Mises: The Distinction Between Commodity and Circulation Credit Is the Key to Understanding Banking Theories

The recent financial crisis has undermined well-established convictions and paradigms within the “mainstream” macroeconomic profession, triggering an intense search for better “analytics”, as the models dominating so far largely turned out insufficient not only in predicting the crisis, but even in explaining it. In searching for new theories attention is sometimes turned to past ideas. One of them are the monetary and business cycle theories of Ludwig von Mises, which were subsequently refined by Friedrich von Hayek and other economists of the Austrian School of Economics (ASE). This big picture overview focuses on explaining the kernel of Austrian Business Cycle Theory (ABCT), which is the distinction between the two types of credit (commodity credit and circulation credit) and how this distinction applies to two types of banking activity: negotiation of credit and issuance of credit, and how these findings are being “rediscovered” in current monetary theory. Mises (1981) emphasized 101 years ago (in 1912 his “Theory of Money and Credit” was first published) that understanding of this distinction is the key to understanding banking theories (p. 297). This lesson has been forgotten for a long time, but now is being rediscovered.

—Marcin Mrowiec, “Rediscovering Mises-Hayek Monetary and Business Cycle Theory in Light of the Current Crisis: Credit Expansion as a Source of Economic Boom and Bust,” Financial Internet Quarterly 9, no. 2 (2013): 64.