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• Preface
• Foreword
• Part One: Setting the Stage
• 1: Overview
• 2: The Evolution of a Free Banking System
• Part Two: Free Banking and Monetary Equilibrium
• 3: Credit Expansion With Constant Money Demand
• 4: Monetary Equilibrium
• 5: Changes In the Demand For Inside Money
• 6: Economic Reserve Requirements
• Part Three: Free Banking Versus Central Banking
• 7: The Dilemma of Central Banking
• 8: The Supply of Currency
• 9: Stability and Efficiency
• 10: Miscellaneous Criticisms of Free Banking
• 11: Free Banking and Monetary Reform
• Conclusion
• Notes

4

Monetary Equilibrium

Having seen the limits to expansion by free banks when the demand for money is constant, it is logical to ask what happens to these banks when the demand for money changes. In preparation for this we must define concepts like the demand for money and monetary equilibrium. Not to do so would invite unnecessary misunderstanding, since those concepts have various meanings in different contexts. The particular definitions provided in this chapter, though hardly original, are the ones most useful for studying the implications of free banking. The chapter also draws attention to some consequences of monetary disequilibrium, showing that a banking system’s ability or inability to preserve monetary equilibrium is extremely important.

The Demand for Money

“The demand for money” is a very slippery expression. Financial writers, and sometimes economists as well, have a habit of using this expression as a synonym for the demand for bank credit or loanable funds. Consequently they refer to particular interest rates as “the price of money” and call the short-term credit market “the money market.” This use of terms is highly misleading. Bank borrowers generally acquire money balances only to spend them immediately on goods and services. The demand for money, properly understood, refers to the desire to hold money as part of a financial portfolio. A bank borrower contributes no more to the demand for money than a ticket agent contributes to the demand for plays and concerts; only holders of money or actual occupants of concert seats contribute to demand.

Thus to be useful the expression demand for money must refer to peoples’ desire to hold money balances and not just to the fact that they agree to receive money in exchange for other goods and services, including later-dated claims to money.1 It is only when people who receive money income elect to hold it rather than spend it on other assets or consumer goods that they may properly be said to have a demand for money. Edwin Cannan (1921) made this point forcefully years ago:

Following a suggestion by Alex McLeod (1984, 68), it should also be noted that, although transactions balances are less obviously “held” than are speculative and precautionary balances, they are still, strictly speaking, part of the demand for money-to-hold. The demand for them is distinct from demand for money-to-spend insofar as the latter kind of demand, if accommodated by an increase in the nominal quantity of money, would lead to an increase in total spending and nominal income. It follows that, although all money in existence is at every moment held by someone, this does not mean that the demand for it is necessarily equal to the existing stock given the existing purchasing power of the money unit. When an excess supply of money exists, people will spend their surplus holdings. Money payments will increase, and so will the flow of money income. If the nominal supply of money and the extent of real output do not independently change, the increased spending will cause prices to rise in the long run. This will reduce the real value of the existing money stock, bringing it in line with the real demand for money balances. If the nominal supply of money is deficient the opposite adjustments occur. Therefore, although long-run changes in the value of money equate the demand for money with its supply, when considering the short run it is entirely valid to speak of an excess demand for or an excess supply of money. Moreover, since changes in the value of money fully eliminate excess supply or demand only in the long run (because it takes time for changes in spending to influence prices in a general way), short-run corrections in the real money supply require changes in the nominal quantity of money.

