August Lösch’s Monetary Theory and its Implications
for the Spatial Neutrality of Money∗
David S. Bieri†1,2
1
Global Forum on Urban and Regional Resilience, Virginia Tech, Blacksburg, VA 24061, USA
2
School of Public and International Affairs, Virginia Tech, Blacksburg, VA 24061, USA
Preliminary and incomplete draft
This version: October 25, 2016
Abstract
With the classical dichotomy embedded in its theoretical core, contemporary mainstream
spatial economics has little to say about money and its spatial consequences. Yet, such a disengagement with respect to regional phenomena of money and credit represents a break with
the intellectual tradition of a long ancestry of spatial economists, stretching back to the seminal writings of Heinrich von Thünen. This contention is illustrated by examining the monetary content of the work of August Lösch (1906–1945), the last of the great German location
theorists. Specifically, this paper argues that Lösch’s monumental Die räumliche Ordnung der
Wirtschaft (1940b; 1944) contains overlooked spatial elements that are associated with credit
theories of money, including the notion of monetary non-neutrality, and the observation
that money is created endogenously in a monetary-financial order that is inherently hierarchical. A student of Schumpeter’s and life-long friend, Lösch’s thinking on spatial aspects of
money and credit is shown to have been profoundly shaped by Schumpeter’s own chartallist
insights. Beyond Schumpeter’s influence, Lösch’s monetary thought also reflects traces of
a ‘credit view’ that emerged in Germany during the waning years of the Weimar Republic,
with Kahn, Lautenbach, and Neisser among its strongest exponents. On these grounds alone,
the lack of recognition of Lösch’s contributions to monetary theory, let alone his attempt to
link the real and financial in a spatial synthesis of location theory with modern credit theory
represents a historical curiosity, if not puzzle.
Keywords: Monetary theory, monetary-financial system, credit view, hierarchy of money.
JEL classification: G18, G28, E42, R1.
∗
I thank Andrés Álvarez, Peter Schaeffer, and Hans-Michael Trautwein for helpful discussions and comments
on an earlier draft of this paper. I am also grateful for input from seminar participants at the 2016 Annual Meetings
of the History of Economics Association at Duke University and at West Virginia University’s Regional Research
Institute. Comments welcome.
†
Corresponding author: Global Forum on Urban & Regional Resilience, Virginia Tech, 250 S. Main St. (Suite
312), Blacksburg, VA 24601-0922, USA. Web: circular-flows.org. Email: [email protected] (David Bieri)
“The geographic variations in interest rates are generally a mirror image of
the spatial organization of the banking system and of regional differences in the
economic structure of production.” – August Lösch (1940c, p.26, author’s translation)
1
2
3
4
“Indeed Keynes’ Treatise on Money, in its business cycle sections, could be
described as a belated effort (in large part confused) to catch up with continental
thinking, particularly as represented by Wicksell, Tugan-Baranowsky, Spiethoff
and Schumpeter.” – Alvin Hansen (1952, p.305)
5
6
7
8
“The essential problem is whether any macroeconomic theory that is constructed upon a set of assumptions from which the proposition that money and
finance are neutral is derived can be a serious guide to understanding our economy and to the development of policies for our economy.” – Hyman Minsky
(1993, p.77)
9
10
11
12
13
1
14
Introduction
15
The contemporary canon of spatial economics has enshrined the ‘classical dichotomy’
16
in that it treats the spheres of money and production as analytically distinct.1 As such,
17
spatial theory upholds the neutrality of money in its most basic quantity-theory po-
18
sition, suggesting it is only the absolute price level, not relative prices and interest
19
rates, and hence real output, that is affected by changes in the quantity of money.2
20
Spatial economists thus tend to treat the monetary system as the proverbial veil that
21
renders money and financial interrelations a source for short-term frictions at best,
22
but not relevant to the determination of regional market (dis)equilibria. In short,
23
real factors determine real regional variables. With monetary neutrality deeply em-
24
bedded in its theoretical core, contemporary mainstream spatial economics has little
25
to say about money and its spatial consequences.
26
Yet, such a disengagement with spatial phenomena of money and credit represents
27
a break with the intellectual tradition of a long ancestry of spatial economists, stretch1
In keeping with Blaug’s (1997) terminology, I use the term ‘spatial economics’ to refer to a broad body of subfields in economics, including urban and regional economics, regional science, and geographical economics. See
Meardon (2000) for the taxonomic subtleties in delineating the field.
2
See Patinkin and Steiger (1989) and Klausinger (1990) for complementary overviews on the origins of the term
‘neutrality of money’.
2
28
ing back to the seminal writings of Heinrich von Thünen and Wilhelm Roscher (cf.
29
Gordon, 1983; Barkai, 1989). Examining the monetary content of the work of Au-
30
gust Lösch (1906–1945), arguably the most famous, but least known of the ‘younger’
31
German location theorists, I show that his monumental Die räumliche Ordnung der
32
Wirtschaft (1940b; 1944) contains overlooked spatial elements that are associated with
33
credit theories of money, including the notion of monetary non-neutrality, and the
34
observation that money is created endogenously in an institutional order that is in-
35
herently hierarchical.3
36
More generally, I argue that the continued separation of monetary theory from
37
price theory in spatial economic thought represents a radical departure from the
38
field’s intellectual origins. Indeed, in combining key elements of interregional trade
39
theory and location theory, Lösch’s treatment of monetary aspects of the ‘space-
40
economy’ give rise to a spatialized interpretation of the non-neutrality of money.4 In
41
its engagement with regional aspects of money and credit, an important focus of my
42
argument is the fact that, as a student of Joseph Schumpeter’s, Lösch represents an
43
important branch in the long lineage of 20th century Continental monetary thought.
