Friedrich August von Hayek, Redebeitrag [zur Aussprache über Kredit und Konjunktur] (1929)

Hayek’s public scientific conference discussion contribution examines a narrowly defined theoretical problem: whether monetary business-cycle theory explains crises through external intervention or through tendencies inherent in the credit system. Addressing an ongoing debate, and returning to a question left unresolved in his written report, he challenges a point on which advocates and opponents of monetary explanation apparently agree. His central claim is that discrepancies between the bank interest rate and the “natural” rate need not originate in deliberate rate reductions. Modern banking itself repeatedly produces them. The contribution moves from this institutional argument to a methodological distinction between establishing monetary fluctuations as necessary and showing that they adequately explain historical business cycles.

Hayek identifies Adolf Löwe and Ludwig von Mises as sharing an exogenous interpretation of monetary crisis theory. Löwe attributes its explanatory mechanism to conscious bank intervention; Mises, in the recent work discussed here, attributes recurring crises to central banks’ tendency to depress the money rate below the natural rate. Hayek does not reject the consequences attributed to that discrepancy. Instead, he questions whether its usual presentation mistakes a conspicuous special case for the general mechanism. A monetary theory that concentrates on artificially lowered rates neglects its stronger argument: divergence can arise without a bank changing its quoted rate at all.

Die Situation, daß der von den Banken geforderte Zins unter dem „natürlichen“ Zinssatz liegt, kann nämlich keineswegs nur dadurch entstehen, daß die Banken den Zinsfuß ungebührlich herabsetzen.

English translation: The situation in which the interest rate charged by banks lies below the “natural” rate of interest can by no means arise only because banks unduly lower the interest rate.

The decisive alternative is a rise in the natural rate. Improved profit prospects, or reduced accumulation of savings, can raise the rate at which the supply of savings would meet demand. If banks continue lending at their previous rate, newly created credit satisfies borrowing demand beyond what actual savings could support. An unchanged bank rate is therefore not necessarily an economically neutral rate. Hayek’s conceptual move shifts attention from a deliberate banking decision to the relationship between changing economic conditions and an institutionally mediated price.

Two characteristics of credit organization explain why adjustment is not prompt. First, borrowers do not encounter the supply of savings directly. Bank credit serves as a substitute, and its quantity can vary, within limits, independently of changes in saving. The interest rate consequently reflects the availability of that substitute rather than simply the scarcity of savings. Second, banks have neither the information nor the incentive required to keep lending continuously aligned with saving. Deposits originating in savings cannot, in principle, be distinguished from deposits originating in bank credit; nor can banks directly ascertain the hypothetical natural rate. These are structural obstacles, not merely errors that better intentions would remove.

Dagegen haben die Banken infolge der gegenseitigen Konkurrenz das größte Interesse, ihre Kreditgewährung so weit auszudehnen, als es die Sicherheit der Anlagen und ihre Liquidität zuläßt.

English translation: By contrast, owing to competition among themselves, banks have the strongest interest in expanding their lending as far as the safety of their investments and their liquidity permit.

Competition reinforces the informational problem. The operative limits on lending are security and liquidity, neither of which directly confines credit to accumulated savings. Improved profitability can enlarge the range of investments banks regard as safe, enabling additional lending without a corresponding interest-rate increase. Hayek treats banks’ capacity to create credit as established and declines to reargue it here. He likewise leaves aside the mechanism that eventually forces bank rates to follow the natural rate and stops further credit creation. The speech establishes the recurrent origin of the discrepancy; it does not reconstruct every stage of expansion and crisis.

Hayek then connects his argument to R. G. Hawtrey’s thesis that regulating credit by reserve proportions entails recurring cycles. He accepts the proposition while explicitly giving it a somewhat different meaning: liquidity-based regulation cannot ensure immediate adjustment to movements in the natural rate. Whenever borrowing demand exceeds accumulating savings, it leaves room for additional credit creation. The resulting undercutting of the natural rate and overinvestment thus belong, in his account, to the operation of the existing credit system rather than requiring an arbitrary external disturbance.

This strong claim about recurrence is accompanied by a qualification about explanatory scope. Hayek distinguishes the logical consequences of credit expansion from the empirical magnitude and duration of business cycles:

Es muß nun ohne weiteres zugegeben werden, daß sich nicht a priori entscheiden läßt, ob jene als notwendige Folge unserer modernen Bankorganisation zu erwartenden Schwankungen ohne Mitwirken weiterer, in der monetären Konjunkturtheorie nicht berücksichtigter Momente schon jenen Umfang annehmen und gerade jene Dauer haben würden, die wir an den historischen Konjunkturwellen beobachten, oder ob sie nicht ohne solche ergänzende Einflüsse viel kleiner, viel schwächer, viel flacher wären.

English translation: It must now readily be conceded that it cannot be decided a priori whether those fluctuations to be expected as a necessary consequence of our modern banking organization would, without the participation of further factors not considered in monetary business-cycle theory, already attain the magnitude and precisely the duration that we observe in historical business cycles, or whether, without such supplementary influences, they would be much smaller, much weaker, much flatter.

Nonmonetary influences therefore remain possible, but their explanatory starting point must change. They cannot simply be introduced into the stationary economy of general equilibrium theory. They must supplement an economy already subject to monetarily induced fluctuations, even if those fluctuations alone would be too slight to count as observed business cycles. Hayek’s insistence on an endogenous monetary mechanism does not amount to a claim that monetary theory is empirically exhaustive.

Wenn aber auch die Richtigkeit der von der monetären Theorie behaupteten Zusammenhänge kaum zu bestreiten ist, so bleibt doch die Frage bestehen, ob diese Theorie auch zureicht, alles zu erklären, was wir an den empirischen Konjunkturschwankungen beobachten.

English translation: Yet even if the correctness of the relationships asserted by monetary theory can scarcely be disputed, the question remains whether this theory is also sufficient to explain everything we observe in empirical business-cycle fluctuations.

The conclusion replaces the binary question of monetary theory’s correctness with questions of sufficiency and research sequence. Before investigating additional causes in detail, economists should work out the consequences and extent of the monetary disturbance already identified. The contribution’s relevance lies in this conjunction of institutional explanation and methodological priority: credit organization makes fluctuations endogenous, while their necessary existence leaves their historical scale open to further investigation.