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Abstract
Neutral money plays a central role in contemporary macroeconomic theory, and is a live issue in recent monetary policy discussions. We challenge the opinion that Hayek’s writings on neutral money have been influenced by, and are similar to, the work of Menger and Mises. We show, first, the significant alternative influence of Friedrich von Wieser on Hayek’s work on the subject. Second, we rehabilitate a neglected method of monetary theorising specific to Menger and Mises that rejects money neutrality both as a tool for investigating monetary phenomena and as the standard by which monetary regimes, and the market economy itself, should be evaluated. Examining this chapter in the history of economic thought can aid in a deeper reconsideration of the doctrinal foundations of modern monetary theory and policy.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 For example, in his book on German Monetary Theory, Ellis (Citation1934, 460) listed “Mises, 337–38,” under the “Neutral money” entry in the book’s subject index, despite the fact that neither the term nor the concept appears in the discussion of Mises’s business cycle theory on these pages. Ellis (Citation1934, 335), however, did make the telling statement a few pages earlier, “For the full development of Mises’ theory it is necessary to study the work of Hayek.” Similarly, in his textbook, which was intended as a summary of “the present state of the debate in monetary theory” circa 1940, Georg Halm (Citation1946, ix, 379) included Mises among “some theorists” whose analysis of the business cycle started from the proposition that cyclical fluctuations would not occur under “the assumption of a neutral behaviour of money.”
2 On Wieser’s personal relationship with Hayek and his profound and persistent influence on Hayek’s thought, see Salerno (Citation1999, 42–43) and Salerno (Citation2002).
3 See, for example, Mankiw (Citation2003, 107–108) and Abel and Bernanke (Citation1992, 139).
4 We are grateful to the anonymous referee who suggested clarifying this distinction.
5 The Wicksellian natural rate of interest is defined as the rate which “is neutral in respect to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods” (Wicksell Citation1962 [1936], 102; emphasis added). In modern times, however, monetary policy makers use the rather opposite concept of the Keynesian neutral rate, in order to gauge “when the federal funds rate reaches a level consistent with full employment of labor and capital resources over the intermediate run” (Yellen Citation2005, 11). For a discussion of the differences between Wicksell and Keynes on this point, cf. Salerno (Citation2016).
6 Wieser distinguishes between the “Theory of the Simple Economy” (a purely communistic economy) and the “Theory of the Social Economy” (the unhampered exchange economy). Cf. Wieser (Citation1967 [1927], 9–12).
7 This paper only deals with one aspect of Wieser’s monetary thought. For surveys and critiques of Wieser’s overall monetary theory, see Anderson (Citation1917, 74–79), Greidanus (Citation1932,119–123), Ellis (Citation1934, 81–87, 176–180), Dullaart (1988) and Hülsmann (Citation2007, 225–236).
8 The other editors of the Handwörterbuch (Wieser was actually one of them) state in a brief postface to the article that Wieser himself referred to it as his “ökonomische Schlußarbeit.” Hans Mayer had to do the final editorial work prior to publication. This encyclopedia entry is of great interest for our investigations, since Carl Menger was the author of the entry on money in the first three editions of the Handwörterbuch. Only after Menger’s death did Wieser assume the task. Their respective expositions allow for a direct and illuminating comparison, as we will see below.
9 For a critical discussion of the quantity theory, see also Wieser (Citation1929 [1909a], 212ff.). In this essay as well as the associated lecture delivered at the Vienna meeting of the Verein für Socialpolitik the same year, Wieser Citation1929 [1909b] emphasized the importance of carefully distinguishing between the different causes of changes in the exchange value of money: they can come from the goods side as well as the money side, and their implications are very different.
10 This is reminiscent of the British Banking School’s “law of reflux”, which Wieser (Citation1967 [1927], 245, 247; Dullaart Citation1988, 125) fully accepted. See also Wieser (Citation1926, 694).
