Joseph A. Schumpeter · 1915
Schumpeter’s 1915 review of Karl Schlesinger’s 1914 book presents monetary theory as a field whose analytical advances have scarcely penetrated practical debate. Against the public prominence of Knapp’s school, he emphasizes a transformation associated above all with Walras. Schlesinger’s achievement is both to recognize this theoretical inheritance and to extend it independently toward problems of money and banking.
Es war, wie die Dinge lagen, schon ein großes Verdienst, die Bedeutung der Walrasschen Gedanken zu erkennen, ein noch größeres, kräftig und originell auf ihnen weiterzubauen.
English translation: As matters stood, it was already a great merit to recognize the significance of Walras's ideas, and a still greater one to build upon them vigorously and originally.
This endorsement establishes the review’s evaluative framework: Schlesinger matters as an original theorist, not simply as an expositor. Schumpeter follows the book’s progression from economic equilibrium through monetary valuation to deposit banking and central-bank policy. Its compression is itself noteworthy:
Der Autor befleißigt sich lakonischer Kürze: in den 176 Seiten des Buches stecken reichlich drei- oder vierhundert.
English translation: The author applies himself to a laconic brevity: in the 176 pages of the book there are contained a good three or four hundred.
The first two chapters construct a theory of economic circulation, determining prices for consumption goods, productive services, capital goods, and land. Marginal utility and marginal productivity enter through equilibrium quantities without extensive psychological exposition. Schumpeter’s chief reservation concerns the combination of productivity and abstinence in explaining interest. He nevertheless credits Schlesinger with recognizing that abstinence alone cannot explain interest and that the combined explanation does not entirely exclude an interest-free stationary economy.
Productive resources committed to particular enterprises, together with uncertainty in economic judgment, open another line of inquiry. Schumpeter distinguishes explaining the familiar seven-to-nine-year cycle from analyzing relations among the profitability of different enterprises’ productive assets. He particularly values Schlesinger’s treatment of the latter. Discrepancies between entrepreneurial valuations and realized outcomes offer an approach to entrepreneurial profit without constituting a complete theory of cyclical fluctuations.
The third chapter introduces money, concentrating on purchasing power and its relation to the discount rate. Schlesinger first derives the quantity-theory theorem under restrictive assumptions about the timing of receipts and payments. Relaxing these assumptions permits investigation of cash reserves, clearing, uneven transactions, uncertainty, and interest. For Schumpeter, this procedure replaces general statements about money supply and circulation velocity with an analysis of the mechanisms governing reserve demand. Schlesinger thereby advances beyond the generalities at which other monetary theorists, including Irving Fisher, too often stop.
The final two chapters examine deposit banking. Schlesinger separates components of deposits, differentiates transaction balances from reserve holdings, and analyzes the expansion of bank money through successive lending and redepositing. Schumpeter accepts that lending customers’ funds creates money, increases its supply on the money market, and immediately tends to lower the discount rate and raise prices. He is more cautious about lasting consequences for real interest and purchasing power.
Schlesinger’s claims that credit expansion disturbs purchasing power without moving its gravitational center, and that an economy without a central bank faces frequent severe monetary crises, depend on restrictive assumptions. Schumpeter also questions the strength attributed to connections among competing banks’ reserves and between interest-rate increases and stagnation in sales.
The discussion consequently moves toward central banking and international monetary relations. Schumpeter welcomes the challenge to conventional arguments about national gold reserves but emphasizes restraining inflation and deceptive prosperity rather than preserving gold alone. His final policy disagreement concerns Schlesinger’s related wartime article: rejecting interest-rate increases, despite their drawbacks, would remove a remaining check on anticipated postwar inflation.
These reservations about concrete conditions and policy instruments do not overturn the review’s unusually strong judgment of the book’s theoretical accomplishment.
Ganz abgesehen von der Tatsache, daß es sich um eine Erstlingsarbeit handelt, liegt zweifellos eine ungewöhnliche Leistung vor und eine Talentprobe, wie man nicht oft einer begegnet.
English translation: Quite apart from the fact that this is a first work, there lies before us without doubt an unusual achievement and a proof of talent such as one does not often encounter.
Schumpeter thus combines substantive criticism with recognition of an exceptional analytical contribution. Schlesinger extends Walrasian theory by connecting equilibrium, uncertainty, cash holding, and bank credit, while leaving important questions about interest and monetary stabilization open to dispute.
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