate the currency. 88 00:06:42.660 --> 00:06:46.860 The reason for this, and the core theme of the writings of the banking school, is what 89 00:06:46.860 --> 00:06:51.100 John Fullerton called the law of reflux, or the law of the reflux. 90 00:06:51.100 --> 00:06:56.100 The reflux refers to the process whereby excess notes are returned to the bank, and thus how 91 00:06:56.100 --> 00:06:58.700 their issue is limited. 92 00:06:58.700 --> 00:07:03.420 The idea was that any time a bank issued more paper than was demanded by the business community, 93 00:07:03.420 --> 00:07:07.020 The notes would be immediately returned to the bank for redemption. 94 00:07:07.020 --> 00:07:11.980 And so because of this, the supply of credit, bank credit, could never exceed the quantity 95 00:07:11.980 --> 00:07:19.220 necessary for the ordinary operations of business or what were described as the needs of trade. 96 00:07:19.220 --> 00:07:23.420 Now there are many problems with this banking school position, but the one pointed out by 97 00:07:23.420 --> 00:07:27.140 Robert Torrens of the currency school in which Mises develops explicitly in The Theory of 98 00:07:27.140 --> 00:07:32.860 Money and Credit is that it views banks as being essentially passive, as simply responding 99 00:07:32.860 --> 00:07:37.340 according to the so-called needs of trade, which, by the way, the banking school had 100 00:07:37.340 --> 00:07:40.540 never really defined. 101 00:07:40.540 --> 00:07:45.200 But what Torrens and Mises point out is that, of course, this is not the case. 102 00:07:45.200 --> 00:07:50.900 Banks are not passive in this situation because banks have the power to influence the interest 103 00:07:50.900 --> 00:07:54.200 rate, which is a determinant of the demand for credit. 104 00:07:54.200 --> 00:07:58.060 So by lowering the interest rate, one can increase the demand for credit, which is not 105 00:07:58.060 --> 00:08:03.380 not independent of bank policy, as it would have to be for the banking school. 106 00:08:03.380 --> 00:08:08.980 This for Mises was essentially the death blow for the banking school doctrine, this argument. 107 00:08:08.980 --> 00:08:13.220 But the banking school didn't see this simple flaw, because they were focused on an entirely 108 00:08:13.220 --> 00:08:15.740 different view of how money prices worked. 109 00:08:15.740 --> 00:08:20.580 They largely ignored the role of interest in this regard, because its relation to the 110 00:08:20.580 --> 00:08:24.760 supply of credit was simply not important for them, because in their view, the quantity 111 00:08:24.760 --> 00:08:27.180 of money did not influence prices. 112 00:08:27.180 --> 00:08:43.060 This orthodox banking school view was then adopted in Mises' own day by Rudolf Hilfreding, 113 00:08:43.060 --> 00:08:48.460 and that may partly explain why Mises devotes special attention to attacking it, because 114 00:08:48.460 --> 00:08:52.200 it may have seemed like the reflex theory was on the rise again in 1912, as it was being 115 00:08:52.200 --> 00:08:55.900 promoted by scholars of Mises' acquaintance. 116 00:08:55.900 --> 00:09:01.100 Hilferding was a member of the relatively short-lived so-called Austro-Marxist School, 117 00:09:01.100 --> 00:09:06.340 which is a branch of Marxism which grew up around a Boehm-Bawerk seminar in Vienna. 118 00:09:06.340 --> 00:09:11.500 Hilferding's economic research project revolved around, first, defending Marx against his 119 00:09:11.500 --> 00:09:17.860 Austrian critics, and second, flushing out the unfinished ideas in Marx's system, particularly 120 00:09:17.860 --> 00:09:22.280 the problems of money, banking, finance, and the business cycle, which Marx had only begun 121 00:09:22.280 --> 00:09:24.280 to discuss. 122 00:09:24.280 --> 00:09:28.120 And so to address these problems, Hilferding published Finance Capital in 1910, which is 123 00:09:28.120 --> 00:09:33.680 a sort of spiritual successor to the unfinished volumes of Das Kapital, especially the third 124 00:09:33.680 --> 00:09:34.680 volume. 125 00:09:34.680 --> 00:09:38.880 Now, Marx had supported some of the tenets of the banking school already, especially 126 00:09:38.880 --> 00:09:43.520 with regard to the needs of trade and the causal effect of prices on money. 