11 Elsewhere, in the German original, Wieser (Citation1926, 716) describes his ideal monetary system in the isolated economy in the following way:
Es kann kein Zweifel darüber bestehen, daß überall dort, wo man im Verkehre bereits an Noten gewöhnt ist – und wo wäre man das nicht! – das Papiergeld auf dem Markte den überlieferten Tauschwert des alten Geldes in geschichtlicher Kontinuität fortsetzen wird. Das neue Papiergeld wird nicht nur alle bestehenden Metallgeldschulden bezahlen, sondern auch auf dem Markte so viel kaufen wie das alte Metallgeld. Die Vorteile einer solchen Geldordnung sind einleuchtend. Die Masse des vorhandenen Währungsmetalls wird zu anderer Verwendung frei, man erspart die fortlaufenden Kosten seiner Erneuerung, das neue Geld ist der Gefahr der Depreziation entzogen, die von der reicheren Ergiebigkeit der Geldproduktion droht, und ebenso ist das Geldwesen von den Beengungen frei, die von der Erschöpfung der Goldproduktion zu befürchten wären; denn der Staat kann dem steigenden Geldbedarfe eines steigenden Verkehres mitentsprechender Erhöhung seiner Notenausgabe entgegenkommen.
In our own translation, it reads:
There can be no doubt that wherever you are already used to notes in circulation - and where wouldn't you be! - the paper money on the market will continue to be exchanged at the value of the old money in historical continuity. The new paper money will not only pay all existing metal money debts, but will also buy as much on the market as the old metal money. The advantages of such a money order are obvious. The mass of the existing money metal becomes free for other purposes, one saves the ongoing costs of its renewal, the new money is freed from the danger of depreciation, which emanates from higher yields of money production, and likewise the monetary system is free from the restrictions, which would have to be feared from the exhaustion of gold production; because the state can meet the increasing need for money due to increasing circulation with corresponding increases of its note issue.
12 Wieser (Citation1926, 717) writes: “Ein Weltpapiergeld ist heute eine Utopie. Unter den geschichtlich gegebenen Umständen muß das Weltgeld auf der Goldbasis verbleiben.“[own translation: A world paper money today is a utopian idea. Under the historically given circumstances, world money must remain on the gold base.]
13 The importance of a money with internationally stable exchange value has also been pointed out in Wieser’s (Citation1929 [1904], 167) inaugural lecture at the University of Vienna.
14 With his notion of the “one-sided influence”, Hayek in a sense generalizes the Wieserian term “einseitiges Geldangebot [one-sided supply of money]” (Wieser 1929, 178). In his Social Economics, Wieser clearly lays out the meaning of the one-sided supply of money as follows:
“The equation of supply and demand is disturbed by the increase in the quantity of money. The demand, which originates from the money form, increases, but the supply of natural values [goods] remains the same. Neither the gold miner who has struck an exceedingly rich deposit or the state which issues paper money in huge quantities are under any compulsion to introduce beforehand into the economic organism natural values in equal amounts which would prepare the ground for their demand. They appear as purchases [sic, purchasers] in a market which they have never entered as sellers. Therefore they do not meet ready sellers without disturbing the market” [Wieser Citation1967 [1927], 280; emphasis added).
15 See for example his early article on The Paradox of Saving, first published in German in 1929 and later translated and published in Economica in 1931, where Hayek (Citation1969, 262) emphasized that “every increase in the volume of money” results in a disarrangement of the productive apparatus.
16 Even though the German edition of Monetary Theory and the Trade Cycle was initially published in 1929, the footnote in question was one of “the numerous minor alterations and additions” Hayek (Citation1966 [1933], 15) said he made to the English edition because the footnote refers to Prices and Production published in 1931. For confirmation of this, see Hayek (Citation2012, 98 fn. 49).
17 Selgin (Citation1999) argues that Hayek’s view was a “productivity norm” type of anti-inflationism, different from the extreme deflationist view that was attributed to him by later commentators. Due to this, Selgin (Citation1999, 719) claims that Keynes and Hayek were much more similar in their views: “Hayek came at last to accept a view of optimal price level behavior that was practically the same as the one he had found wanting in Keynes almost half a century before. And Keynes… acknowledged on more than one occasion the merits of a productivity norm, which Hayek had embraced in the early 1930s.”
18 By 1978, in New Studies in Philosophy, Politics, Economics and the History of Ideas (Hayek 1985, 210–211; emphasis added), Hayek had made it clear again: “Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued.”
19 It should be noted that Hayek—unlike Mises, for example—considered the creation of fiduciary media as an endogenous and necessary outcome of the operation of socially-evolved monetary and financial institutions and practices, especially the issue of fiduciary media by fractional reserve banks. According to Hayek (Citation1966 [1933], 141–142), “this elasticity in the volume of money is an immanent characteristic of our present money and credit system…, an inherent necessity of the existing money and credit system that its reaction to certain changes in data is different from what we should expect on the basis of economic equilibrium theory.” Hayek thus gave a Wieserian twist to business cycle theory, portraying cyclical phenomena as one of the various dislocations of the barter equilibrium equation of supply and demand brought about by the one-sided supply of money.