A demand may exist for either of two kinds of money: “base” or commodity money—the ultimate money of redemption—and inside money (bank notes and demand deposits) redeemable in base money. In a mature free banking system, commodity money does not circulate, its place being taken entirely by inside money. Such being the case, the unqualified expression “demand for money” used in this study will henceforth mean demand for inside money. For example, an increase in the public’s demand for money means an increase in the aggregate demand to hold bank liabilities. Unless otherwise stated, a change in demand will refer to an autonomous change in both real and nominal demand, meaning a change not itself induced by any exogenous change in aggregate nominal income.2

The Market for Inside Money and the Market for Loanable Funds

As used here “monetary equilibrium” will mean the state of affairs that prevails when there is neither an excess demand for money nor an excess supply of it at the existing level of prices. When a change in the (nominal) supply of money is demand accommodating—that is, when it corrects what would otherwise be a short-run excess demand or excess supply—the change will be called “warranted” because it maintains monetary equilibrium.

This view of monetary equilibrium is appropriate so long as matters are considered from the perspective of the market for money balances. But it is also possible to define monetary equilibrium in terms of conditions in the market for bank credit or loanable funds. Though these two views of monetary equilibrium differ, they do not conflict. One defines equilibrium in terms of a stock, the other in terms of the flow from which the stock is derived. When a change in the demand for (inside) money warrants a change in its supply (in order to prevent excess demand or excess supply in the short run), the adjustment must occur by means of a change in the amount of funds lent by the banking system.

An important question, one particularly controversial among monetary economists in the middle of this century, arises at this point. Are adjustments in the supply of loanable funds, meant to preserve monetary equilibrium, also consistent with the equality of voluntary savings and investment? The answer is yes, they are. The aggregate demand to hold balances of inside money is a reflection of the public’s willingness to supply loanable funds through the banks whose liabilities are held. To hold inside money is to engage in voluntary saving. As George Clayton notes, whoever elects to hold bank liabilities received in exchange for goods or services “is abstaining from the consumption of goods and services to which he is entitled. Such saving by holding money embraces not merely the hoarding of money for fairly long periods by particular individuals but also the collective effect of the holding of money for quite short periods by a succession of individuals.”3

Whenever a bank expands its liabilities in the process of making new loans and investments, it is the holders of the liabilities who are the ultimate lenders of credit, and what they lend are the real resources they could acquire if, instead of holding money, they spent it.4 When the expansion or contraction of bank liabilities proceeds in such a way as to be at all times in agreement with changing demands for inside money, the quantity of real capital funds supplied to borrowers by the banks is equal to the quantity voluntarily offered to the banks by the public. Under these conditions, banks are simply intermediaries of loanable funds.

Thus a direct connection exists between the conditions for equilibrium in the market for balances of inside money and those for equilibrium in the market for loanable funds. An increase in the demand for money warrants an increase in bank loans and investments. A decrease in the demand for money warrants a reduction in bank loans and investments. To put the matter in Wicksell’s terms, changes in the supply of loanable funds that accord with changes in the demand for inside money also ensure that the money rate of interest is kept equal to the “natural rate.”

Any departure from monetary equilibrium has disruptive consequences. Consider what happens when the supply of money fails to increase in response to an increase in demand for money on the part of wage earners. The wage earners attempt to increase their money balances by reducing their purchases of consumer products, but there is no offsetting increase in demand for products due to increased, bank-financed expenditures. Therefore, the reduction in demand leads to an accumulation of goods inventories. Businesses’ nominal revenues become deficient relative to outlays for factors of production—the difference representing money that wage earners have withdrawn from circulation. Since each entrepreneur notices a deficiency of his own revenues only, without perceiving it as a mere prelude to a general fall in prices including factor prices, he views the falling off of demand for his product as symbolizing (at least in part) a lasting decline in the profitability of his particular line of business. If all entrepreneurs reduce their output, the result is a general downturn, which ends only once a general fall in prices raises the real supply of money to its desired level.5

As was said previously, such a crisis can occur only if banks fail to respond adequately to a general increase in the demand for inside money. The crisis involves a deflationary Wicksellian process during which bank rates of interest are temporarily above their natural level. This is opposite the inflationary Wicksellian process, with bank rates below the equilibrium or natural rate of interest, that economists of the Austrian school traditionally emphasize.6 Nevertheless deflation (resulting from unaccommodated excess demand for inside money) has been an important factor in historical business cycles, and a banking system that promotes deflation disrupts economic activity just as surely as one that promotes inflation, although the exact nature of the disruption differs in each case.

