Interest and Prices: A Study of the Causes Regulating the Value of Money

by Knut Wicksell

INTEREST AND PRICES Geldzins und Guterpreise A STUDY OF THE CAUSES REGULATING THE VALUE OF MONEY By KNUT WiCKSELL Translated from the German by R. F. KAHN With an Introduction by PROFESSOR BERTIL OIIL1N Published on behalf of the Royal Economic Society by MACMILLAN AND CO., LIMITED ST. MARTINS STREET, LONDON 1936 COPYRIGHT PRINTED IN GREAT BRITAIN BY R. R. CLARK, LIMITED, EDINBURGH TRANSLATORS NOTE I IFAVE to express my sincere thanks to Miss Anna Schwarz schild, who read a portion of the manuscript with great care, and to Dr. Eduard Rosenbaum, who helped me out of many difficulties. The Appendix consists of Wicksells last published article, translated from the original Swedish by Mrs H. Norberg. Wicksells Geldzins und Giiterpreise was published at Jena by Gustav Fischer in 1898. Such footnotes as I have found it necessary to insert are enclosed in square brackets. R. F. K. CONTENTS PAGE INTRODUCTION BY PROFESSOR BERTH, OHLIN . . vii AUTHORS PREFACE ...... xxiii CHAPTER 1 INTRODUCTORY ....... 1 CHAPTER 2 PURCHASING POWER or MONEY AND AVERAGE PRICES . 7 CHAPTER 3 RELATIVE PRICES AND MONEY PRICES . . .18 CHAPTER 4 THE SO-CALLED COST OF PRODUCTION THEORY OF MONEY 29 CHAPTER 5 THE QUANTITY THEORY AND ITS OPPONENTS . .38 v vi INTEREST AND PRICES PAQM CHAPTER 6 THE VELOCITY OF CIRCULATION OF MONEY A. A Pure Cash Economy . . . . .51 B. Simple Credit ...... 59 C. An Organised Credit Economy . . . .62 CHAPTER 7 THE RATE OF INTEREST AS REGULATOR OF COMMODITY PRICES A. The Classical Theory and the School of TooJce . . 81 B. Simplest Hypothesis. Variations of the Rate of Interest when the Market Situation Remains otherwise Unaltered 87 CHAPTER 8 THE NATURAL RATE OF INTEREST ON CAPITAL AND THE RATEOF INTEREST ON LOANS . . . .102 CHAPTER 9 SYSTEMATIC EXPOSITION OF THE THEORY . A. The Causes which Determine the Natural Rate of Interest on Capital ....... 122 B. The Use of Money . . . . . .134 CHAPTER 10 INTERNATIONAL PRICE RELATIONSHIPS . . .157 CHAPTER 11 ACTUAL PRICE MOVEMENTS IN THE LIGHT OF THE PRECED ING THEORY . . . . . .165 CHAPTER 12 PRACTICAL PROPOSALS FOR THE STABILISATION OF THE VALUE OF MONEY . . . . . .178 APPENDIX THE MONETARY PROBLEM OF THE SCANDINAVIAN COUN TRIES ........ 197 INTRODUCTION To judge the character and importance of Knut Wicksells monetary doctrines, it is necessary to view them against the background of the monetary controversy of the late nineties. For some decades the organisation of an inter national gold standard had been the outstanding problem. Hardly had this organisation won its victory in the seventies, when its position was threatened by the con tinued fall in wholesale prices. A violent propaganda for bimetallism set in almost everywhere. The character, working, advantages, and disadvantages of this system naturally became the central topic of discussion in the monetary field. The old debate between the currency and the banking schools had died out and the latter un doubtedly held the field. The quantity theory of money was discredited, even in the Anglo-Saxon countries. Most writers agreed that if credits were granted on adequate security in accordance with sound banking principles, the supply of means of payment could not exceed the re quirements of the market. There was no discussion in that connection of the level of bank rate. Two things seem to have caused Wicksell to adopt an entirely different attitude to monetary problems. First ofall, he was a close student and admirer of the English classical school of economists, above all of Ricardo. To Wicksells mathematical mind the quantity theory of money, as presented by Ricardo, made a much stronger appeal than the vague generalisations of the current bank ing discussions, which side-stepped the question Why do prices rise or fall that Wicksell at an early stage came to regard as the main problem of monetary theory...

Genres: Economics, Business

370 pages, Hardcover

Published November 4, 2008

Reviews

[Fábio Miguel Santos · Rating 5 out of 5]

Knut Wicksell's insight of a possible divergence between the contractual and natural rates of interest eventually paved the way for the development of a robust theory of the business cycle in the Misesian branch of the Austrian tradition. However, some technical difficulties emerge from Wicksell's exposition of his cumulative process in chapter IX.

First, the lower order good market clearing only after the market for the factors of production is a specious proposition. Drawing from the work of Fetter (and, implicitly, from Turgot), prices of the factors of production represent the capitalized future stream of the marginal revenue product, which invariably requires a market-clearing price for the final good.
Second, it appears there are two distinct pricing dynamics: a classical mechanism— supply and demand adjust to produce a market-clearing price— between the owners of factors of production and capitalists/dealers and a subsequent fixed-price, predicated on the former, between dealers and entrepreneurs. If one indeed allows for competitive pricing in both moments, entrepreneurs are unable to earn profits in kind, and the cumulative process becomes infeasible.
Finally, Wicksell neglects the impact of "forced savings" arising from an exogenous increase in productivity on capital accumulation, depressing the natural rate of interest without procurement of the regulator of money prices.

IP still holds tremendous importance today for anyone aiming to think more clearly about the purchasing power of money.

[Enrique AB · Rating 4 out of 5]

Un libro pionero en el estudio y análisis sobre los precios y el interés, siendo precursor de las ideas que serían tomadas bajo distintas conclusiones por dos de los más grandes economistas del siglo XX: John Maynard Keynes y Friedrich von Hayek.