Hayek’s position with respect to interest also grew out of Wicksell’s work. In his two major contributions to business cycles, i.e., Monetary Theory and the Trade Cycle (1929) and Prices and Production (1931), he distinguishes between two rates: the monetary rate of interest and the equilibrium rate. (21) When reconstructing Wicksell’s argument, Hayek writes that if there were no money, the “natural” rate of interest, which he prefers to call the “equilibrium” rate of interest, would be such as to make the in natural demand for capital (i.e., investment) coincide with the in natura supply of capital (i.e., savings). By contrast, in a money economy the monetary rate may differ from the equilibrium one, because demand and supply do not meet in their “natural” form, but in the form of money, “the quantity of which available for capital purposes may be arbitrarily changed by the banks” ( 1935:23). Thus the possible divergence between the two rates is due to the existence of a banking syst em that may interfere with the working of the capital or loanable funds market, since banks can create new means of payment that circulate within the economy by granting credit to entrepreneurs. Therefore, provided all banks are induced to take concerted action with one another, the banking system as a whole can modify the conditions under which saving and investment adjust each other. In other words, disequilibria only becomes a possibility when the organization of credit disturbs the adjustment process towards equilibrium between supply and demand.
As is now obvious, Hayek and Schumpeter were both critical of the price stabilization proposal, yet for different reasons. Clearly, Hayek attacks this prescription from the following angle: a stable instead of a falling trend of the price level in a growing economy causes an artificial increase of the total money stream, leading to an inevitable crisis. (46) For Schumpeter, a policy that stabilizes prices inhibits economic development by preventing the process of banks’ credit creation to have its full effects, of providing the innovators with the required means of payment in order to implement their productive activity.
From Agnes Festre, “Money, banking and dynamics: two Wicksellian routes from Mises to Hayek and Schumpeter,” Am. J. of Economics & Sociology. Vol. 61, No. 2. (April, 2002), pp. 439-48.