Joseph A. Schumpeter, “Kreditpolitik und Wirtschaftslage” (1925)

Schumpeter’s “Kreditpolitik und Wirtschaftslage” is a short newspaper policy essay. Written for the Berliner Börsen-Courier at the end of 1925, it addresses post-inflation Germany: taxation, discount policy, the gold relation, unemployment, production, and the possible uses of central-bank power after stabilization. It begins from the anti-inflation orthodoxy—raise taxes and tighten credit—but turns it into an argument for selective, development-oriented credit policy.

Schumpeter first accepts that taxation can replace inflation as a way of extracting purchasing power from the economy, but he refuses to make budget balance the sole criterion of success. Fiscal pressure can become economically disabling.

Fraglich kann dabei nur das Befinden des Patienten sein.

English translation: The only question in doubt can be the patient's condition.

The same judgment governs his treatment of credit restriction. He grants that a stable currency cannot rest on a bank rate permanently below the market rate, and that credit restraint was necessary to stop tax payments and cost burdens from being financed through new credit and higher prices. But necessity is not the same as success.

Dennoch war diese Politik kein voller Erfolg.

English translation: Nevertheless, this policy was not a full success.

The reason is historical and structural. Tight money presupposes relatively normal money markets, exchange rates, trade flows, and production. Germany after war, inflation, and stabilization did not satisfy these assumptions. Credit restriction therefore risked disabling production, increasing emergency loans, and worsening unemployment relief burdens rather than simply lowering prices.

Die Größe der Opfer, die diese Politik gefordert hat, und das Ausbleiben ihres vollen Erfolges erklären sich offenbar daraus, daß die Störungen im Wirtschaftsleben, welche die Kriegs- und die Nachkriegszeit gebracht haben, viel zu groß und noch viel zu wenig überwunden sind, als daß eine solche Politik ihre normalen Wirkungen zeitigen könnte.

English translation: The magnitude of the sacrifices this policy has demanded, and the absence of its full success, evidently arise from the fact that the disturbances in economic life brought about by the war and the post-war period are far too great and still far too little overcome for such a policy to produce its normal effects.

The essay’s central conceptual move is to detach credit policy from the narrow role of “servant of the currency.” Keynes has raised the broader question, but Schumpeter notes that Germany, having chosen a fixed gold relation, cannot simply reopen the standard without destroying credit. The practical question is what can be done within that constraint. His answer rests on the bank-credit theory of money and development:

Wir wissen heute, was frühere Zeiten nicht wußten und nicht wissen wollten, daß Geldwert, Preisniveau und Wirtschaftslage, vor allem aber das Tempo der wirtschaftlichen Entwicklung nach der monetären Seite hin, nicht starr und unabänderlich durch Goldmengen und Sparsummen bestimmt werden, sondern vom Betrag der durch den Bankkredit geschaffenen Zahlungsmittel abhängen, daher innerhalb weiter Grenzen willkürlich regulierbar sind.

English translation: Today we know what earlier ages did not know and did not wish to know: that the value of money, the price level and the economic situation—and above all the tempo of economic development on its monetary side—are not rigidly and immutably determined by quantities of gold and sums of savings, but depend on the amount of means of payment created by bank credit, and are therefore regulable at will within wide limits.

This is the Schumpeterian core of the article. Bank credit is not a passive veil over real saving; under central-bank dominance it becomes an instrument of economic therapy. Schumpeter stresses the dangers—politicization, lack of expertise, short horizons—but insists that the instrument exists and must be understood.

Man kann damit Konjunkturen schaffen und verhindern, Produktionszweige fördern und drosseln, Richtung und Temperatur der wirtschaftlichen Entwicklung diktieren.

English translation: By this means one can create and prevent booms, promote and throttle branches of production, dictate the direction and temperature of economic development.

The practical program is not indiscriminate expansion. Even if total credit cannot rise, banks can differentiate credit toward firms and branches where modest sums produce durable productive gains. Support credits may be unavoidable, but they often preserve weakness. Credit should instead go to enterprises with technical and commercial futures, especially where it can also reduce unemployment without endangering the currency.

Der Starke, oder derjenige, der stark werden kann, muß gestärkt, nicht aber der Schwache gepflegt werden. So verlangt es die Zukunft unseres Volkes.

English translation: The strong, or he who can become strong, must be strengthened; the weak must not be nursed. So the future of our people demands.

The article’s relevance lies in this hard-edged synthesis of stabilization and development. Schumpeter rejects both inflationary looseness and deflationary paralysis. Productive credit, if tied to increased output or improved productive apparatus, need not be currency-destructive, because the resulting goods can offset the additional means of payment. The conclusion links selective credit to price reductions, tax relief, and reform of the tax system.

Aber geschickte Kreditpolitik und Reduktion der Steuerlast auf ein Maß, das mit dem Funktionieren der treibenden Kräfte der heutigen Volkswirtschaft vereinbar ist – zum Teil auch ein rationeller Umbau des Steuersystems –, das würde helfen, und nicht nur für den Augenblick.

English translation: But a skillful credit policy and a reduction of the tax burden to a level compatible with the functioning of the driving forces of the modern economy—together in part with a rational restructuring of the tax system—that would help, and not merely for the moment.