44
For our purposes here, I pay particular attention to Lösch’s (1940a,b,c,d, 1944, 1949)
45
analysis of the spatial consequences of monetary-financial arrangements. In this con-
46
text, I show how Schumpeter’s own monetary insights have shaped Lösch’s think-
47
ing on spatial aspects of money and credit to a significant degree – after all, Lösch’s
48
own intellectual formation and greatest theoretical insights take place under under
3
Throughout, I will refer to the original German first and second editions of Die Ordnung (1940b; 1944), rather
than its English translation which was published posthumously as The Economics of Location (1954). Translated and
edited by Wolfgang Stolper, a fellow student of Lösch’s under Schumpeter and close friend, the 1954 edition contains
a number of (acknowledged) interpretational judgements by Stolper himself that give Lösch’s monetary message a
particular ideational bent.
4
Walter Isard (1919–2010), in some ways the American heir of Lösch’s intellectual legacy, first introduces the
expression ‘space-economy’ in his QJE (1949) survey article of German location theory, defining the term as “concern[ing] itself with the local distribution of factors and resources as well as with local variations in prices, and thus
with the immobilities and spatial inelasticities of factors and goods” (p. 478). Isard’s usage of the term is clearly
inspired by its German origin as Raumwirtschaft (cf. Weigmann, 1931). While it has never found wide adoption in
spatial economics beyond Isard, a variety of economic geographers with a political economy perspective continue
to use the expression (e.g. Sheppard and Barnes, 1990; Martin, 1999).
3
49
Schumpeter’s close watch and guidance over the course of almost two decades, from
50
the mid to late 1920s right until Lösch’s premature death in 1945 – a period during
51
which Schumpeter worked most intensively on his troubled grand treatise on money,
52
Das Wesen des Geldes ([1943] 1970).
53
Beyond Schumpeter’s direct influence, Lösch’s monetary thought is also shown
54
to reflect traces of a ‘credit view’ that emerged in Germany during the waning years
55
of the Weimar Republic, with Kahn, Lautenbach, and Neisser among its strongest
56
exponents. On these grounds alone, the lack of recognition of Lösch’s contributions
57
to monetary theory, let alone his attempt to link the real and financial in a synthesis
58
of location theory with modern credit theory represents a historical curiosity, if not
59
puzzle. With regard to view that there are important, neglected contributions in
60
Lösch’s work far beyond his ordinarily acknowledged influence on location theory,
61
my argument in this paper thus echoes Ponsard’s (2007) sentiment in suggesting that
62
Lösch is “a famous, but ignored economist”.
63
In this vein, the recent financial crisis could not only be viewed as a ‘Minsky mo-
64
ment’, but also a ‘Lösch moment’ in so far as the disparate regional impacts of the
65
financial dislocations during the crisis were a powerful reminder that the intersec-
66
toral flow of funds – always and everywhere – constitutes a local phenomenon with
67
real effects across space. Indeed, the crisis has generated significant new interest in
68
spatial aspects of monetary phenomena, for example in understanding the monetary
69
origins of differences in regional price level dynamics (e.g. Del Negro and Otrok,
70
2007; Fielding and Shields, 2011; Beckworth, 2010; Beraja, Fuster, Hurst, and Vavra,
71
2015).5 In much of this literature, old monetary questions are new again; these are
72
questions regarding the sanctity of the money multiplier and the acknowledgment
73
that regional money creation happens by commercial banks ‘at the stroke of a pen’,
5
In many ways, the muted post-crisis responses of monetary aggregates to the large-scale unconventional monetary policy experiments can be interpreted as long-overdue vindication of the critics of the quantity theory (cf.
Minsky, 1993; Marcuzzo, 2002).
4
74
while with the central bank retains ultimate control through monetary policy. In
75
addition to the spatial effects of endogenous money, place-based credit allocations
76
are an emergent core competency of the state which, in turn, has set off a series of
77
important institutional and regulatory changes after the crisis. In short, Lösch lives!
78
The balance of this chapter is organised as follows. Section 2 sets the scene by re-
79
tracing key intellectual developments that have induced ‘monetary amnesia’ in spatial
80
economics. Section 3 then provides a brief genealogy of monetary thought in spatial
81
economics, ascribing the central views on money, credit and banking in the work of
82
Lösch to the monetary tradition of Schumpeter. In section 4, I then discuss the core
83
of Lösch’s regional monetary theory and it implications for the spatial non-neutrality
84
of money, followed by some concluding thoughts in section 5.
2
85
Monetary analysis and the space economy
86
While the recent crisis has been a stark reminder of the heterogenous consequences
87
of monetary-financial developments across regions, it seems somewhat paradoxically
88
that the orthodox canon of spatial economic analysis remains firmly grounded in the
89
classical dichotomy.6 Yet, over seven decades age, Lösch had already articulated his in-
90
sights on the spatial nature of monetary phenomena, consistent with Schumpeter’s
91
vision of placing the element of money “on the very ground floor of our analytic
92
structure, abandoning the idea that all essential features of economic life can be rep-
93
resented by a barter-economy model” (Schumpeter, 1954, p.278).
94
Indeed, in the sense of Schumpeter’s distinction between real analysis and mone-
95
tary analysis, Lösch argued for a better standing of the latter tradition in spatial eco-
96
nomics, rejecting the notion of treating money as the proverbial ‘veil’ behind which
6
The recent attempts to infuse location theory with monetary analysis in Figueiredo and Crocco (2008) and in
Nogueira, Crocco, Figueiredo, and Diniz (2015) represent remarkable exceptions in the otherwise languishing literature on money and its role in regional development. See Dow (1987) and Bieri and Schaeffer (2015) for comprehensive
surveys of the literature on the treatment of money in spatial economics.
5
97
the fundamental exchange processes of a barter economy take place. This this sense,
98
monetary analysis in the Löschian system “spells denial of the proposition that [. . .]
99
the element of money is of secondary importance in the explanation of the economic
process” (Schumpeter, 1954, p.277).7
100
101
As will be discussed in more detail below, Lösch recognized that money and credit
102
always and everywhere had local consequences. Exemplary for this position, he con-
103
tended that the spatial differences in changes in purchasing power were, above all,
104
a phenomenon with monetary origins. Specifically, Lösch argued that “[t]he true
105
shifting of the price level occurs only with credit creation; that is, with a hierarchy
106
of different kinds of money, whereas in a region with a uniform currency the price
107
waves started by a shift in purchasing power necessarily suffice for transfer” (Lösch,
108
1954, p.227).