20 In the German original we read:
Das Geld, das sich als Tauschvermittler zwischen die anderen Verkehrsgüter einschiebt, ist nicht lediglich ein neutrales Zwischenglied in der Kette der Tauschakte, die vom Produzenten zum Konsumenten führt; es ändert nicht unwesentlich die Stellung der Parteien auf dem Markte. Das Tauschmittel ist ein wirtschaftliches Gut wie jedes andere; es ist als solches einer selbständigen Wertbewegung unterworfen, und soweit diese vom Erwerber und vom Veräußerer nicht in den Kalkül mit einbezogen wurde oder ihren Erwartungen entgegen verläuft, wird im Tausche nicht jener Erfolg erreicht werden, den sie angestrebt haben. […] Im Mechanismus der Austauschorganisation wirkt eine Kraft, die das Verhältnis der tauschenden Parteien unter Umständen zu verschieben vermag; hier ist eine Quelle, aus der für die einen Verluste, für die anderen Gewinne entstehen. […]
Dieser Fehler wiegt gewiß recht schwer und keine denkbare Organisation des indirekten Tausches vermag ihn zu vermeiden. Da der indirekte Tausch eine notwendige Erscheinung in der arbeitsteilig produzierenden Verkehrswirtschaft ist, sind diese Mängel untrennbar mit ihr verknüpft. Keine Reform vermochte sie zu beseitigen. Das Ideal eines Geldes von unveränderlichem innerem objektiven Tauschwert ist unerreichbar und wird es ewig bleiben.
21 Hayek joined the seminar in 1924, after reading Mises’s book, Socialism, first published in 1922. Ebeling (Citation2014, 143) explains that the topics of money and prices were often discussed: “when Hayek was participating he delivered presentations on the theory of imputation, credit and banking policy, price level stabilization, and a variety of related subjects.” Hayek moved from Austria to the UK to teach at LSE in 1931.
22 Hayek used Cantillon effects in his analysis of the business cycle as a “leitmotiv” in his critique of alternative monetary theories (Hagemann and Trautwein Citation1998, 293). However, as Hagemann and Trautwein (Citation1998) show, his adaptation of Cantillon is different from Mises‘s in two ways: first, Hayek’s primary focus on the structure of production and investments neglects the role of expenditures for consumption, making Cantillon effects in the Hayekian interpretation (i.e. forced savings) a special case of the more general distributional and allocative effects (Hagemann and Trautwein Citation1998, 303). For Mises, however, both consumption and investment are equally important transmission channels of inflation, and in both channels Cantillon effects show the gradual and uneven adjustment of prices following an increase in the money supply. This leads to the second difference between Mises and Hayek,: while for Hayek, the crisis—and thus Cantillon effects during the boom—could be avoided via compensatory voluntary savings to finance investments ex-post (Hagemann & Trautwein Citation1998, 304), for Mises the Cantillon effects in the upswing of a crisis can only be compounded by the Cantillon effects of a post-financing of malinvestments, but never compensated (Mises Citation1990 [1938]). For Mises, therefore, the non-neutrality of money is taken into account in its full distributional and allocative effects, thus dispersed, gradual and uneven among individual cash balances that any attempts at smoothing out the effects of a credit expansion are doomed to fail. See also Salerno (Citation2012) for a brief discussion of the difference in emphasis between Mises and Hayek on malinvestment and overconsumption during a business cycle—difference in emphasis which in our view is due to Hayek’s restricted application of Cantillon effects to investments.
23 We are grateful to the anonymous referee who suggested clarifying this distinction.
24 Hayek held at first a similar view to Mises on the possibility and likelihood of national governments sabotaging the operations of the monetary system (cf. Caton Citation2018). In Denationalisation of Money, Hayek still argued, specifically citing Mises, that “It was not ‘capitalism’ but government intervention which has been responsible for the recurrent crises of the past” (Hayek Citation1978, 100). Nevertheless, he also diverged significantly from Mises by this time, calling for an ideal “rationally regulated world monetary system” (Hayek 1971, 74) made of competitive fiat currencies managed by a world government immune to inflation.
