Friedrich A. Hayek Attributes the Severity and Duration of the Depression to the World Taking Monetary Policy Advice from the "Stabilizers" (Forerunners of the Monetarists)

Hayek wrote Monetary Theory and the Trade Cycle as an explication of the monetary causes of the business cycle. However, in order to do so, he believed that he had to “save the sound elements in the monetary theories of the trade cycle” by refuting those naïve quantity theorists who posited a simplistic and mechanical connection between the aggregate money supply and the average price level. Thus he took after the price “stabilizers” like Irving Fisher and Gustav Cassel who were the forerunners of the modern monetarists. He identified “the critique of the program of the ‘stabilizers’” as “the central theme of this book.” Nor did Hayek tread lightly in verbalizing his criticisms. He placed the blame for “the exceptional severity and duration of the depression” squarely on central banks’, particularly the Fed’s, “experiment” in “forced credit expansion,” first to stabilize prices in the 1920s, and then to combat the depression in the early 1930s. Hayek defiantly declared:

We must not forget that, for the last six or eight years [up to 1932] monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xix-xx.

Friedrich A. Hayek Defends a Solid and Natural Theory of Capital Against Frank Knight's Mythology of Capital

In the “The Mythology of Capital,” Hayek took on the long and bitter crusade against the Austrian theory of capital waged by Frank Knight, fifteen years Hayek’s senior, an eminent American economist and the founder and leader of the early Chicago School. Hayek fittingly adopted as the introductory quotation of his article a statement by Eugen von Böhm-Bawerk, not coincidentally the greatest economic disputant of the nineteenth century and Hayek’s chief influence in capital theory. Hayek’s quotation of Böhm-Bawerk read, “With every respect for the intellectual qualities of my opponent, I must oppose his doctrine with all possible emphasis, in order to defend a solid and natural theory of capital against a mythology of capital.” This is actually a concise statement of the early Hayek’s general method of attaining theoretical breakthroughs: he would carefully develop the correct theoretical position and then use it as a weapon with which to strike down the fallacies of his opponents. In this article he proceeded to demolish Knight’s claim that capital, once accumulated, was a permanent fund that perpetually and automatically reproduced itself without regard to human purposes and the prevailing conditions of scarcity. Hayek trenchantly characterized Knight’s notion of capital as “a pseudo-concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.”

--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xviii-xix.

Professor Mises Transformed the Wicksellian Theory into an Explanation of the Credit Cycle

Here it is only necessary to point out that Professor Mises has improved the Wicksellian theory by an analysis of the different influences which a money rate of interest different from the equilibrium rate exercises on the prices of consumers’ goods on the one hand, and the prices of producers’ goods on the other. In this way, he has succeeded in transforming the Wicksellian theory into an explanation of the credit cycle which is logically satisfactory.

--Friedrich A. Hayek, "Theories of the Influence of Money on Prices," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 217.

In a Money Economy, the Actual or Money Rate of Interest May Differ from the Equilibrium or Natural Rate

Put concisely,Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital 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.

--Friedrich A. Hayek, "Theories of the Influence of Money on Prices," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 215.

The Automatic Adjustment of Supply and Demand Can Only Be Disturbed When Money Is Introduced into the Economic System

The argument of the foregoing chapters has demonstrated the main reason for the necessity of the monetary approach to trade cycle theory. It arises from the circumstance that the automatic adjustment of supply and demand can only be disturbed when money is introduced into the economic system.

--Friedrich A. Hayek, "Monetary Theories of the Trade Cycle," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 51.