109
[INCOMPLETE: Discuss figure 1] In further contextualizing the central elements of
110
the Lösch’s spatial credit view, it is useful to distinguish between three categories
111
among the large array of regional economic linkages. First, there are market-based
112
regional linkages, with a particular focus on the mechanics of regional specialization
113
and local economic development. Second, there are nonmarket linkages that emerge
114
from the presence of nonmarket goods, such as amenities that determine local sus-
115
tainability or urban quality of life, thereby acting as an essential driver of regional
116
economic activity. And lastly, there are monetary-financial linkages that shape the re-
117
gional pattern of economic activity through the flow of funds, which emerges from a
118
spatial web of balance sheet linkages among the different entities (households, firms
119
and governments) in the space-economy.
120
With regard to monetary-financial linkages, it is particularly worth highlighting
121
that there are really two separate pathways for monetary quantities to interact with
122
the rest of the economy, namely, via the price level of financial assets and via the price
7
See Klausinger (1990) on more detail of the early usage of the term ‘veil of money’ in Schumpeter’s work.
6
Figure 1: Monetary disturbances and their spatial consequences
Notes: In a spatial version of the classical transfer problem, Lösch (1954) demonstrates how monetary disturbances
propagate in wave-like ripples across the space economy.
123
level of real assets. In this formulation, the spatial non-neutrality of money will be
124
due to the difference in how money enters into the determination of each price level.
125
Instead of making the non-neutrality of money dependent on (real or informational)
126
frictions, this set-up is essentially ‘Keynesian’ in that the determination of the two
127
price levels critically depends on the existence of both capital and nonmonetary as-
128
sets, the interaction between prices for investment goods and those for capital goods,
129
and the conditions for external finance.8
130
From today’s perspective, the purview of Löschian monetary analysis in spatial
131
economic would concerns itself with the examinations of the regional effects of mon8
See, for example, Arestis (1988) and Minsky (1993) for details on the mechanics of (Post) Keynesian monetary
economics in general and the non-neutrality of money in relation to the price level of output and the price level of
capital assets, in particular.
7
132
etary policy. At its core, this approach questions the sanctity of the money multi-
133
plier and acknowledges that regional money creation happens by commercial banks
134
‘at the stroke of a pen’, while with the central bank retains ultimate control through
135
monetary policy, particularly by setting the interest rate. As we have seen, the fi-
136
nancial crisis has, in important ways, challenged the concept of neutral money, even
137
in the aspatial setting of standard macroeconomics and finance. Yet, the canon of
138
contemporary regional economic theory, by and large, continues to uphold the clas-
139
sical dichotomy in that it treats the spheres of money and production as analytically
140
distinct. In fact, much of regional analysis is formulated in terms of the mechanics
141
of a pure exchange economy which relegates money and financial interrelations, at
142
best, to being a source for short-term frictions, but not fundamentally relevant to the
143
determination of regional market (dis)equilibria.
144
145
3
A brief genealogy of monetary thought in spatial
economics
146
Beyond documenting how the monetary content of August Lösch’s spatial system
147
completely disappeared from spatial economics, a related aim of this paper is to show
148
that this development its origins in the microfoundations-equilibrium transforma-
149
tion of the main corpus of orthodox economic theory, which now provides most of
150
the epistemological and methodological underpinnings of contemporary spatial eco-
151
nomics. In this context, I adopt Storper’s (2013) label to describe the dominant per-
152
spective in contemporary regional economics as ‘new neoclassical urban economics’
153
(NNUE). Under the NNUE paradigm spatial heterogeneity of economic activity
154
exclusively emerges from the optimal location choices of atomistic, representative
155
agents (households, firms) and their respective interaction with the economies of ag-
156
glomeration in equilibrium. As such, spatial economists’ increasingly anaemic en8
157
gagement with monetary issues during the discipline’s first half-century is but a direct
158
consequence of the axiomatic embedding of the neutrality of money in the NNUE
159
framework.
160
In the sense of Schumpeter’s (1954) distinction between real analysis and mone-
161
tary analysis introduced above, spatial economics today has thus completely turned
162
its back on the latter, solely relying on the former which rests on the idea that all
163
economic phenomena of the region can be represented by a barter-economy model
164
that is fully described in terms of goods and services, and not monetary relations. In
165
the mainstream of regional science, in other words, there is no theoretical place for
166
the analysis of money, credit and banking. While this does not deny money some
167
spatially non-neutral effects, the sanctity of the neoclassical dichotomy in regional
168
science implies that all spatial phenomena for which money matters are exclusively
169
attributed to some form of monetary frictions.9 In terms of the Schumpeterian dis-
170
tinction, the analytical approaches of the contemporary regional mainstream – ir-
171
respective of whether they are subsumed under the heading of the NNUE or the
172
NEG – are exclusively concerned with the study of ‘real’ problems of a spatial barter
173
economy in which money plays only a perfunctory role.
3.1
174
Location theory in retrospect
175
The editorial to the silver jubilee edition of the Journal of Regional Science (2010)
176
may lead even the most neutral observer to the seemingly inevitable but erroneous
177
conclusion that the New Economic Geography (NEG) and NNUE majority view
178
represents something of a natural outcome in the evolutionary development of spa-
179
tial economics in general, and locational theorizing in particular. Certainly, much of
9
Monetary frictions that are consistent with the neoclassical dichotomy include the slow adjustment of nominal quantities, such as, for example, sticky prices, and money illusion. Importantly, this form of monetary nonneutrality would still be considered part of Schumpeter’s real analysis as it predominantly concerns itself with the
impact of the nominal money stock on real variables. In the same sense would Milton Friedman’s monetarism also
be considered as part of real analysis despite its “money does matter” maxim
9
180
the seductiveness of such a perspective derives from depicting the theoretical core of
181
NNUE as the inescapable endpoint that anchors a long arc of almost two centuries
182
of steady intellectual progress, tracing out a smooth trajectory that begins with von
183
Thünen and Weber and extends – via Lösch, Isard and his student William Alonso
184
– to Edward Glaeser, one of the contemporary high priests of the majority NNUE
185
view. In what follows, I make the argument that many heterodox, spatially-inclined
186
social scientists are right to be suspicious of the claim that the elegant shorthand
187
of the neoclassically-inspired microeconomic core that defines both the NEG and
188
the NNUE represent unequivocal signs of progress in the sense of Lösch’s original
189
project.
