Karl Schlesinger’s published conference discussion contribution addresses two connected problems: how bank lending creates deposits, and why credit expansion gives way to contraction. Its structure reflects the limited speaking time of an intervention. Schlesinger first answers objections associated with Röhr’s report and qualifies Hahn’s presentation of credit creation; he then challenges Eucken’s explanation of credit restriction, introduces a distinction among three interest rates, and concludes by proposing a broader conception of the business cycle. Throughout, he seeks explanations grounded in banking practice, delayed adjustments, and entrepreneurial expectations.
Schlesinger opens by defending the usefulness of explaining deposit creation, even where its theoretical formulation is already familiar:
Im Gegensatz zu Herrn Dr. Hahn halte ich es doch nicht für ganz nutzlos, aus Anlaß des Referates des Herrn Dr. Röhr die Möglichkeit der durch Krediteinräumung stattfindenden Schöpfung von Depositen zu motivieren.
English translation: Contrary to Dr. Hahn, I do not consider it entirely pointless, on the occasion of Dr. Röhr’s report, to explain the possibility of deposits being created through the granting of credit.
His disagreement concerns the presentation and practical intelligibility of the theory. English theorists, he suggests, can treat credit creation as self-evident because of widespread cheque use and the corresponding bookkeeping of credit transactions. Hahn’s assumption that only credit money exists and circulates sharply demonstrates the theoretical point, but makes it difficult for practitioners to recognize their own experience. Schlesinger instead provisionally accepts Röhr’s objection that borrowers may withdraw all newly granted credit by cheque the next day. The decisive qualification is that much of this money subsequently returns to banks as deposits.
This argument distinguishes an individual bank’s immediate cash requirements from the subsequent position of banks collectively. Lending presupposes cash that a bank is prepared to release, whether by drawing on the central bank or reducing its cash holdings. Nevertheless, the banking system receives back much of what it has lent. Withdrawal therefore does not by itself disprove deposit creation. Schlesinger proposes replacing the contentious terminology of credit creation with a theory of the interaction between credit granting and deposit formation. This makes the reciprocal process visible without assuming away the liquidity constraints emphasized by bankers.
The second part turns from the possibility of expansion to the explanation of contraction. Schlesinger praises Eucken’s account of expanding credit but disputes the transition from strained bank liquidity to falling credit and prices. Merely refusing additional loans, he argues, does not explain why the existing volume should shrink:
Die Einstellung der frischen Kreditgewährung kann jedoch nur eine Stabilisierung des Preisniveaus und des Kreditvolumens zur Folge haben. Die Frage, warum eine Kreditrestriktion eintreten muß, blieb ungelöst.
English translation: The cessation of new lending can, however, result only in a stabilization of the price level and the volume of credit. The question of why a credit restriction must occur remained unresolved.
Schlesinger supplies two mechanisms for the missing transition. First, banks cannot know precisely what volume of borrowing a given interest rate will produce, and rate changes take weeks or months to work through. Profit-seeking reinforces this uncertainty: during an upswing, banks prefer to err toward lending too much rather than too little. Their rates consequently lag behind those needed to secure the desired credit volume. Subsequent correction requires a rate high enough to force that volume downward. Contraction thus emerges from delayed control and asymmetric incentives, rather than simply from the cessation of expansion.
His second mechanism revises the conceptual framework of interest-rate analysis. Alongside the monetary rate and the real rate corresponding to economic equilibrium, Schlesinger distinguishes a “putative” real rate: the return entrepreneurs believe they can earn by investing borrowed funds. Earlier lending and expectations of price increases can raise that anticipated return, but he places greater weight on lagging costs. Wages, borrowing costs, and royalties need not adjust immediately to higher product prices. Expected profitability can therefore remain above its equilibrium level even after prices have stopped rising and further increases are no longer expected.
Die Stabilität des Kreditvolumens wird aber bedingt durch die Gleichheit zwischen Geldzins und putativem Realzins, und nicht durch die Gleichheit zwischen Geldzins und Gleichgewichtszins.
English translation: The stability of the volume of credit is, however, conditional on equality between the monetary interest rate and the putative real interest rate, and not on equality between the monetary interest rate and the equilibrium interest rate.
This distinction makes entrepreneurs’ perceived returns central to credit demand. As lagging costs catch up with product prices, the putative return falls. Maintaining a stable credit volume then requires banks to lower their rates. Because this adjustment also occurs late, contraction can arise even when lending has never exceeded the banks’ intended volume. Schlesinger therefore offers a mechanism distinct from the correction of an earlier overshoot.
The conclusion extends this reasoning to American and German examples of an expansion in quantities. Schlesinger proposes replacing rising prices as the defining cyclical element with the tension between product prices and inflexible production costs. What matters is their relationship, not price increases considered in isolation:
Dann behalten wir einen einheitlichen Konjunkturbegriff, ohne daß wir den Fall einer bloßen Mengenkonjunktur als eine Ausnahmserscheinung betrachten.
English translation: We then retain a unified concept of the business cycle without treating the case of a purely quantity-based expansion as an exceptional phenomenon.
The contribution’s significance lies in connecting banking-system feedback with uneven adjustment over time. Deposits return after lending, credit responds belatedly to interest rates, and costs catch up with revenues. These temporal discrepancies support Schlesinger’s central conceptual move: explaining credit contraction through changing perceived profitability and delayed bank responses, while accommodating expansions that do not depend on a rising general price level.
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