Money, Banks and Finance in Economic Thought

Lavington’s trade cycle - an early account of business activity, unemployment and economic policy

Ehnts Dirk, Pufendorf-Gesellschaft für politische Ökonomie e. V.

In 1922, Fredrick Lavington published his book „The trade cycle: an account of the causes producing rhythmical changes in the activity of business“. It is one of the first academic writings explicitly linking business activity and unemployment with a focus on the banking system. Lavington recognizes that changes in the quantity of paper money and variations in bank loans can influence the price level and hence business activity. More precisely, the volume of promises to pay would be one of the main causes of cyclical price fluctuations. Lavington thus stresses the role of expectations of profits in determining present business activity. He explains that booms contain the cause of the following bust as the the boom is contained by the supply of legal tender money, which, however, can be extended through new supplies of Treasury notes. Lavington argues in favor of counter-cyclical monetary and fiscal policy in order to tame the fluctuations and the resulting unemployment. The paper summarizes the theory of Lavington’s trade cycle and then seeks to establish a link towards the theories of Schumpeter, Keynes and Minsky. It is then applied to the Great Financial Crisis and compared to contemporary economic textbook theory.

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Keywords: business cycle, banks, unemployment, trade cycle, unemployment, economic policy

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