190
While it is true that much of regional science today has been, and continues to be,
191
dominated by NNUE epistemology and methodology, it would be both wrong and
192
historiographically inaccurate to suggest that the central objective of post-war spatial
193
economics “[. . .] was to rewrite neoclassical competitive equilibrium theory in terms
194
of spatial coordinates [. . .] to form an intellectual amalgam focused on identifying the
195
regularities of the neoclassical space-economy” (Scott, 2000, p.486).
196
In light of the fact of how much the general equilibrium approach to spatial prob-
197
lems draws on location-theoretic approaches developed by German spatial economists,
198
we must momentarily engage with this body of literature and evaluate its broader
199
placement in the history of economic ideas. Specifically, we must address the partic-
200
ular claim that the writings of von Thünen, Weber, and – for our purposes here –
201
most importantly, Lösch trace out a coherent evolutionary course of economic ideas
202
which culminates in ‘neoclassical’ thinking.
203
The German hegemony of location theory is widely acknowledged with Blaug
204
proclaiming “an effective German monopoly of spatial economics in the interwar
205
period and an extraordinary German preoccupation with the subject for an entire
206
century after Thünen” (Blaug, 1979, p.22). In so far as the analytical abstraction of
10
207
von Thünen’s (1826) magnum opus Der isolierte Staat is more reminiscent of the writ-
208
ings of Ricardo than of the analytical methods that emerged with the older German
209
Historical School, von Thünen can be thought of as a ‘German classical economist’
210
(Hutchinson, 1962; Blaug, 1985a).
211
Yet, it would be inaccurate to lump together – merely by extension – the later
212
generation of German location theorists, i.e., Weber, Engländer, Predöhl, Ritschl,
213
Weigmann, and eventually Lösch, under the heading ‘neoclassical’ simply for tem-
214
poral reasons or on the grounds of their innovations in mathematical analysis and
215
its application to new fields of inquiry.10 To be sure, the rapid adoption of linear
216
programming among regional scientists as the technique of choice during the 1950s
217
and 1960s may have rendered more tractable, and thus made more accessible, key
218
elements of neoclassical theory, particularly the spatial equilibrium properties of a
219
theory of production in an exchange economy (Beckmann, 1960).
220
At the same time, however, this does not imply that modern descendants of clas-
221
sical location theory are inherently neoclassical by pedigree. It is in this sense that
222
the highly abstract, hypothetico-deductive method of studying locational problems
223
of this group of German spatial thinkers, including Lösch, ought not be automat-
224
ically associated with neoclassical, marginalist thought, let alone be equated as the
225
intellectual origins of neoliberal spatial policy doctrine.11
3.2
226
Lösch’s Schumpeterian heritage
227
Broadly speaking, monetary theory traditionally distinguishes between two sepa-
228
rate approaches to money. The first, which includes ‘metallism’, develops monetary
229
theory from the transactions, store-of-value and unit-of-account needs of a basic ex-
230
change economy with an exogenous amount of high-powered government money.
10
For references, see the comprehensive, chronological historical bibliography in Ponsard (1983, pp. 195–227).
See Lawson (2013) for an extensive discussion of the interpretational ambiguity of the term ‘neoclassical’, including its oft-asserted link to neoliberal thought.
11
11
231
The second approach, which includes ‘chartallism’, views money as a hierarchical
232
form of credit which renders it essentially endogenous to the economic system.12
233
Rather than emphasising his relevance in terms of location theory, this section shows
234
how Lösch can be viewed as important node in a long lineage of chartallist tradition
235
of monetary theory, arguably like his mentor Schumpeter who classified Marx as a
236
‘metallist’ and Keynes as a ‘chartallist’ (Schumpeter, 1954).
237
Lösch was a student of Schumpeter’s at the Friedrich-Wilhelms-Universität Bonn,
238
obtaining his doctorate in 1932, the final year of Schumpeter’s tenure as department
239
chair before taking a position at Harvard. It is precisely during this period that
240
Schumpeter worked most intensively on his grand treatise on money, Das Wesen des
241
Geldes ([1943] 1970), which, over the course of its forty year gestation period, ex-
242
perienced an inordinate amount of trials and misadventures and was only published
243
posthumously. Indeed, Schumpeter’s own monetary insights have shaped Lösch’s
244
thinking on spatial aspects of money and credit to a significant degree.
245
In an extension of Schefold’s (1997) characterisation of Schumpeter as a ‘Walrasian
246
Austrian’ and Keynes as a ‘Classical Marshallian’, Lösch might be viewed as both
247
‘Austrian’ and ‘Classical’ with respect to his monetary ideas in general and their po-
248
sitions on the non-neutrality in particular.13
249
[INCOMPLETE: Discuss relevance of Das Wesen in the development of Lösch’s mon-
250
etary thought. Discuss the Lösch-Minsky relationship and its deep connection to the
251
misadventures of Das Wesen. Highlight Messori (1997); Kulla (1989); Stolper (1989);
252
Alvarado (2014) for different theoretical and historiographical aspects of Schumpeter’s
253
struggle with Das Wesen, the origins of which can be traced back to his Das Wesen
254
und der Hauptinhalt der theoretischen Nationalökonomie (1908).]
Once in the New World, Schumpeter remained an important element in the de-
255
12
The broad chartallism-metallism dual finds its earliest, modern systematization in von Mises (1917).