127 00:09:43.520 --> 00:09:46.940 But as I mentioned, Marx never really finished this part of his project. 128 00:09:46.940 --> 00:09:51.880 So Hilferding steps in to develop the blueprint Marx had laid out regarding the decline of 129 00:09:51.880 --> 00:09:57.800 of Capitalist Society, particularly with regard to ideas about the finance industry and the 130 00:09:57.800 --> 00:10:03.480 business cycle, but also war and imperialism and some other issues as well. 131 00:10:03.480 --> 00:10:07.920 Huffreding basically argued that the last phase of capitalism, before capitalism would 132 00:10:07.920 --> 00:10:13.240 become socialism, would involve the expansion of the finance industry to incorporate and 133 00:10:13.240 --> 00:10:17.480 control all the other sectors of the economy. 134 00:10:17.480 --> 00:10:23.000 In order to do this, Hilferding inserted into his Marxist theory the banking school notion 135 00:10:23.000 --> 00:10:24.000 of the reflux. 136 00:10:24.000 --> 00:10:28.720 So what he required was a theory which would explain a great deal of credit expansion but 137 00:10:28.720 --> 00:10:33.960 would avoid the problems of excess issues of unbacked paper. 138 00:10:33.960 --> 00:10:38.760 And so the bank's, banking school's needs of trade approach fit very nicely into his 139 00:10:38.760 --> 00:10:39.760 system. 140 00:10:39.760 --> 00:10:44.120 And his idea was that credit expansion would eventually form the foundation of the finance 141 00:10:44.120 --> 00:10:49.480 Finance Industry, and that through expanding loans to other sectors of the economy, credit 142 00:10:49.480 --> 00:10:55.440 would eventually form a link between all sectors of the economy, uniting them all under the 143 00:10:55.440 --> 00:11:01.640 control of the finance industry in a first step toward full socialization. In fact, he 144 00:11:01.640 --> 00:11:06.900 actually didn't really attempt to even update the banking theory at all, or especially adapt 145 00:11:06.900 --> 00:11:10.760 it into his Marxist framework, and that was something which Schumpeter later pointed out 146 00:11:10.760 --> 00:11:13.520 is a major shortcoming of his book. 147 00:11:13.520 --> 00:11:17.500 So anyway, this forms an interesting contrast with Mises because while Hilferding almost 148 00:11:17.500 --> 00:11:22.060 blindly added the old theory to his newer one, Mises of course revised and enriched 149 00:11:22.060 --> 00:11:26.800 the currency theory with his own insights as well as those of others. 150 00:11:26.800 --> 00:11:31.540 And especially in his criticism of the reflux, Mises put some emphasis on using the insights 151 00:11:31.540 --> 00:11:36.140 of Torrance and the currency school to solve these recurring problems in the theory of 152 00:11:36.140 --> 00:11:39.880 credit expansion. 153 00:11:39.880 --> 00:11:44.800 Hilferding wrote an extremely negative review of the Theory of Money and Credit, which is, 154 00:11:44.800 --> 00:11:49.520 in large part, it's a diatribe against the subjective theory of value, but it's also 155 00:11:49.520 --> 00:11:56.440 significant because Hilferding seems to unintentionally point out that Mises' monetary theory is not 156 00:11:56.440 --> 00:12:02.320 just a logical development of Boehm-Bawerk's interest theory and Mengerian value theory, 157 00:12:02.320 --> 00:12:08.640 but also he seems to argue that Mises' acceptance of the currency school doctrine is also just 158 00:12:08.640 --> 00:12:11.920 with a logical development of the Austrian approach to value. 159 00:12:11.920 --> 00:12:13.880 And as far as his own work is concerned, 160 00:12:13.880 --> 00:12:15.360 especially in finance capital, 161 00:12:15.360 --> 00:12:19.120 Hilferding positions himself and Marx in the labor theory 162 00:12:19.120 --> 00:12:20.400 with the banking school. 163 00:12:21.320 --> 00:12:23.560 So this is sort of a fairly novel interpretation 164 00:12:23.560 --> 00:12:25.120 of the history of thought which sees 165 00:12:25.120 --> 00:12:27.560 these two types of value theory coincide 166 00:12:27.560 --> 00:12:31.360 with these distinct strands of banking theory as well. 167 00:12:31.360 --> 00:12:36.560 And if this view has merit, it would seem to downplay 168 00:12:36.560 --> 00:12:42.320 The view of those Austrians who don't count business cycle theory as one of the core pieces 169 00:12:42.320 --> 00:12:45.000 of the tradition. 