Opinions of Other Writers

The view of monetary equilibrium presented here should not be controversial, and has been upheld by many economists. To cite but a few examples, it has been put forth by J. G. Koopmans (1933), Gottfried Haberler (1931), Fritz Machlup (1940), Jacques Reuff (1953), W. Zawadski (1937), and (in a qualified way) Friedrich A. Hayek (1935, [1933] 1975b and 1939b, 164ff), among continental European theorists. Most of these writers link the concept of monetary equilibrium to that of “neutral” money.7 According to Koopmans (1933, 257), who has developed this approach most thoroughly, monetary policy should have the goal of “compensating for any deflation, due to hoarding, by creating a corresponding amount of new money, or of compensating for any inflation, due to dishoarding, by destroying money in like measure.” When this goal is achieved “the money outlay stream should remain constant.” In other words, money is neutral as long as Say’s Law remains valid (that is, as long as excess demand for money is zero). Conversely, monetary disequilibrium occurs and money is non-neutral whenever Say’s Law is violated:

Machlup has the same view in mind when he writes (1940, 291 and 184-89) that “credit inflation is ‘healthy’ if it compensates for deflation through current net hoarding, or for an increase in the number of cash balances or in the number of ‘stopping stations’ in the money flow” and that credit contraction is healthy if it compensates for dishoarding (“a decrease in idle balances”).

Hayek is more equivocal in his suggestions concerning an ideal monetary policy. At one point in Prices and Production he recommends that the money supply be kept constant.8 Yet he follows this with a statement acknowledging the need to make adjustments in the money supply in response to changes in the “co-efficient of money transactions.” In still another passage he mentions the need to accommodate changes in the “average velocity of circulation” of money, noting that “any change in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral towards prices.”9 Finally, in his most explicit statement concerning the importance of adjusting the nominal supply of money, he says (1939b, 165) that banks must “create additional credits for investment purposes to the same extent that holders of deposits have ceased to use them for current expenditure.” This serves to avoid the “undesirable deflationary consequences” of unaccommodated saving.

Hayek’s equivocation is due, on one hand, to his view that desirable adjustments in the money supply cannot be formulated into a “language of practice” (1935, 108) which, of course, does not argue for rejecting them as a theoretical ideal, and on the other to his notion that equilibrium in the market for “real capital” can be preserved only if banks do not issue unbacked (fiduciary) media (Hayek 1935, 23). The latter view contradicts our claim in the previous section: it ignores the fact that changes in the desire to hold inside money reflect the public’s willingness to lend “real capital” to and through the banking system. More will be said in defense of this criticism later on.

Allowing for the ambivalent views of Hayek, all of the continental writers cited have notions of monetary equilibrium similar to the one adopted in the present work. The same may be said concerning views on monetary equilibrium entertained by many well-known British theorists, including Dennis Robertson (1926, and [1957] 1964, chap. 5, sect. 4), E. F. M. Durbin (1933), J. E. Meade (1933), A. G. B. Fisher (1935), Ralph Hawtrey (1951), and A. C. Pigou (1933). Typically these writers express the notion in question in the form of the rule that the supply of money multiplied by its income velocity of circulation should remain constant. According to Durbin (1933, 187) such a policy would “avoid income deflation on the one hand and a profit inflation on the other.”10

J. E. Meade (1933, 8) argues along the same lines that the total increase in the supply of money in a given period of time should equal the net increase in the demand for money during the same period, with bank investments adjusted correspondingly. Besides preventing changes in final (nominal) income this policy would assure an equilibrium interest rate.