The mainstream claim about the original classical economists’ adherence to the ‘classical neutrality postulate’,
i.e., that money-stock changes affect only the price level and not real output and employment, is subject to much
debate (Humphrey, 1991).
13
12
Figure 2: Lösch-Isard lineage of monetary thought in spatial economics
13
Notes: The Lösch-Isard lineage of monetary thought is visualized as a mentor-student relationship, highlighting key areas of research in spatial economics (‘inputoutput’ and the ‘flow-of-funds’ analysis) where a ‘credit view’ of money perspective is instrumental to the integration of the spatial linkages between the real and
financial sector. See main text for more details. Source: Adapted from Bieri (2016).
256
velopment of Lösch’s career and theorizing; it was not only with the help of his old
257
mentor that Lösch was able to spend two extensive research stays in the U.S. on a
258
Rockefeller Fellowship (1934-35 and 1936-37), but access to Schumpeter’s own aca-
259
demic network – from Haberler, to Taussig and Hoover – became instrumental for
260
much of the novel theorizing that shaped both the first and second editions of his
261
path-breaking Die räumliche Ordnung (1940c; 1944). Indeed, it is clear from Lösch’s
262
own records (partly published in Riegger, 1971) that Schumpeter was more than an
263
academic mentor, but also a personal inspiration and close friend with whom he
264
resided several times in Cambridge, Mass. during his Rockefeller fellowship stays.
265
Figure 2 illustrates Lösch’s rich lineage of monetary thought as a central node
266
in a dense network of mentor-student relationships among a wide spectrum mone-
267
tary theorists on both sides of the Atlantic, all of whom, to varying degrees, can be
268
grouped as espousing a ‘credit view of money’ during the interwar period. Specifi-
269
cally, Lösch’s (1940a,b,d) work on money, credit and financial markets acknowledges
270
the importance of capital flows throughout the urban hierarchy, highlighting the
271
spatial relationship between financial variables and institutional functions, such as
272
interest rates or credit intermediation. Furthermore, Lösch (1949) recognizes that
273
money and credit are fundamentally hierarchical in nature and that all money is credit
274
money, even state money. The Löschian perspective on money and credit will be dis-
275
cussed in more detail in section 4.
276
3.3
German interwar monetary theory and the Löschian system
277
Beyond Schumpeter’s direct influence, Lösch’s broader intellectual formation takes
278
place during the waning years of the Weimar Republic, a period of intense mone-
279
tary debate in Germany that – from Kahn, to Lautenbach and Neisser – was marked
280
by a series of neglected contributions to a ‘credit view’ of money that has recently
281
attracted renewed attention.
14
282
[INCOMPLETE: Discuss figure 3.
283
Discuss Garvy (1975), Backhaus (1983), Hudson (1985), Backhaus (1997), Laidler
284
and Stadler (1998), Klausinger (1999), and Laidler (2012) regarding neglected contri-
285
butions to monetary theory by German economists during the interwar period.
286
See Trautwein (2000) and Arestis and Mihailov (2011) for more detailed overviews
287
in terms of possible classifying the literature on monetary thought, including a good
288
survey on the literature related to the ‘credit view’ of money.]
289
3.4
Atlantic crossings and the ‘American Lösch’
290
[INCOMPLETE: Discuss Walter Isard’s rise as the ‘American Lösch’ at Harvard, spurned
291
by Schumpeter, but ultimately encouraged by Hansen.]
292
In tracing Isard’s monetary heritage, Alvin Hansen was, to a smaller extent, what
293
Schumpeter was to Lösch. In his own account of Hansen’s vital role during in his
294
intellectual formation at Harvard, Isard refers to Hansen not only as the source for
295
contemplating monetary factors as causes of the regional business cycle, but also as a
296
“towering exception amid the widespread continued ignorance among Anglo-Saxon
297
economists” with regard to the importance of location theory (Isard, 2003, p.9).
298
At Harvard, Isard also came to study under Abbott Usher, who, in addition to his
299
famous work on the transformational role of technology, was in the midst of a large
300
project on the history of the early credit system in Europe (Usher, 1943) when Isard
301
arrived in Cambridge. Perhaps more importantly, Usher became, after the death of
302
his European-trained colleague and mentor F. W. Taussig, something of a resident
303
expert on the work of the German Historical School, particularly the work of Gus-
304
tav Schmoller, who emphasized the effects of space on the trajectory of economic
305
development (Molella, 2005).
306
As with Lösch, a closer examination of Isard’s main works reveals the clear in-
307
tellectual imprinting of the mentors on the student’s work – a fact that is best wit15
Figure 3: Lösch and the making of Die räumliche Ordnung der Wirtschaft
16
Notes: See main text for more details. Source: Author’s illustration.
308
nessed by the dedication of Location and Space Economy (1956) to both his teachers
309
Hansen and Usher. It is Usher’s influence that gave the impetus for Isard’s founda-
310
tional QJE (1949) article wherein he introduces an English-speaking general interest
311
audience to the nuances of German location theory, including the work of Lösch.
312
At the same time, however, Isard credit Hansen for kindling his interest in locational
313
analysis and its relevance for to national policy (Isard, 2003, p.8).
314
Although Hansen is mostly remembered for his ‘Keynesian’ stance in the con-
315
text of post-war U.S. public policy, earning him the popularized moniker of the
316
‘American Keynes’ (cf. Breit and Ransom, 1982), a central component of Hansen’s
317
early work propounded a continental-style monetary theory of the business cycle
318
– particularly today in the context of a recent revival of his term ‘secular stagna-
319
tion’ (Mehrling, 1997).14 As a representative of the banking school tradition, Hansen
320
played a pivotal role in the transformation of 20th century monetary thought, advo-
321
cating Keynesian fiscal activism and strong monetary restraint for economic stabili-
322
sation (Mehrling, 1998). Indeed, Hansen’s banking school position on the monetary
323
transmission mechanism and credit creation is perhaps most clearly visible in Isard’s
324
own position regarding the importance and role of monetary institutions for inter-
325
regional flows.