170 00:12:45.000 --> 00:12:48.400 Hilferding recognizes, of course, that Mises posed a significant challenge to the banking 171 00:12:48.400 --> 00:12:52.840 school by pointing out that the interest rate influences the demand for credit. 172 00:12:52.840 --> 00:12:58.280 But because he was under the sway of orthodox banking school ideas, he seems to have misunderstood 173 00:12:58.280 --> 00:13:03.520 Mises' warnings about the dangers of the overissue of fiduciary media. 174 00:13:03.520 --> 00:13:06.880 Because for the banking school, there could be no such thing as undue credit expansion, 175 00:13:06.880 --> 00:13:09.120 as long as convertibility prevailed. 176 00:13:09.120 --> 00:13:13.000 Credit expansion is never more than just a natural part of business activities. 177 00:13:13.000 --> 00:13:16.480 And in following this notion, Hilferding also believed that credit expansion in basically 178 00:13:16.480 --> 00:13:21.680 all its forms is just a natural component of the capitalist process, and he takes Mises 179 00:13:21.680 --> 00:13:23.720 to mean this as well. 180 00:13:23.720 --> 00:13:29.160 And thus, because Mises talks about the business cycle and how banks possess the ability to 181 00:13:29.160 --> 00:13:34.160 expand credit in unison, and how this poses a great danger to capitalist economies. 182 00:13:34.160 --> 00:13:38.160 Hilferding reaches the conclusion that even Mises admits that 183 00:13:38.160 --> 00:13:42.560 capitalism contains the seeds of its own destruction and so Marx is right after all. 184 00:13:42.560 --> 00:13:45.560 But again it's 185 00:13:45.560 --> 00:13:49.800 interesting that while Hilferding dismisses Mises' view of the importance of the 186 00:13:49.800 --> 00:13:50.560 interest rate 187 00:13:50.560 --> 00:13:55.360 in determining the demand for credit and how that influences banks' incentives for 188 00:13:55.360 --> 00:13:59.720 collusion. At the same time, he also argues for his own reasons 189 00:13:59.720 --> 00:14:03.160 that banks naturally tend to concentrate and cartelize 190 00:14:03.160 --> 00:14:07.320 eventually to the point that they form a central bank to solidify the finance 191 00:14:07.320 --> 00:14:09.640 industry's control over the entire economy. 192 00:14:09.640 --> 00:14:13.440 And this development into a central bank is supposed to be 193 00:14:13.440 --> 00:14:17.040 one of the most important in explaining the transition from capitalism to 194 00:14:17.040 --> 00:14:17.760 socialism 195 00:14:17.760 --> 00:14:21.720 because once banking and finance control everything, the economy is sort of 196 00:14:21.720 --> 00:14:23.440 effectively socialized already. 197 00:14:23.440 --> 00:14:34.440 So as sometimes is the case with these sorts of economists, even when Hilferding gets it completely wrong, he still has some sort of interesting points to consider. 198 00:14:34.440 --> 00:14:46.440 The same thing might also be said about Mises' other contemporary, Joseph Schumpeter. Schumpeter's 1911 book, The Theory of Economic Development, is usually remembered as a treatise on entrepreneurship. 199 00:14:46.440 --> 00:14:53.440 But what is often forgotten is that it is also fundamentally, in fact inextricably, a theory of credit expansion as well. 200 00:14:53.440 --> 00:14:57.440 Credit expansion is the key to the whole problem of economic development for Schumpeter, 201 00:14:57.440 --> 00:15:02.440 because it is literally the only way for the economy to leave the static circular flow. 202 00:15:02.440 --> 00:15:06.440 So in addition to being the creator and the innovator, the ideas everyone is familiar with, 203 00:15:06.440 --> 00:15:11.440 Schumpeter's entrepreneur is also the necessary recipient of new bank credit. 204 00:15:11.440 --> 00:15:16.440 Now, as far as his own influences are concerned, Schumpeter is a bit slippery. 205 00:15:16.440 --> 00:15:23.440 He was certainly familiar with the currency banking literature, as you can tell from other things he wrote at the same time, 206 00:15:23.440 --> 00:15:30.440 especially his early history of thought pieces and his famously unfinished treatise on money. 207 00:15:30.440 --> 00:15:35.440 But in keeping with the style of the period, he cites very few sources in the theory of economic development. 