This Is the ONLY Sense in Which It is Proper to Speak of a MONETARY Explanation of the Business Cycle

Introducing Prices and Production in 1935, Hayek contrasted the two main pillars of his theory of the cycle,  “the monetary factors which cause the trade cycle” and “the real phenomena which constitute it.” In the following we will keep to this distinction and first concentrate on money as the prime cause of the cycle before turning to the changes in the structure of production as the crucial cyclical mechanism. 

As already noted, Hayek maintains that cycles and crises are possible only in a money economy. The analytical force of this argument draws on the distinction between neutral and non-neutral money, epitomised in the interest rate criterion, and in the identification of violations of this criterion as the ultimate cause of the business cycle. This is the only sense in which it is proper to speak, in Hayek’s view, of a monetary explanation of the business cycle. With the introduction of money the tendency towards equilibrium prevalent in the static economy is replaced by the more complicated adjustment patterns of dynamic theory. Yet, among the various peculiarities that make the money economy differ from its static counterpart, the most systematic, and that most pertinent to the existence of the business cycle, is the effect of credit creation (or destruction) in causing an incongruity between investment and voluntary saving.

—Hansjoerg Klausinger, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 7, Business Cycles, Part I, by F. A. Hayek (Carmel, IN: Liberty Fund, 2017), 19.