Fritz Machlup, German Monetary Theory, 1905–1933. Howard S. Ellis (1935)

Fritz Machlup’s review evaluates Howard S. Ellis’s survey of German monetary theory as both a history of economic thought and a substantive contribution to monetary analysis. Its central judgment is strongly favorable: Ellis combines unusually thorough scholarship with the capacity to reconstruct, compare, and improve the arguments he studies. Machlup nevertheless identifies significant weaknesses in the treatment of inflation and foreign exchange. The review’s governing distinction is between an exposition that judiciously synthesizes competing theories and one that, in seeking fairness, obscures their unequal explanatory importance.

The opening establishes the book’s relevance to English-speaking economists. Ellis’s command of more than four hundred bibliographical items removes a linguistic obstacle that had allowed monetary theorists to mistake unfamiliarity with German scholarship for intellectual independence. Machlup does not treat research effort as sufficient evidence of merit. What matters is how Ellis uses it: he examines implications, internal inconsistencies, later commentary, and parallel Anglo-American discussions before arriving at criticism and reconstruction. His achievement lies in turning extensive reading into analytical judgment.

The conscientiousness of Ellis' work is admirable.

This praise introduces a methodological argument about the history of economics. Ellis organizes his account around problems rather than successive authors, chronological development, or schools. The relevant question is how German theory formulated and attempted to solve a monetary problem, not simply which doctrines a particular economist advanced. Machlup explicitly endorses that priority:

The history of economic doctrines should emphasize theories more than theorists.

Such organization allows historical exposition to become constructive theory. Comparison and criticism yield a synthesis rather than an inventory of positions. Machlup singles out the chapters on cash balances and velocity as offering better analysis than contemporary textbooks and treatises. The review therefore measures Ellis’s work not merely by its fidelity to earlier writers but also by its ability to clarify unresolved conceptual problems.

Machlup follows the book’s four-part structure, varying his attention according to its strengths and difficulties. Part I, on the nature and value of money, receives the briefest and most skeptical treatment. He characterizes much of the German literature as philosophical speculation about money’s nature, logic, origin, and end. Ellis’s extended engagement with nominalism and metallism is indulgently excused as a consequence of working through this material. The reservation suggests that comprehensive coverage can reproduce the disproportionate attention a literature gives to questions of limited analytical usefulness.

Part II, on the determination of price levels, supplies a more productive example of Ellis’s method. The transactions approach considers monetary transactions over a period; the cash-balance approach considers balances held at a particular moment. Machlup notes European writers’ preference for the latter, in contrast to American literature. Cash balances connect purchasing power and velocity with individual decisions, but Ellis does not make the approaches mutually exclusive. Instead, he reconciles them through a working hypothesis about the balances individuals hold. Machlup regards this amendment as helping resolve difficulties in velocity theory and endorses Ellis’s rejection of circuit velocity as lacking heuristic value. Here, synthesis involves conceptual revision, not merely compromise.

Part III, on price levels and foreign exchange during inflation, occasions the review’s principal criticism. German wartime and postwar inflation produced an abundant, contentious literature on purchasing-power parity and the balance of payments. Machlup finds Ellis’s exposition weakened first by inconsistent uses of an unfavorable balance of payment. Defining the expression in one passage does not prevent ambiguity when it takes on different meanings elsewhere. His objection extends the demand for conceptual discipline that underlies his approval of eliminating circuit velocity.

The second weakness concerns causal reasoning. Ellis repeatedly presents exchange depreciation as causing further inflation, despite recognizing that reversing the claim that inflation causes depreciation involves different meanings of economic causation. For Machlup, awareness of that distinction should have governed the exposition throughout. More importantly, the wish to accommodate both sides of the controversy diminishes the historical weight of their disagreement:

To treat the two conflicting theories as though they were equally right (and equally wrong) is to leave out of consideration the historic background of the issues.

Machlup concedes that purchasing-power-parity theorists overstated unilateral causation from inflation through prices to exchange rates. Yet their emphasis answered monetary authorities who denied responsibility and blamed import needs or speculators. Changes in relative demand for foreign goods might explain slight exchange-rate movements under disrupted currencies; they could not be granted comparable importance when foreign exchanges rose to enormous multiples of their former levels. His criticism thus joins causal precision to historical proportion: theoretical qualifications must not obscure the scale of the phenomenon being explained.

Part IV, the longest section, treats business cycles. Machlup praises Ellis’s careful interpretations of Wicksell, Cassel, Schumpeter, Mises, and Hayek. English translations do not make these discussions redundant, because access to a text does not ensure understanding of its argument. Ellis remains valuable as a commentator, particularly for readers confronting Hayek’s complexity.

Like any good tutor, Ellis raises several points of criticism, but his criticism is always sensible and never hostile.

Machlup expressly extends this judgment to Ellis’s criticisms of his own writings. The closing endorsement therefore rests on a model of scholarship that combines exacting scrutiny with intellectual generosity. His invitation for a comparable study of Italian theory confirms the review’s wider significance: problem-centered histories can expand economists’ access to foreign traditions while advancing theory itself, provided synthesis preserves clarity about concepts, causation, and historical context.