Michell, Jo

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UWE Bristol Research Repository

Review of Treatise on Money by Joseph A.SchumpeterJo MichellSenior Lecturer in EconomicsUniversity of the West of Englandjo.michell@uwe.ac.ukThe appearance in English translation of Schumpeter’s Treatise on Moneyshould be of considerable interest for scholars of monetary theory. The newlypublished volume may be viewed as the missing link between two of Schum-peter’s other key works: Theory of Economic Development ([1938] 2008)and Business Cycles ([1939] 1964).1 The latter volume, published threeyears after Keynes’ General Theory, was dismissed by Schumpeter’s studentHyman Minsky: “The crisis of capitalism produced a magnificent theoreti-cal response from Keynes; Schumpeter’s was banal.” (Minsky, 1983, p. 1).Minsky’s dissatisfaction sprung from Schumpeter’s increasing devotion tothe Walrasian general equilibrium system—a system Minsky viewed as in-compatible with the central role played by money in Schumpeter’s earlierwork: “. . . Schumpeter got enmeshed in a Walrasian trap that assumed onlyreal things matter, whereas in his original vision, money mattered.” (Min-sky, 1983, p. 15) The current volume is of interest then for the light it shedson Schumpeter’s attempts to reconcile a positive role for money with theWalrasian system.In History of Economic Analysis, Schumpeter (1954) contrasts his “credittheory of money” with the dominant—then, as now—“monetary theory ofcredit”. It is this credit theory of money that Schumpeter attempts to layout in his Treatise. Schumpeter argues that the “essence” of money is notlocated in any of the specific forms in which it is found—whether that bea commodity, a banknote or something else—but in the constantly shiftingcomplex of credit and debit positions which underpin all economic transac-tions. The role of money is to provide a clearing system for this networkof creditors and debtors, allowing claims and counter-claims to cancel eachother out: “the economic meaning of the handover of little pieces of metal1Schumpeter began work on the Treatise in between writing Theory of Economic De-velopment and Business Cycles yet the book remained unfinished even by the time of hisdeath. Some commentators have suggested that the publication of Keynes Treatise onMoney ([1930] 1971) led Schumpeter to abandon the project. Messori (1997) argues thatthis view has been overstated.1fashioned in a certain manner . . . is that it reduces someone’s credit andincreases someone else’s by the same amount” (p. 218). It is argued thatanything that can be used to perform this clearing process performs the roleof money: “what performs the service of money is money” (p. 244).2.Money in its most essential form is thus a pure unit of account, as inWicksell’s (1936) “pure credit” economy. This leads Schumpeter to rejectthe concept of the supply of money: “to speak of a quantity of existingunits of account would make as much sense as to say that a certain numberof units of length exist with which everything that has that length mustbe measured” (p. 244). Without a meaningful measure of the supply ofmoney, the quantity theory of money and all of the associated apparatussurrounding must also be abandoned.Schumpeter’s theory is laid out in a sequence of steps, starting with theanalysis of a socialist economy in which all production is performed by labourand the clearing of value credits (labour) and debits (consumption) is doneby the central planner. The model is gradually expanded to include non-labour inputs and unexpected shifts in consumption demand. The analysisis then shifted to the more complex case of a capitalist system in whicheconomic activity takes place “. . . by the interlocking of individual or ‘sub-group’ motives and initiatives” (p. 133).Schumpeter then goes on to outline a system of accounts based on adivision of the economy into household, firms, banks and the central bank.Although not formalised to the same degree, Schumpeter here essentiallydescribes what are now known as flow-of-funds accounts (see, e.g. Michell,2012). On the basis of these accounts, Schumpeter demonstrates the roleof the banking system as the locus of account settlement, and the centralbank as “the final distillate of all transactions passing through the bankingsystem” (p. 132). It is this settlement role that confers on the bankingsystem the power to create new purchasing power: in issuing new credit,new deposits are created simultaneously.3At this point, however, the text begins to dwindle. Further discussionis provided of the determination of the price level and of the concept of thevelocity of circulation, but at the end of Chapter XII the text simply stopsmid-sentence. The reason for this is that the draft was never completed,and the version published now is an English translation of the manuscriptcompiled by Fritz Karl Mann and published as Schumpeter (1970). It is2Schumpeter is highly critical of the chartalist approach of Knapp ([1905] 1924) as wellas dismissing “monetary reformers”: “A sharply-defined type of social reform monomaniacsees money, it’s reform or abolition, as a social panacea . . . ” (p. 4)3Of the incorrect doctrine that “borrowing by banks is the actual and logical precondi-tion for their lending”, Schumpeter notes, “even today it is still advocated by distinguishedmen of science and practice” (p. 192). The correct doctrine—that loans create deposits—is traced by Schumpeter back beyond even Hartley Withers (1909) to Henry DunningMcleod (1855–56).2thus intriguing that the introductory notes provide so little discussion of theprocess by which the manuscript was compiled—particularly in light of theclaim by Messori (1997) that drafts exist of an additional three chapters.We can therefore still only speculate as to whether Schumpeter succeededin synthesising Wicksellian monetary theory with Walrasian framework—and what his opinion would have been of Woodford’s (2003) more recentattempt at exactly the same synthesis.ReferencesKeynes, J. M. ([1930] 1971). A Treatise on Money: The Pure Theory ofMoney . Macmillan Cambridge University Press.Knapp, G. F. ([1905] 1924). The State Theory of Money . London: Macmil-lan.Mcleod, H. D. (1855–56). Theory and Practice of Banking . London, NewYork and Bombay: Longman’s Green and Co.Messori, M. (1997). The trials and misadventures of schumpeter’s treatiseon money. History of Political Economy , 29 (4), 639–673.Michell, J. (2012). The Flow of Funds. In J. Toporowski, & J. Michell (Eds.)The Handbook of Critical Issues in Finance, (pp. 127–134). Cheltenham:Edward Elgar.Minsky, H. P. (1983). Money and crisis in Schumpeter and Keynes. HymanP. Minsky Archive Paper 334, Levy Economics Institute of Bard College.Schumpeter, J. A. ([1938] 2008). The Theory of Economic Development .New Jersey: Transaction.Schumpeter, J. A. ([1939] 1964). Business Cycles: A Theoretical, Historicaland Statistical Analysis of the Capitalist Process. USA: McGraw-Hill.Schumpeter, J. A. (1954). History of Economic Analysis. London: GeorgeAllen & Unwin.Schumpeter, J. A. (1970). Das Wesen Das Geldes. Go¨ttingen: Vandenhoeck& Ruprecht.Wicksell, K. (1936). Interest and Prices. A Study of the Causes Regulatingthe Value of Money . London: Macmillan. Originally published as Geldzinsund Gu¨terpreise (1898), Jena: Gustav Fischer.Withers, H. (1909). The Meaning of Money . London: Smith, Elder & Co.Woodford, M. (2003). Interest and Prices: Foundations of a Theory ofMonetary Policy . Princeton University Press.3

Book review: 'Treatise on Money' by J. A. Schumpeter

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Book review: 'Treatise on Money' by J. A. Schumpeter

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