25 For Mises, “great and abrupt fluctuations” refer to changes in the money supply that initiate the cycle of inflationary expectations. Also, unlike monetary injections directly into credit markets to reduce the loan rate of interest, the accretions of new money due to variations in the production of gold are not systematically introduced into credit markets and therefore do not necessarily distort interest rates and falsify economic calculation.
26 In his own words, money prices provide a “ungleich übersichtlicheres und genaueres Mass der Mittel und Erfolge der Wirtschaft [more clear-cut and exact measurement of inputs and results of economic activities]” (Menger Citation1970 [1909], 71). For the whole discussion of the benefits of money prices, see Menger (Citation1970 [1909], 66–73), in particular, subsection 3 entitled Die praktische Bedeutung der Bewertung der Güter in Geld (“The practical significance of the valuation of goods in money”). We use Leland B. Yeager with Monika Streissler’s translation of the text (Menger Citation2002 [1909]).
27 In the original, we read: “Der Realbegriff des Kapitals umfaßt das Vermögen der Erwerbswirtschaft, welcher technischen Natur dasselbe an sich auch sein mag, insofern sein Geldwert Gegenstand unseres ökonomischen Kalküls ist, d. i. wenn dasselbe sich uns rechnungsmäßig als eine werbende Geldsumme darstellt“(Menger Citation1935 [1888], 174).
28 Note that in this quotation the translators have chosen to render Menger’s terms “innerer Tauschwert” and “äußerer Tauschwert” more literally as the “inner exchange value” and “outer exchange value,” respectively, while we use the terms “internal exchange value” and “external exchange value” in the text.
29 In the original: “Die Untersuchung über das obige Problem, dem vielfach und, zwar nicht ohne guten Grund, die Bezeichnung der nationalökonomischen Quadratur des Zirkels zu teil geworden ist, erweist sich indes als aussichtslos” (Menger Citation1970 [1909], 74).
30 Menger (Citation1970 [1909], 85) writes that “die Möglichkeit eines Gutes von stabilem inneren Tauschwerte ist prinzipiell nicht schlechthin ausgeschlossen [a good of stable exchange value is not utterly unthinkable.].”
31 In the original: “[…] so künstlich, auch so schwer zu kontrollieren, dass selbst die sinnreichsten Methoden der Durchführung dieses Gedankens zu keinem ganz befriedigenden Ergebnisse führen können. Alle auf der obigen Voraussetzung fussenden Methoden zur Bestimmung der örtlichen Verschiedenheit und der Bewegung des inneren Tauschwertes des Geldes sind schon i[m] Prinzipe willkürlich und unverbürgt.” (Menger Citation1970 [1909], 90–91)
32 Menger (Citation1970 [1909], 106) writes:
Die prinzipielle Zurückweisung des Zwangskurses ist ebensowohl ein Irrtum wie die prinzipielle Forderung desselben. Indes scheint mir die erstere denn doch den geringeren Irrtum in sich zu schliessen. Kann nämlich den prinzipiellen Gegnern des Zwangskurses mit Recht entgegengehalten werden, dass sie das, was im grossen und ganzen eine (von berechtigten Ausnahmen durchbrochene) Regel praktischer Wirtschaftspolitik ist, zu einem ausnahmslosen Gesetze verallgemeinern: so den Verfechtern des prinzipiellen Zwangskurses, dass sie dasjenige, was nur für gewisse Ausnahmefälle sich als nützlich oder notwendig erweist, zur allgemeinen Regel […] erheben.
In Yeager and Streissler’s translation:
To reject legal tender on principle is just as much an error as to demand it on principle. It seems to me, though, that the former involves the lesser error. For while it may rightly be held against those who oppose legal tender on principle that they generalize what is a rule (on the whole, with justified exceptions) of practical economic policy into a law without exception, it may be held against those who advocate legal tender on principle that they turn something that proves useful or necessary only in certain exceptional cases into a general rule – indeed, by including legal tender in the very concept of money, into a law without exception. (Menger Citation2002 [1909], 83)
33 That Menger assigned a stronger role to government in his 1909 encyclopedia entry than in his earlier writings was also highlighted by Ikeda (Citation2008). A very firm position in favor of sound money and skepticism towards government intervention came through in Menger’s Lectures to Crown Prince Rudolph, delivered at a time when he was a relatively young professor at the University of Vienna (Menger Citation1994 [1876]).