Robertson, in Banking Policy and the Price Level, states his views on the requirements for monetary equilibrium in very idiosyncratic language.11 Nevertheless he also believes that an increased general desire to hoard should be offset through additional bank lending:

Most of these authors explicitly distinguish the goal of accommodating changes in the demand for money through changes in nominal supply from that of stabilizing an index of prices. The two goals differ because general price movements may be caused by changes in productive efficiency, and not just by changes in the demand for money balances relative to nominal income. Offsetting price changes due to changes in productive efficiency would not preserve monetary equilibrium.13 The reasons for this will be discussed in chapter 7. For the time being it is only necessary to note that the procedures for maintaining monetary equilibrium discussed here should not be viewed as leading to price-level stabilization.

Many past and present American monetarists would probably agree with the theoretical views of the European writers discussed above. Their preference for other policies—for price-level stabilization or a fixed money growth rate rule—stems, not from any theoretical disagreement, but from their view that these policies provide the best achievable approximation to the ideal of a truly demand-elastic money supply.14 Other American writers have explicitly defended the monetary equilibrium ideal, calling for the adjustment of nominal money supply to avoid monetary disequilibrium. The most important of these theorists was Clark Warburton (1981), who noted the popularity of what he termed the “monetary disequilibrium” approach in American writings of the early decades of the 20th century. In the 1960s the same approach was “rediscovered” by Robert Clower (1965, 1967) and Axel Leijonhufvud (1968), who also interpreted Keynes as a monetary disequilibrium theorist. Lately Leland Yeager, who has been heavily influenced by Warburton, has defended the monetary equilibrium-disequilibrium approach against the “equilibrium always” theorizing of the new-classical school (Yeager 1986).

Finally, some remarks should be made about Keynes and Keynesian theory. It is well known that consumers’ propensity to hoard and “liquidity preference,” in conjunction with downward inflexibility of money wages, play a crucial role in Keynesian explanations of depression and unemployment. In general, Keynes believed, an elastic supply of inside money should prevent hoarding and liquidity preference from having any negative influence on aggregate demand: increased investment (financed by the banking system) should follow every net increase in aggregate money demand.15 This view is quite consistent with the other views on monetary equilibrium cited here. Keynesian analysis, however, came to attach great importance to the possibility of a liquidity trap, a possibility which Keynes himself treated as an extreme, limiting case. The presence of a liquidity trap (which involves an infinitely interest-elastic demand for money balances) renders monetary expansion through conventional banking channels impotent as a spur to investment. It therefore necessitates resort to increased government spending in order to augment aggregate demand. Also, some Keynesians (and Keynes himself may be included here) suggest that employment should not be considered “full” so long as it can be increased by an expansionary policy, even if the policy leads to an increase in money wages.16 This view seems to attach overriding importance to short-run reductions in unemployment without acknowledging the undesirable consequences, both in the long and in the short run, of monetary disequilibrium.17

Despite these important differences between Keynesian analysis and the views of other monetary-equilibrium theorists, many Keynesians might accept the prescription for monetary equilibrium offered in this chapter. Those who do not regard the liquidity trap as an important factual possibility would probably accept it as entirely adequate. Some might wish to supplement it with government spending programs, of course. Those who accept the possibility of a permanent or semi-permanent inflation-unemployment trade off, or otherwise think that the benefits of inflation generally exceed the costs, will likely reject it in favor of outright inflation.

These views of other writers are not cited as evidence of the correctness of any theory. Their purpose is merely to show that the concept of monetary equilibrium adopted in this study is neither new nor controversial. The concept is applied here to the appraisal of free banking. Any originality lies in this appraisal, rather than in the criteria on which it is based.

Transfer Credit, Created Credit, and Forced Savings

The difference between warranted and unwarranted additions to the stock of inside money is usefully illuminated by a distinction between “transfer credit” and “created credit.”18 Transfer credit is credit granted by banks in recognition of people’s desire to abstain from spending by holding balances of inside money.19 In contrast, created credit is granted independently of any voluntary abstinence from spending by holders of money balances.20 When the demand for money falls, its nominal supply must also be reduced or else some transfer credit becomes created credit.

