Hayek’s neglected truths about credit, capital and the trade cycle

Last night, I caught up with Martin Wolf’s November programmes for Radio 4 Analysis, which you can find here. He offered a predictable blend of commentators calling for more money printing, world central banking and greater global governance. It prompted me to look out Monetary Theory and the Trade Cycle (1933).

Hayek wrote (emphasis mine):

It is a curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the present working of our monetary organization exclusively responsible for our present plight. And the same stabilizers who believed that nothing was wrong with the boom and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling.The same superficial view,which sees no other harmful effect of a credit expansion but the rise of the price level, now believes that our only difficulty is a fall in the price level, caused by credit contraction.

All eerily familiar. And:

We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

The truths set out by Hayek in that crucial essay – and in Prices and Production in the same PDF – are ever more relevant today. Yet, despite the evidence of the intervening 80 years, the Keynesians, and indeed the Monetarists, continue to peddle their interventionist policies and monetary statism. Their intellectual bankruptcy is plain but still institutions are regarded as august which hawk their poor ideas about money and bank credit.

The economic truths which Hayek set out in the 1930s are much neglected. It is high time that they were widely read by economists and businessmen and that the impoverishing ideas of Keynes which are now doing so much damage are laid to rest.

This article was previously published at stevebaker.info.

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6 replies on “Hayek’s neglected truths about credit, capital and the trade cycle”
  1. says: Paul Marks

    I will believe that the financial industry is starting to return to honest people (rather than the junkie types who dominate now – with their endless demands for just one more “fix” of credit money) when the vile Financial Times newspaper finally goes bankrupt, hopefully taking the Economist magazine with it.

    As for the BBC – the first action of a Conservative government should be to abolish the television tax.

    If the people really love it so (as is claimed) – they will fund the BBC by donations.

    1. says: Michael JR Jose

      Well I can but applaud the article by Mr Baker and the comment by Mr Marks. If Mr Baker would like to cross the floor and join UKIP, he will find many, many, more like minds in our camp. As to Mr Marks, he sounds like he should be giving a brief talk at the Mises Circle in the European Parliament in Brussels, held every month on a Wednesday night. I can sign him in and get him a speaking spot if he would like to present his ideas. He sounds rather UKIP already, but if he is not, join us! We are on the UP.

  2. says: Ed Setters

    As regards the BBC, rather than donations why should it not become a voluntary subscription like Sky? Since they already have an organisation that deals with licence fees they have the personnel and many of the processes and structures to effect this. They only need covert it to a voluntary subscription payment. The only change that government needs to make therefore is simply to abolish the law that allows people to be prosecuted for non-payment – that creates a de facto voluntary subscription service. The technical business of the changeover is the BBC’s business – if they wish to continue as an organisation they will make it happen.

    The BBC likes to argue that their programmes are of especially good quality and so requires a non-commercial channel. But if their programmes are as good as they like to tell us people will buy them. What are they afraid of? Perhaps it is more the case of life being easier as a predator (able to use the coercive power of the state) than a producer (operating as a legitimate producer within voluntary exchange).

  3. Hayek knew very well the problems of Keynesianism, but as he recognized later, he did not have a sound monetary theory to strongly reject Keynesians principles. Today, Carlos Bondone departing from Menger´s principles provides us with a monetary theory that demonstrates that:

    – When currency is a liability, the creditor is the agent that accepts that liability in exchange of a present good.

    – From the above statament, is clear that current Central Banks nor commercial banks do not grant credit. The market does.

    – It is also clear that Central Banks are not lenders of last resort, but DEBTORS of FIRST resort.

    – Credit arises only from present goods (i.e. money).

    – As Carl Menger stated, money is always a present good.

    – Currencies that are not a present good can only be credit.

    – From the above 3 statements is clear how endless credit is generated, because if credit is treated as money (understood as a present good) when in fact is not money, is just credit currency (a bank liability) then currency might be created ad infinitum.

  4. says: Paul Marks

    However, if new currency is created “ad infinitum” (as the Economist magazine demands banks and national governments are give “unlimited” [their word] support) the economic harm of doing so (the malinvestments, the distortion of the capital structure, the whole credit-bubble-ism) becomes so vast that no economy could possibly withstand it.

    A “little” problem that Hayek understood.

    And, of course, the problems put off by monetary expansion just come back (and worse) each time – so the monetary expansion is made bigger and bigger, and the problems are made bigger and bigger (see above).

  5. Of course Hayek understood, but how did Keynes get away being so deeply wrong? Because Hayek did admit, for example, that the Fed can print money. But what the Fed issues is not money according to Menger principles.

    If you want to demonstrate that a car is lighter at the moon than at the Earth, yo need a Theory which allows you to differenciate the concepts mass and weight. We have a very similar problem with Mises monetary theory, which includes credit money, fiat money and commodity money within the category of Money Proper or money in the narrower sense. The simple fact of having a subcategory called “credit money” is extremely confusing.

    I am not saying that Mises or Hayek were not able to differenciate Money from Credit, I am sure they were. What I am saying is that they were not able to build a monetary theory that clearly separates them.

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