208 00:15:35.440 --> 00:15:41.440 But the book does seem to be informed by the older debates and certainly is informed by his contemporaries. 209 00:15:41.440 --> 00:15:47.440 The historical issues of currency and banking come into Schumpeter's work through the entrepreneur. 210 00:15:47.440 --> 00:15:54.440 The credit-based view of the entrepreneur gives Schumpeter a big problem to solve because if credit is credited for the entrepreneur ex nihilo, 211 00:15:54.440 --> 00:15:59.440 surely there must be some inflationary effects he may have to explain. 212 00:15:59.440 --> 00:16:29.440 Schumpeter gets around this by saying, by sort of incorporating a pseudo banking school explanation of credit expansion, but what he says is, well, when the credit initially floods the market, prices do rise, and there was a transfer of purchasing power to the first recipients of credit, but after a time when the entrepreneurs finish introducing new goods, the new goods balance out the new money and everything just sort of settles back to where it was, just at a higher price level. 213 00:16:29.440 --> 00:16:34.040 So there's no real inflation, there's just the semblance of it, he calls it. 214 00:16:34.040 --> 00:16:39.640 And of course there are no business cycle-like effects in the sense of Mises. 215 00:16:39.640 --> 00:16:45.940 The strange part about this explanation though is that in the second edition of The Theory of Economic Development, 216 00:16:45.940 --> 00:16:50.540 Schumpeter quotes Mises on the concept of force saving when he explains this problem. 217 00:16:50.540 --> 00:16:55.140 And he uses Mises to explain what's happening in between 218 00:16:55.140 --> 00:16:59.220 the time of credit creation and the time of successful entrepreneurial innovation. 219 00:16:59.220 --> 00:17:02.580 And he says, oh yes, it's good that Mises pointed out this 220 00:17:02.580 --> 00:17:06.820 forced savings problem for us. But of course he doesn't go on to draw any conclusions 221 00:17:06.820 --> 00:17:08.860 from this because he's so involved in 222 00:17:08.860 --> 00:17:12.700 solving his own problem of development that he doesn't seem to 223 00:17:12.700 --> 00:17:18.180 accept the significance of what Mises is really arguing. 224 00:17:18.180 --> 00:17:21.580 The other point which is worth exploring is the relationship between Schumpeter's 225 00:17:21.580 --> 00:17:23.780 business cycle theory and that of the banking school. 226 00:17:23.780 --> 00:17:31.780 Since the banking school had opposed the currency school on the issue of monetary theories of the trade cycle, they had to replace those theories with something. 227 00:17:31.780 --> 00:17:37.780 And generally they argued for an explanation that looked for the source of problems in the so-called real economy. 228 00:17:37.780 --> 00:17:47.780 Thomas Took, for example, argued that cycles are caused by essentially exogenous events like the opening of new markets, the introduction of innovations and bad harvests. 229 00:17:47.780 --> 00:17:54.780 And this is of course not far from Schumpeter's own innovation theory of the business cycle, which is a part of the same family of theories. 230 00:17:54.780 --> 00:18:00.780 Both types rely on the idea of disproportionality in investment, especially over-investment in fixed capital. 231 00:18:00.780 --> 00:18:08.780 The banking school is one of the primary 19th century sources of these over-production sorts of theories of the business cycle. 232 00:18:08.780 --> 00:18:16.780 And it's in contrast to their ideas and those of economists like Schumpeter that Mises' development of the currency school theory gains additional significance. 233 00:18:16.780 --> 00:18:27.780 Because Mises' theory is, of course, not one of overinvestment, but of malinvestment, a distinction which critics of the Austrian approach continue to struggle with to this day. 234 00:18:27.780 --> 00:18:39.780 Now, of course, Mises did not accept the currency school theory entirely. He did identify what he called two great errors of the school, which are mostly the subject of the next paper, so I won't dwell on them. 235 00:18:39.780 --> 00:18:55.780 I will point out that it is indicative of how strongly Mises associated himself with the currency school, that he still maintained that identity while acknowledging the errors of the school, even though one of the errors involved central banking, which was of course anathema to Mises. 