Joseph A. Schumpeter, “Kreditkontrolle” (1925)

“Kreditkontrolle” is a single-author academic article in four sections, an intervention in interwar debates over central banking, the return to gold, Keynesian-Hawtreyan credit reform, and the trade cycle. Schumpeter’s thesis is double: inherited central-bank rules are not abstract dogma but evolved instruments of capitalist life; yet the reformers’ critique of gold and blind banking practice is theoretically serious. The question is whether 1925 requires replacing regulated market mechanisms with conscious macroeconomic management.

Part I follows the Bank of England from privileged private bank to bankers’ bank. Its policy, Schumpeter argues, arose less from doctrine than from reserve needs, convertibility, international payments, and the discount rate’s power to influence credit. This older regime can correct small, temporary disturbances, but not structural disorder, panic, revolution, or national impoverishment.

Angesichts mancher sehr hoch gespannter Erwartungen bezüglich der Leistungsfähigkeit bloßer Diskontpolitik, ist es nicht überflüssig hier vor Überschätzungen zu warnen.

English translation: In view of certain very highly pitched expectations regarding the efficacy of mere discount policy, it is not superfluous to warn here against overestimation.

Part II applies that caution to gold. Schumpeter accepts that money need not be metallic and that gold production can disturb prices or transmit crises internationally. His defense of gold is therefore practical, not devotional.

Nochmals sei betont, daß die Goldwährung hier nicht als ein Ideal hingestellt, daß sie hier überhaupt nicht prinzipiell verteidigt wird.

English translation: Once again let it be emphasized that the gold standard is not being presented here as an ideal, and is indeed not defended here on principle at all.

He separates return to gold from deflation and insists that stabilization should occur at a realistic equilibrium exchange rate. Britain’s 1925 return to prewar parity is risky because exchange parity and purchasing-power parity have diverged. Yet the feared American gold glut is not, for him, an autonomous monetary disaster: it reflects war-made shifts in wealth and payments and should be eased by U.S. capital exports, imports, and creditor status. Gold is second-best, but it can restore international adjustment after wartime controls.

Part III is the theoretical core. Against Keynes and Hawtrey, Schumpeter denies that the cycle is merely a monetary malfunction to be cured by price-level stabilization. Development means entrepreneurs undertake new combinations before they possess the proceeds of completed production; banks supply purchasing power in advance.

Das Interessante am Verhalten der Bank ist vielmehr, daß sie in einem solchen Fall Zahlungsmittel neu schafft, die vorher nicht existierten ¹⁶).

English translation: What is interesting about the bank's conduct is rather that in such a case it newly creates means of payment that did not previously exist ¹⁶).

Boom inflation expresses a temporary excess of new purchasing power over current goods; depression accompanies new output, repayment, liquidation, and the diffusion of gains. The reformers reverse cause and effect when they make price instability the root of the cycle. Credit expansion is dangerous, but it is also capitalism’s mechanism for reallocating productive forces toward innovation.

Den Wechsel von Prosperität und Depression ein rein monetäres Phänomen zu nennen, ist also einfach falsch, wenn damit gemeint ist, daß dieser Wechsel gar keine volkswirtschaftliche Funktion und seine Ursache lediglich in den Mängeln unseres Kreditsystems habe.

English translation: To call the alternation of prosperity and depression a purely monetary phenomenon is therefore simply wrong, if what is meant is that this alternation has no economic function whatsoever and that its cause lies solely in the defects of our credit system.

Schumpeter does not romanticize crises: unemployment, arbitrary financial survival, and the abrupt emergency-brake effect of convertibility are real costs. But price-level stability is no absolute norm; some price movements perform functions in capitalist development.

So wenig die Stabilität der Wechselkurse unter allen Umständen das absolute Ideal ist, so wenig ist das die Stabilität des Preisniveaus.

English translation: Just as the stability of exchange rates is not under all circumstances the absolute ideal, neither is the stability of the price level.

Part IV shows why Keynes’s program matters beyond money. To stabilize employment and prices through credit, a central authority would need knowledge of industries, investment plans, labor markets, and national priorities, and would have to discriminate among sectors. Monetary policy would become economic governance.

So wird denn auf diese Art ein zugleich feines und wirksames Instrument der Planwirtschaft geschmiedet und eine noch viel feinere Gebrauchsanweisung hinzugefügt.

English translation: In this way there is forged an instrument of planned economy at once subtle and effective, and an even more subtle set of instructions for its use is added.

Schumpeter respects Keynes’s originality while warning that managed credit changes capitalism’s institutional basis. Once authorities decide which industries should expand, endure, or contract, money ceases to be an autonomous policy field and becomes an instrument of planning. Hence the closing identification:

Und von diesem Standpunkt versteht man dann diese ganze Gedankenrichtung und besonders den Keynesplan als sehr ernstzunehmende Vorarbeit für einen ernstzunehmenden Sozialismus.

English translation: And from this standpoint one then understands this entire line of thought, and especially the Keynes plan, as very serious preparatory work for a serious socialism.

The article’s lasting relevance lies in its fusion of monetary theory and development theory. It defends gold only for a specific postwar conjuncture, rejects price stabilization as supreme norm, and presents bank credit as the monetary form of innovation. Central banking is not a neutral control panel but the site where capitalism, crisis, and planning meet.