Hayek Rejected the View that Monetary Disturbances Must Be Attributed to Exogenous Central Bank Action

 In Mises’s theory, the business cycle begins when a central bank exogenously expands the quantity of central bank-issued money and drives the market rate of interest below the “natural” or equilibrium rate consistent with intertemporal coordination. Mises accordingly recommended a monetary regime without central banking, a “free banking” system with competitive market determination of the quantity of money and of the loan rate of interest. In clear contrast to Mises, and explicitly drawing on the Swedish economist Knut Wicksell, Hayek in his early writings consistently and repeatedly rejected the view that monetary disturbances must be attributed to exogenous central bank action. He considered the competitive commercial banking system to be at least equally responsible, because it responds to changes in loan demand in a disequilibrating way. By Hayek’s own account the “sole purpose” of the fourth chapter of his Monetary Theory and the Trade Cycle was “to show that the cycle is not only due to ‘mistaken measures by monopolistic bodies’ (as Professor Löwe assumes), but that the reason for its continuous recurrence lies in an ‘immanent necessity of the monetary and credit mechanism.’ ” 

—Lawrence H. White, “Why Didn’t Hayek Favor Laissez Faire in Banking?” History of Political Economy 31, no. 4 (Winter 1999): 754-755.