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Frank Fetter & the Austrian school

Gerald P. O'Driscoll

• New York University

“Frank A. Fetter and ‘Austrian’ Business Cycle Theory.” History of Political Economy 12(Winter 1980):542–557.

Frank Fetter (1863–1949) was a distinguished American economist at the turn of the century. A number of his contributions to economics (such as his pure time preference interest theory) were developed by members of the Austrian school of economics. In this essay, O'Driscoll argues that Fetter also independently discovered key elements of the Austrian school's theory of economic fluctuations. His contribution was, however, overlooked by the Austrians, despite their familiarity with his other work.

Irving Fisher's (1869–1947) name has long been associated with the effect of inflationary expectations on interest rates, expectations of high inflation leading to high interest rates. Fetter developed this analysis further than did Fisher, observing that inflation and deflation distort investment patterns. Investment that would never have taken place occurs during inflation. And investment is discouraged during deflation. Price fluctions are uneven and their unevenness interferes with resource allocation. Like the later Austrians, Fetter perseived a cycle as being constituted by fluctuations in real variables, such as investment and saving, though caused by monetary disturbance.

Fetter drew attention to the role of the fractional-reserve banking system in generating monetary disturbances and thus causing economic fluctuations. He opposed an “elastic currency.” He also distinguished between the effects of an inflation of the commodity base money and the effects of an inflation of bank credit. In this, he likewise anticipated later Austrian developments

Though his analysis was recognized and praised by such diverse contemporaries as Irving Fisher and Frank Knight (1885–1972), it stands as another lost and largely forgotten contribution in monetary economics. Not only the revival of Austrian economics, but recent theoretical and empirically work generally have highlighted a number of the problems analyzed by Fetter. His work is thus as relevant today as when it was written.