326
After taking courses at Harvard, Isard moved to Chicago to study for a Ph.D.
327
where, in addition to Frank Knight and Oskar Lange, Jacob Viner soon became Is-
328
ard’s most important (monetary) point of reference (see also figure 2). And perhaps in
329
equal measure because of Viner’s complex and contested role in defining the Chicago
330
Monetary Tradition (e.g. Nerozzi, 2009) and Isard’s own early exposure to Keynesian
331
thinking at Harvard, he eventually positions himself against some of the Chicagoan
332
tenets regarding “how money matters”. For example, Isard rejects Viner’s ([1937]
14
See Summers (2014a,b) for the contemporary revival and re-interpretation of Hansen’s interwar idea of ‘secular
stagnation’ in the context of the post-crisis limits of monetary policy to accomplish much more with interest rates
at their lower bound.
17
333
1975) assertion that there are “problems which fall within the domain of interna-
334
tional trade and which distinguish it from domestic and intranational trade, particu-
335
larly those associated with monetary phenomena.” (Isard, 1954, p.320n).
336
Little later, in his seminal Location and Space-Economy (1956), Isard takes an even
337
stronger monetary stance, suggesting that “[it is] invalid to take the position that
338
price and monetary phenomena are merely surface manifestations and reflections of
339
the more nearly basic and underlying relations and interactions of man with his phys-
340
ical environment” (Isard, 1956, p.6). By the time Methods of Regional Analysis (1960)
341
is published, Isard has integrated Lösch’s ideas on the regional role of money and
342
credit into a ground-breaking treatment of the regional flow of funds, where link-
343
ages between the institutional evolution of money, credit and banking and the spatial
344
structure of moneyflows form central pillars of the analysis.15
345
In the next section, we now turn to the core of the Löschian monetary systems
346
which – as is later developed in more detail by Isard – hinges on the understood
347
that the structure of regional economic activity is influenced by how institutional
348
components of the monetary-financial system (financial instruments, financial mar-
349
kets, monetary and financial intermediaries) promote the interregional mobility of
350
funds and, by extension, the mobility of funds among the various sectors of the space-
351
economy.
4
352
Monetary hierarchy and spatial non-neutrality in
the Löschian system
353
354
With regard to Lösch’s (1940c,d, 1949) pioneering analysis of the spatial consequences
355
of monetary-financial arrangements, this section attempts to demonstrate specific as-
356
pects of hitherto neglected important theoretical insights for theorizing the flow of
15
Throughout, I adhere to Isard’s (1957) terminology of using ‘moneyflows’ in one word, rather than a hyphenated
or two-word term.
18
357
credit money across space. Throughout, I will take the postion that these lesser-
358
known aspects of Lösch’s work are broadly consistent with a spatialised version of
359
(Post) Keynesian monetary theory, in particular with regard to some aspects of liq-
360
uidity preference, the loan-to-deposit causality, and circuitist notions of the flow of
361
funds (Dow and Earl, 1982; Arestis, 1988, 1996; Chick and Tily, 2014).16
4.1
362
Hierarchy and endogenous money
363
A key feature that the Löschian systems shares with contemporary Post Keynesian
364
monetary theory pertains their respective characterisation of the monetary-financial
365
system as hierarchical. A further particularity of this view is the observation that
366
the ‘hierarchy of monies’ is a hybrid, that is part public (‘outside money’, a net as-
367
set to the private sector) and part private (‘inside money’).17 It has both public and
368
private liabilities that circulate as money (Bell, 2001; Mehrling, 2013). Indeed, two
369
specific aspects of Lösch’s analysis of the spatial consequences of monetary-financial
370
arrangements provide a useful lens for linking the hierarchy of money to the spatial
371
structure of the financial system.
372
First, Lösch (1949, 1954) recognizes that money and credit are always and every-
373
where fundamentally hierarchical in nature and that all money is credit money, even
374
state money. The modern monetary system is not only hierarchical in finance, but
375
it is also hierarchical in power. (e.g., in the Federal Reserve’s ex-post definition of
376
what is adequate collateral and its inherent role as the ‘market maker of last resort’
377
Mehrling, 2011). Table 1 illustrates the hierarchy of money in the Löschian system
378
as a spatial monetary order where money and credit are created by different financial
16
Throughout, I will use the convention of using the capitalized, non-hyphenated version of writing ‘Post Keynesian’, largely in keeping with the self-identification of the thinkers who use the label. See Davidson (1991), King
(2002, pp.9–11), and Lavoie (2014, pp.42–45) for a discussion of the deep semantics behind the four different ways in
which the term can be written (hyphenated or not and captialized or not).
17
The distinction between ‘outside money’ and ‘inside money’ goes back to seminal work of Gurley and Shaw
(1960). In this context, ‘outside money’ is either of a fiat nature or backed by some asset that is not in zero net supply
within the private sector, whereas ‘inside money’ is an asset backed by any form of private credit that circulates as a
medium of exchange.
19
379
institutions at separate levels of the hierarchy. The Löschian monetary pyramid can
380
be read both institutionally and, perhaps more importantly, in a functional manner,
381
i.e., in terms of what constitutes money and credit as an accepted mean of settlement.
382
In fact, with regard to the spatial propagation of changes in the price level, Lösch ob-
383
serves that the “shifting of the price level occurs only with credit creation; that is,
384
with a hierarchy of different kinds of money, whereas in a region with a uniform
385
currency, the price waves started by a shift in purchasing power necessarily suffice
386
for transfer” (Lösch, 1954, p.227).
387
A central feature of this monetary hierarchy is the fact that the distinctions be-
388
tween money and credit are not strict and largely depend on the specific vantage
389
point from within each layer of the system. In this system, gold and deposits at the
390
Bank for International Settlements are the ultimate money because they are the ul-
391
timate means of international payment. Currencies, both international money and
392
national money, are deemed a form of credit insofar as they are promises to pay gold.
