Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

524 Money, Bank Credit, and Economic CyclesThe English economist R.G. Hawtrey, a main exponent ofthe Monetarist School in the early twentieth century, is onewhose position illustrates the theoretical difficulties of monetarism.In his review of Hayek’s book, Prices and Production,which appeared in 1931, Hawtrey expressed his inability tounderstand the book. To comprehend this assertion, one musttake into account that Hayek’s approach presupposes a capitaltheory; but monetarists lack such a theory and thereforefail to grasp how credit expansion affects the productivestructure. 20 Furthermore against all empirical evidence,Hawtrey declares that the first symptom of all depressions isa decline in sales in the sector of final consumer goods, thusoverlooking the fact that a much sharper drop in the price ofcapital goods always comes first. Thus the prices of consumergoods fluctuate relatively little throughout the cycle whencompared to those of capital goods produced in the stages furthestfrom consumption. Moreover, in keeping with his monetaristposition, Hawtrey believes credit expansion gives riseto excess monetary demand which is uniformly distributedamong all goods and services in society. 2120 To be precise, Hawtrey stated that Hayek’s book was “so difficult andobscure that it is impossible to understand.” See R.G. Hawtrey, “Reviewof Hayek’s Prices and Production,” Economica 12 (1932): 119–25. Hawtreywas an officer of the British Treasury and a monetarist who competedwith Keynes in the 1930s for prominence and influence on governmenteconomic policy. Even today the Austrian theory of the cycle continuesto baffle monetarists. Modern monetarists keep repeating Hawtrey’sboutade: for instance, Allan Meltzer, in reference to Hayek’s Prices andProduction, has stated:The book is obscure and incomprehensible. Fortunately for allof us, and for political economy and social science, Hayek didnot spend his life trying to explain what Prices and Productiontried to do. (Allan Meltzer, “Comments on Centi andO’Driscoll,” manuscript presented at the General Meeting ofthe Mont Pèlerin Society, Cannes, France, September 25–30,1994, p. 1)21 R.G. Hawtrey, Capital and Employment (London: Longmans Green,1937), p. 250. Hayek levels penetrating criticism against Hawtrey in hisreview of Hawtrey’s book, Great Depression and the Way Out, in Economica12 (1932): 126–27. That same year Hayek wrote an article (“Das