Obviously, created credit can exist only in the short run: a spurt of credit creation prompts an adjustment of prices which eventually restores monetary equilibrium, causing all outstanding credit to conform to the aggregate demand for money. In equilibrium all credit is transfer credit because, by our definition of monetary equilibrium, nobody holds inside money balances in excess of the balances he desires to hold. Thus any reference to created credit or to credit creation means a temporary excess supply of money due to excessive bank lending or investment.

Credit creation, Fritz Machlup notes (1940, 183), “places money at the disposal of the market . . . without any corresponding release of productive factors . . . due to voluntary refraining from consumption.” Unlike operations involving credit transfer it “makes it possible for investment to take place in the absence of voluntary savings.” Such investment “gives rise to the development of disproportionalities in the production process.”

Whereas voluntary savings support transfer credit, real resources invested by means of credit creation represent “forced savings.” The notion of forced savings, which Hayek (1939a, 183-97) traces back to Bentham, refers to the reduction of real income suffered by earners of fixed money incomes when goods they normally purchase are bid away by recipients of new income having its source in credit creation.21 Malthus’s discussion of this phenomenon, which appeared in an 1811 issue of the Edinburgh Review, assumes a case where credit is created exclusively in the form of bank notes:

This artificial diversion of resources to new industries does not continue once prices adjust to eliminate the excess supply of money:

What begins, in other words, as both a nominal and a real increase in loanable funds becomes, after a general adjustment of prices, a nominal increase only, which cannot support the needs of capital maintenance and project completion for both new (post-expansion) and old (pre-expansion) employers of credit. Marginal borrowers will be excluded from the market for loanable funds, and their investments may have to be liquidated, resulting in a slump.

The point of this discussion is to show how forced savings and its consequences are bound up with created credit. They arise whenever the granting of credit gives rise to bank liabilities in excess of the demand for balances of inside money. They do not arise insofar as credit offered by banks consists solely of transfer credit, i.e., of credit the granting of which gives rise to liabilities in amounts consistent with the demand for inside money. The distinction between created credit and transfer credit will be employed later in examining the response of a free banking system to changes in the demand for money.

A contrasting view of bank credit appears in the writings of several of the Austrian economists, especially Ludwig von Mises, who give the phenomenon of forced savings a prominent place in their elaborations of the monetary theory of the business cycle.24 According to these writers any credit expansion or increase in the supply of fiduciary media—inside money not backed 100 percent by reserves of commodity or base money—is unwarranted. “The notion of ‘normal’ credit expansion,” according to Mises, “is absurd”:

In other words, all net expansion of fiduciary credit is a cause of loan-market disequilibrium. It causes bank rates of interest to fall below their “natural” levels, leading to forced savings and other trade-cycle phenomena. This contrasts with the view defended here, which holds that no ill consequences result from the issue of fiduciary media in response to a greater demand for balances of inside money. According to the latter view it is perfectly possible that fiduciary media may arise from loans or investments involving transfer credit only. The expansion of bank liabilities may represent a response to greater abstinence by money holders and, hence, to a fall in the “natural” rate of interest. In this case the fiduciary issue conforms with the “golden rule” referred to by Mises ([1953] 1980, 295). According to this rule, “the credit that [a] bank grants must correspond . . . to the credit that it takes up.”

If some issue of fiduciary media does not involve credit creation, then Mises’s “commodity credit,” which is supposed to be credit not based on fiduciary media (and hence, in Mises’s view, not having trade-cycle consequences), must be a mere fraction of what we are calling transfer credit. In fact precisely what Mises means by commodity credit is not clear. If the phrase refers to bank issues backed 100 percent by reserves of commodity money (which would make it the complement of what Mises calls “fiduciary” or “circulation” credit) then it does not refer to a form of credit at all. A bank holding 100 percent reserves against all of its liabilities is not a credit-granting institution, but a warehouse.