393
Similarly, further down the hierarchy, bank deposits are viewed as a form of pri-
394
vate credit money, effectively promises to pay currency on demand and thus twice
395
removed from the promises to pay ultimate money. Private money in the form of
396
debt obligations or securities is then a promise to pay currency or deposits over some
397
specific time horizon.
398
Another crucial feature of this hierarchical view of money lies in the fact that at
399
each layer the ‘moneyness of credit’ depends on the credibility of the promise by a
400
given issuer to convert a specific form of credit into the next higher form of money. In
401
other words, what counts as money and what counts as credit depends on the layer
402
of the hierarchy under consideration, on what counts as ultimate means of settle-
403
ment. The translated and augmented version of Lösch’s original table in the bottom
404
panel of Table 1 reveals that the Löschian monetary hierarchy maps directly into a
405
Post Keynesian-Minskian perspective of monetary hybridity according to which the
20
Table 1: Hierarchical money in the Löschian system
Inside money
Outside money∗
Translated (and augmented) version:

1. Highest-order money:








2. High-order money:




3.
Mid-order money:















4. Lower-order money:











5. Lowest-order money:











Global money


























 Regional money
(‘partial money’)



























International money‡




National
money






















Private credit money













Private money













(Currency: Gold;
credit money: BIS† )
(£, Reichsmark)
High-powered money
(currency, central bank
reserves), occasionally
equivalent regional
money
National commercial
and retail banks,
regional and local
(community) banks
Private or fiscal debt
obligations, in
particular commercial
paper
Notes: This ‘monetary order’ links the hierarchy of money on the left hand side to the spatial structure of the
financial system on the right-hand side. ∗ ‘Outside money’ is either of a fiat nature or backed by some asset that is
in positive net supply within the private sector, whereas ‘inside money’ is an asset backed by any form of private
liabilities (credit) that circulate as a medium of exchange, an analytical distinction first introduced by Gurley and
Shaw (1960). † BIZ/BIS: Bank für Internationalen Zahlungsausgleich/Bank for International Settlements, Basel,
Switzerland. ‡ Corresponds to both ‘top currency’ and ‘patrician currency’ in the terminology of Cohen’s (1998,
2003) currency pyramid. Source: Original table with monetary hierarchy in Lösch (1949, p.59). Author’s translation
and adaptation.
21
406
credit pyramid oscillates between a condition where money is ‘scarce’ and one where
407
credit is ‘elastic’ (Wray, 2009; Mehrling, 2013).
408
Second, Lösch’s (1940c,d) work on financial markets acknowledges the impor-
409
tance of capital flows throughout the urban hierarchy, highlighting the spatial re-
410
lationship between financial variables and institutional functions, such as financial
411
regulation. Indeed, Post Keynesian monetary thinkers assign functional and insti-
412
tutional variation one of the most influential pathways for change in real-financial
413
linkages (e.g. Dow, 1982; Chick and Dow, 1988, 1996). Another important, related
414
perspective that is consistent with Lösch’s work comes from Minsky’s (1991, 1993)
415
re-emphasis of Keynes’ (1930) fundamental insight that the non-neutrality of money
416
needs to be a “deep part of the system, not an afterthought in a capitalist economy”
417
(Minsky, 1996, p.78). Indeed, the similarities between Lösch’s monetary thought and
418
that of Minsky are far from coincidental: as figure 2 illustrates, both were students of
419
Joseph Schumpeter’s (Lösch at Friedrich-Wilhelms-Universität Bonn, and Minsky at
420
Harvard).
421
As Minsky (2008) reminds us, the key to the flow-of-funds perspective is to look
422
at all actors in the economy (households, firms, governments and the financial sector)
423
“as if they were banks”, each with a balance sheet of cash inflows and cash outflows
424
and each bound by the ‘survival constraint’ (that is the requirement that cash outflow
425
not exceed cash inflow). The moneyflow economy then arises in aggregate from the
426
interconnection of all balance sheets, which, in turn, gives rise to the ‘fundamental
427
instability of a credit economy’ (Hawtrey, 1919; Minsky, 1977, 1993).
428
429
4.2
Monetary aspects of spatial equilibrium
[INCOMPLETE: Add important link to Miksch (1949a,b, 1951)].
430
“If everything occurred at the same time there would be no develop-
431
ment. If everything existed in the same place there would could be no par22
432
ticularity. Only space makes possible the particular, which then unfolds
433
in time.” – Lösch (1954, p.508, emphasis in the original)
434
“The neo-classical economist thinks of a position of equilibrium as a
435
position towards which an economy is tending to move as time goes by.
436
But it is impossible for a system to get into a position of equilibrium, for the
437
very nature of equilibrium is that the system is already in it, and has been
438
in it for a certain length of past time. Time is unlike space in two very
439
striking respects. In space, bodies moving from A to B may pass bodies
440
moving from B to A, but in time the strictest possible rule of one-way
441
traffic is always in force. And in space the distance from A to B is of the
442
same order of magnitude (whatever allowance you like to make for the
443
Trade Winds) as the distance from B to A; but in time the distance from
444
to-day to to-morrow is twenty-four hours, while the distance from to-day
445
to yesterday is infinite, as the poets have often remarked. Therefore a space
446
metaphor applied to time is a very tricky knife to handle, and the concept
447
of equilibrium often cuts the arm that wields it.” – Robinson (1953, p.85,
448
emphasis in the original)
449
450
451
452
[INCOMPLETE: Add Isard and Liossatos (1973) as elements of integration space-time
development and capital flows.]
[INCOMPLETE: Add Stolper (1956); Isard (1954); Isard and Peck (1954) and add Gordon (1983); Blaug (1985b); Meltzer (1980).]
