English speakers now have access to a work that pervaded German-speaking economics in the 1920s, L. Albert Hahn’s Economic Theory of Bank Credit (hereafter ETBC). The new English version, a compilation of three original German editions published from 1920 to 1930, was translated by Clements Matt, and published with an introduction by Harald Hagemann. This review summarizes the primary topics covered in ETBC as well as briefly provides parallels to related works. Although Donald Boudreaux and George Selgin (1990, p. 261) describe Hahn’s macroeconomics in ETBC as “proto-Keynesian,” we highlight Hahn’s monetarist tendencies and the relevance of ETBC for contemporary monetary economists, most notably Friedrich Hayek. ^{Footnote 1}

Hagemann’s introductory chapter includes a brief biography of Hahn as well as a background discussion with references to both the contemporary and current literatures. The book ETBC was, in its time, considered “one of the most influential and certainly the most controversial book on monetary economics in the German-speaking world” (Hagemann, p. vi). Hagemann notes in the introduction that Hahn himself boasted in the preface to the second edition of ETBC that “almost every economic seminar at German universities discusses my book in detail” (p. xxxiii). Hahn was heavily influenced by the works of Knut Wicksell and Joseph Schumpeter (pp. xi–xv), and Schumpeter, in return, was often complimentary of ETBC (pp. xiv, xv). Hagemann briefly discusses the major criticisms of ETBC by Hans Neisser, Gottfried Haberler, and Ludwig von Bortkiewicz (pp. xv–xviii), and describes the “further elaboration” of Hahn’s monetary theory by Ludwig von Mises and Friedrich Hayek (p. xi).

The new English edition of ETBC includes the three original parts of the first edition. ^{Footnote 2} A fourth part added at the end provides the sections that were revised for the third edition of ETBC published in 1930. “Part 1: Banks and Credit” (pp. 9–79) explains the basic functions of banks in terms of accepting deposits, making loans, and creating financial intermediation. One initial point, still a source of confusion today, is that the term “capital” has multiple definitions, including capital goods used for production, capital markets for financial products, and equity capital as a source of funding for banks and other firms. Hahn (pp. 16–19) argues that the standard quantity theory of money is limited by focusing on cash transactions and that credit is more important than cash as a driver of the business cycle. This point is reminiscent of Milton Friedman and Anna Schwartz (1963), who argue that M2, which includes bank deposits, is more closely correlated than base money with fluctuations in economic activity.

Hahn also discusses the importance of liquidity for different types of banks and financial products. He (pp. 54–77) again recognizes an ambiguity in terminology regarding several definitions of “liquidity,” including distinctions between the direct liquidity of a bank’s cash holdings versus the “indirect liquidity” of assets that might be easily converted to cash, depending on economic conditions. Like Walter Bagehot (Reference Bagehot1873), Hahn (p. 60) proposes that central banks must act as lenders of last resort, arguing that “accommodating central bank policy in the case of a money crisis is not only a necessary intervention but also a historical fact.”

“Part 2: Credit and Goods Markets” (pp. 83–125) discusses the impacts of banks’ credit expansion on the macroeconomy. Hahn (pp. 97–102) follows Eugen Böhm-Bawerk’s theory that lower interest rates encourage manufacturers to adopt longer, more roundabout methods of production. In some cases, Hahn (pp. 93, 123–125) makes a monetarist hypothesis that “the start of a boom is due to a credit expansion induced by low interest since low interest rates make new businesses seem profitable” (p. 124). As Boudreaux and Selgin (Reference Boudreaux and Selgin1990) note, however, Hahn also makes “proto-Keynesian” arguments that inflationary credit booms lead to “a real increase in wages” (p. 107) and that economic downturns can be prevented by “lowering the price for credit as soon as consumption begins to stagnate” (p. 117).

Interestingly, Hahn reverses these “proto-Keynesian” positions in his revisions to the third edition of ETBC, putting greater emphasis on credit expansion policies as the source of inflationary business cycles: “In line with the monetary business cycle theory, we claim that those business cycles are nothing other than the effects of an inflationary and then deflationary credit policy of banks” (p. 179). In addition, “roundabout methods of production which only seemed profitable in light of rising prices ultimately become unprofitable. This is when the so-called ‘business cycle’ swings and turns downwards” (p. 163). Hahn clarified that inflationary booms might not increase wealth since “wage increases might not be real but only nominal” (p. 165). Unlike in earlier editions, Hahn (pp. 179–188) specifically links changes in interest rate policies to central banks rather than private banks, noting that the goal of stabilizing the business cycle does not necessarily entail maintaining “a high level of employment,” but simply “preventing deviations from an average level of economic activity” (p. 188). These changes seem to support Boudreaux and Selgin’s hypothesis of Hahn’s turn away from Keynesianism in favor of monetarism. Their note (p. 269n16) that “Hahn’s son, Nicky, remembers 1929 as the year that Hahn ‘had totally refuted his ‘Keynesian’ past’” is consistent with the timing of Hahn’s new perspective in the third edition of ETBC, published in 1930.

Although Hagemann (p. xi) describes Mises and Hayek as having elaborated on Hahn’s monetary theory, both authors seem to have treated Hahn more as a contemporary than a predecessor. Hayek (Reference Hayek1933), for example, cites Hahn six times, offering both praise and criticism. Hayek (1933, pp. 233–234) admires Hahn’s (1927) work “in the statistics of private banking” as “pioneering.” He (1933, pp. 111, 144–145, 153) categorizes Hahn (1920) as similar to Mises in their studies of monetary theories of the trade cycle. However, Hayek also chides Hahn (it appears) for focusing his theory extensively on bank credit. As he describes, “it is generally just those economic writers who are also practical bankers who are most unwilling to admit in any circumstances that they are in a position to create credits.… Professor A. Hahn, on the other hand, falls into the opposite error” (Hayek Reference Hayek1933, p. 164).

Hahn’s work seems to have gained little attention beyond the circles of German-speaking economists of the period. Despite the friendship between Mises and Hahn (as noted by Hagemann), Mises failed to cite Hahn in either Theory of Money and Credit ([1934] 1980) or his masterwork Human Action ([1949] 2008). Robert Leeson (Reference Leeson1997) discusses Hahn’s lack of lasting impact on the profession, concluding that although Hahn’s age and his outsider status in New York City may have diminished his impact somewhat, the greatest barrier was simply that “Hahn and his like, were largely rolled over by the Keynesian juggernaut” (p. 637).

Overall, ETBC is interesting for its historical significance but provides little lasting contribution. Though Hahn’s mid-life reversal is interesting in itself, the important changes between the first and final editions of ETBC create some confusion. Many of Hahn’s valuable insights are incorporated into the works of Mises and Hayek. Still, Boudreaux and Selgin (Reference Boudreaux and Selgin1990) rightly categorize Hahn as an interesting and underrecognized scholar of banking and business cycles. As Hagemann (2015, p. xxiv) describes, “with his theoretical training and his experience as a practical banker he was among the first who understood the importance of bank credit for the monetary economy.”