236 00:18:55.780 --> 00:19:01.780 Related to this, I just want to make one last point about the Currency School and its reform program. 237 00:19:01.780 --> 00:19:09.780 A very quick reading of the controversy might imply that the banking school believed more in the power of the market than the currency school did, 238 00:19:09.780 --> 00:19:15.780 in the sense that the currency school favored a rule instituted by a central bank to govern monetary policy, 239 00:19:15.780 --> 00:19:22.780 whereas the banking school believed that only a guarantee of convertibility was required to maintain economic stability. 240 00:19:22.780 --> 00:19:27.060 But this reading would overlook a couple of critical details. 241 00:19:27.060 --> 00:19:31.660 The most important point is to note that it was not that the currency school 242 00:19:31.660 --> 00:19:33.900 preferred some sort of monetary rule 243 00:19:33.900 --> 00:19:37.140 instead of a market-based system of monetary management. 244 00:19:37.140 --> 00:19:40.460 For them, the monetary rule would necessarily 245 00:19:40.460 --> 00:19:45.340 realize the market-based system, which was for them a system of purely metallic money. 246 00:19:45.340 --> 00:19:50.780 So, to take one example, if more cash were needed for circulation, 247 00:19:50.780 --> 00:19:54.940 and there would be a tendency for the value of money to rise relatively to what it was elsewhere. 248 00:19:54.940 --> 00:19:57.980 Gold would flow in and the need would be met. 249 00:19:57.980 --> 00:20:04.060 So it is important to point out that this, that they imagined that this was actually a sort of a, 250 00:20:04.060 --> 00:20:09.980 we might call a market-based system of monetary management, even though they of course 251 00:20:09.980 --> 00:20:14.380 advocated the use of a central bank. 252 00:20:14.380 --> 00:20:19.820 Furthermore, the banking school's views on monetary policy did not imply a free market and money, 253 00:20:19.820 --> 00:20:24.540 but rather the discretion of the central bank in deciding how to expand the circulation. 254 00:20:24.540 --> 00:20:28.820 The so-called needs of trade would have to be interpreted somehow and translated into 255 00:20:28.820 --> 00:20:32.980 monetary policy by the administrators of the bank. 256 00:20:32.980 --> 00:20:35.660 But it's important to recognize that even without this oversight on the part of the 257 00:20:35.660 --> 00:20:42.340 banking school, the position of the currency school on this issue is not necessarily threatened. 258 00:20:42.340 --> 00:20:47.780 Looking at the banking school in the light of the idea of free markets in banking, we 259 00:20:47.780 --> 00:20:51.820 We can see that even without a central bank, the banking school would still have had to 260 00:20:51.820 --> 00:20:57.740 explain how the needs of trade translate into a market-based system of monetary management 261 00:20:57.740 --> 00:21:04.020 and furthermore why that system would succeed better than the currency principle. 262 00:21:04.020 --> 00:21:07.140 So it's important to emphasize that despite the shortcomings, the currency school were 263 00:21:07.140 --> 00:21:12.740 not necessarily anti-market in this way and the orthodox banking school were not necessarily 264 00:21:12.740 --> 00:21:15.340 pro-market. 265 00:21:15.340 --> 00:21:19.460 So just to sum up, I would just like to point out that these debates still hold a great 266 00:21:19.460 --> 00:21:24.340 deal of significance, not just for historians of thought, but for anyone interested in really 267 00:21:24.340 --> 00:21:29.940 understanding, teaching, developing the ideas of Mises and the Austrians. The theories discussed 268 00:21:29.940 --> 00:21:37.280 by the currency school, as well as the errors of the banking school, and of Mises contemporaries, 269 00:21:37.280 --> 00:21:42.860 they helped give shape to the system that Mises built, starting with the Theory of Money 270 00:21:42.860 --> 00:21:52.860 And there's a system which has continued to blossom over the last 100 years and which I hope will continue to grow long past the next 100. So, thank you.