Alternatively, it may be that by commodity credit Mises means credit granted by banks on the basis of time liabilities, as opposed to liabilities redeemable on demand but not backed by 100 percent reserves. But in this case Mises confuses a difference of degree with one of substance. Holders of demand liabilities are granters of credit just as are holders of time liabilities. The only difference is that in the former case the duration of individual loans is unspecified; they are “call loans” that may mature at any time. Bankers must rely upon their entrepreneurial judgment to avoid violating the “golden rule” of not lending more than what is offered to them.26

However one interprets it, Mises’s view that commodity credit is the only sort of credit consistent with loan market equilibrium causes him to be critical of fractional reserve banking.27 This puts him in a league with such writers as P. J. Geyer (1867) and J. L. Tellkampf (1867), who called for the abolition of fiduciary media in Germany, and with Henri Cernuschi (1865) and P. Modeste (1866), who lobbied for its suppression in France.28 Indeed, Mises’s support for free banking is based in part on his agreement with Cernuschi, who (along with Modeste) believed that freedom of note issue would automatically lead to 100 percent reserve banking.29

This difference of opinion has implications for the appraisal of free banking’s consistency with monetary and loan-market equilibrium. If the view defended in this chapter is correct, then it is desirable, not that free banks should prevent all issues of fiduciary media, but rather that they should only prevent issues that are inconsistent with changing demands for money balances. If free banks function this way they are merely transferring credit, not creating it.

Chapter 3 showed why individual free banks cannot create credit as long as the demand for money is constant. But it did not show that they preserve monetary equilibrium when the demand for money is increasing or decreasing. Nor did it show whether credit creation is possible under either static or changing conditions for free banks acting in unison. How free banks respond to changes in demand, and whether there are any adequate restraints on their collective behavior, will be the subjects of the next two chapters.

[1.] See Gilbert (1953, 144).

[2.] In terms of the Cambridge equation of exchange, this means a change in the value of “k.”

[3.] See Clayton (1955, 96) and Brown (1910)

[4.] “In extending any particular individual a loan of a certain sum of money, the lending bank is in effect conferring upon the borrower a claim to a corresponding fraction of the wealth of the community whose real value is matched by the real value of goods which some anonymous depositor [or note holder] has refrained from exercising the right to consume” (Poindexter 1946, 135). Compare Hutt (1952, 237ff).

[5.] Gottfried Haberler (1931, 19) notes that such downturns may be reinforced by the aggravation of debt burdens as a result of the unanticipated fall in prices. This effect may for some time remain “an obstacle to recovery, unless relief is found in the shape of a crop of bankruptcies.”

[6.] See Friedrich A. Hayek ([1933] 1975b and 1935). Also see Ludwig von Mises ([1928] 1978, 59-171). The Austrian economists’ relative lack of attention to the problems of deflation is due in part to their views on the requirements for credit market equilibrium. These are discussed below in this chapter.

[7.] See Friedrich A. Lutz (1969).

[8.] Hayek (1935, 121). See also p. 91, where Hayek writes that “to be neutral . . . the supply of money should be invariable.” Such statements give credence to the view that Hayek advocated a “do nothing” policy for business cycles. See for example Lawrence R. Klein (1966, 51). Of course, given monetary institutions that exist today and those that existed in the 1930s, even a constant money supply is not really the same as a do-nothing policy.

[9.] Hayek (1935, 107). Hayek refers in particular to the need to accommodate changes in the demand for money due to the multiplication of stages of industrial production.

[10.] Durbin’s views were challenged by J. C. Gilbert (1934). This was followed by Durbin’s reply (1935) with a “Rejoinder” from Gilbert and a final note by Durbin (ibid., 223-26).

[11.] The discussion in Money is clearer but at the same time less complete.