453
Table 2 summarizes our preceding discussion in terms of the most important con-
454
ceptual differences between the orthodox view of money in regional science and its
455
Lösch alternative. In particular, table 2 compares these competing paradigms of mon-
456
etary theorizing along key dimensions, namely, money, interest, prices, and the na-
457
ture and structure of financial intermediation. Indeed, of the “continuing muddles
458
in monetary theory”, as Goodhart (2009) puts it, several are particularly relevant for
23
459
the regional analysis of money because they are so deeply embedded in the theoretical
460
fabric of NNUE view of money. Above all, this includes the analysis of the monetary
461
base multiplier of bank deposits, the current three-equation neoclassical consensus,
462
assuming perfect creditworthiness, and hence no need liquidity intermediation and
463
the analysis of the evolution of money. For each of these dimensions of monetary
464
analysis, the last column of table 2 outlines a few high-level areas of theoretical and
465
empirically inquiry that are implied by Lösch’s credit view. While too numerous
466
to be elaborated in detail, I shall briefly discuss a few of the topics for expositional
467
purposes.
468
For example, the financial crisis has reminded policy makers just how much the
469
dynamics of regional cost of living adjustments depend on a clear understanding of
470
house price movements, particularly in the U.S. where the recovery of house prices
471
has shown substantial regional heterogeneity. Even in the absence of nominal ex-
472
change rate movements and trade barriers, some of the observed deviations from
473
regional purchasing power party (PPP) are even more persistent that their interna-
474
tional counterparts. Indeed, relative price levels among U.S. cities have historically
475
shown mean reversions at an exceptionally slow rate, seemingly in contrast to recent
476
evidence of falling transportation cost and the strong regional integration of the U.S.
477
economy (e.g. Cecchetti, Mark, and Sonora, 2002; Chen, Choi, and Devereux, 2006).
478
While non-traded local goods and services are one common real sector explanation
479
for such deviations from PPP, the two-price level perspective of the Lösch view would
480
suggest additional monetary phenomena, such as regional asset price inflation in the
481
housing market, as an alternative causal pathway.
482
Similarly, discussions about regional differences in interest rates commonly as-
483
sume that such divergences strictly reflect real factors, above all the balance between
484
ex ante saving and ex ante investment which drive equilibrium in the goods market.
485
Thus, in the standard view of ‘real analysis’, by construction, there is no difference
24
Table 2: Key dimensions of the Löschian monetary space-economy
Orthodox
NEG)∗
view
(NUUE-
Löschian credit view
What are the (monetary) questions?
Nature of analysis
“Real”
“Monetary”
Economic fluctuations
Business cycle†
Interaction between financial
cycle, business cycle
(i) Finance-growth nexus of regional development;
(ii) regional economic adjustment;
Money
Neutral, exogenous‡
Non-neutral, endogenous
(iii) geography of money and inflation (e.g. regional
money multiplier); (iv) optimal regional currency areas;
Interest
Natural interest rate§
Market interest rates
(v) regional interest rate differentials; (vi) regional
capital market integration;
Prices
One price level (real output)
Two price levels (Financial assets, real assets/output)
(vii) regional cost of living differentials; (viii) spatial
purchasing power parity, law of one price;
Reduction of frictions, information asymmetries
Credit creation, transfer of
purchasing power
Deposits
Sectoral endowments
Created by loans
(xii) regional deposit concentration; (xiii) spatial disparities in the ‘moneyness’ of deposits;
Source of investments
Savings
Financing flows
(xiv) regional discrepancies in liquidity preference;
(xv) regional flows of finance vs. collateral; (xvi) spatial distribution of credit subsidies;
Flow of funds
Current account, net capital
flows
Gross capital flows
(xvii) regional balance of payments (BoP); (xviii) classical ‘transfer problem’ vs. monetary approach to
BoP; (xix) regional reserve flows.
25
Financial intermediaries
(ix) regional transmission mechanism of monetary
policy; (x) structure of financial intermediation
(e.g. spatial disparities in credit creation by nondepository financial institutions); (xi) regulatory arbitrage across space;
Notes: ∗ “New neoclassical urban economics” (NNUE) and new economic geography (NEG). † Real business cycle theory in the tradition of new classical macroeconomics. ‡ Includes superneutrality of money, i.e., real variables are not only unaffected by the level of the money supply, but also by the rate of money supply
growth. § The natural interest rate is unobservable, reflecting only real factors. Explanations for the source of divergences between the market and the natural rate
differ between the Lösch view and the conventional view. See text for more detail. Source: Author.
486
between saving and financing (Borio and Disyatat, 2011; Borio, 2014). The monetary
487
analysis of the Lösch view, by contrast, would highlight that such regional interest
488
rate differentials represent a purely monetary phenomenon whereby variations in lo-
489
cal credit conditions, not informational frictions, drive a wedge between the market
490
rate and the (unobservable) natural rate.
491
Over all, then, a return to the roots of Lösch’s work offers important opportuni-
492
ties for the future of spatial economics, particularly in a rediscovery of the project’s
493
“monetary macrofoundations”.
5
494
Outlook and conclusion
495
In linking the structure of intersectoral money and credit flows with the structural re-
496
lationships that govern the intersectoral flow of goods and services, the Lösch frame-
497
work outlined in this chapter aligns well with the renewed academic interest in mod-
498
elling the pathways between financial markets and the macroeconomy.18 Further-
499
more, this paper has also briefly identified a research agenda associated with the de-
500
velopment of a spatial theory of money and credit as key research frontier for the
501
next half-century of regional science. Specifically, I have argued that a re-engagement
502
with the monetary foundations of the intellectual touchstones of regional science
503
could yield a wide array of promising theoretical and empirical research for the fu-
504
ture.
Relevant Literature
505
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18
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26
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A
Dramatis personæ
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[INSERT DETAILS – see also figure 3]
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Walter Eucken (1891–1950)
736
August Lösch (1906–1945)
737
Fritz Meyer (1907–1980)
738
Joseph Schumpeter (1883–1950)
739
Wolfgang Stolper (1912–2002)
33