[12.] Robertson (1926, 53-54). Robertson’s “Automatic Lacking” has the same meaning as the notion of “forced saving” that I discuss below in this chapter. The expression “cloak-room” banking is a reference to the views of Edwin Cannan, also discussed below.

[13.] Thus, for example, Allan G. B. Fisher writes (1935, 200) that “Apart from increases in population and from changes in the desire of individuals to hold money, economic development which takes the form of increased production per head . . . does not require any increase in the money supply.” See also Robertson (1964, 80-82 and 111-14).

[14.] See for example Lloyd Mints (1950, 129-30).

[15.] Keynes (1936, 167fn) refers specifically to bank deposits. In some respects the arguments in Keynes Treatise on Money (1930) have even more in common with those of other authors cited above.

[16.] See for example Keynes (1936, 16, 303).

[17.] This aspect of Keynesian analysis provoked Jacob Viner to remark prophetically in 1936 that “In a world organized in accordance with Keynes’ specifications there would be a constant race between the printing press and the business agents of the trade unions.” See Viner ([1935] 1960, 49).

[18.] These terms are taken from Machlup (1940, 231-32). A third kind of credit discussed by Machlup (232-37) is credit granted out of “surplus cash balances.” This results from reductions in the public’s demand for base money in circulation. Since base money is assumed not to circulate under free banking (where bank notes supply demands for currency) this type of credit expansion is not relevant to it. On the other hand, it is relevant for the case of central banking if central bank notes or fiat money are used as currency. In this case it may be regarded as a special type of created credit.

[19.] When, on the other hand, the demand for money increases but its supply does not increase correspondingly (i.e., when there is a failure on the part of banks to issue transfer credit) the effect, in Machlup’s terminology, is one of “credit destruction.” The contraction of bank credit in the face of an unchanged demand for money is also an example of this.

[20.] This way of putting it seems preferable to Machlup’s definition (171) of created credit as credit that provides “purchasing power . . . which has not been given up by anybody before hand.” This might be interpreted as including in “created” credit credit granted in response to an increased demand for inside money (which is actually transfer credit), since persons who add to their balances of inside money do not necessarily sacrifice “purchasing power.” What they sacrifice is actual purchasing, which is something different. The trouble lies with the expression “purchasing power,” which sometimes refers to a potential to purchase, and sometimes to the exercise of that potential. Because of its ambiguity I try to avoid using this expression.

[21.] Good, brief discussions of this are Pigou (1933, 227-31), Clayton (1955, 98-101), and Robertson (1964, chap. 5 sect. 3 and 173ff). Pigou uses the expression “forced levies” instead of forced savings. Keynes (1936, 183) called the doctrine of forced savings “one of the worst muddles” of neoclassical economics. But he also associated it with Hayek’s recommendation that the money supply should be kept constant. Keynes might have rejected Hayek’s constant money supply bathwater without throwing out the forced-savings baby. For a critical discussion of the role of forced savings in Keynes’s thought, see Victoria Chick (1983, 236-39).

[22.] Quoted in Hayek (1935, 20).

[23.] Clayton (1955, 99). Compare Machlup (1940, 171). Clayton’s last statement would be accurate only if capital goods were homogeneous, and capital “sunk” as a result of credit creation were not a cause of permanent changes in the structure of production.

[24.] In addition to works of Hayek and Mises cited in the text see Ludwig von Mises ([1953] 1980, 359-67; 1949, 545-73; 1966, chap. 20) and Murray N. Rothbard (1970, 850-63).

[25.] Mises (1949, 439fn). Compare Rothbard (1970, 862), and Hayek (1935, 23).

[26.] Compare Mises (1980, 300-301).

[27.] In the writings of Rothbard (1970, 850-60 and 1962, 115ff) this tendency is complete.

[28.] On these authors see Vera Smith (1936, 91-93 and 110-12).

[29.] See Mises (1966, 443).