How Spatial Economics Abandoned Monetary Analysis*

Hamlet without the Prince? How Spatial Economics Abandoned Monetary Analysis*

David Bieri†1,2,3

1School of Public & International Affairs, Virginia Tech, Blacksburg, VA 24061, USA 2Department of Economics, Virginia Tech, Blacksburg, VA 24061, USA 3Global Forum on Urban & Regional Resilience, Virginia Tech, Blacksburg, VA 24061, USA

Preliminary and incomplete draft This version: May 2019

Abstract From the local income effects of mortgage refinancing to the regional transmission of monetary policy via house price dynamics, the Great Financial Crisis has been a powerful reminder that money and credit—always and everywhere—matter greatly for the evolution of the space-economy. Yet, with the classical dichotomy still embedded firmly in its theoretical core, the contemporary canon of spatial economics (from urban economics to geographical economics and regional science) has little to say about monetary phenomena and their spatial consequences. Such a disengagement with regional aspects of money and credit represents a distinct break with the intellectual tradition of a long ancestry of spatial economists, stretching as far back as the seminal writings of Heinrich von Thünen’s. In this paper, I illustrate this contention by examining the monetary content of the work of August Lösch (1906–1945)—one of the founding fathers of modern spatial economics. Indeed, questions about the spatial neutrality of money, its institutional governance, as well as its endogenous creation, are central elements to his work. In this sense, I argue that Lösch—as a student of Walter Eucken’s, Arthur Spiethoff’s and Joseph Schumpeter’s—represents an important branch in the long lineage of 20th century Continental monetary thought. Yet such a pedigree notwithstanding, the current orthodoxy of spatial economics has now almost completely abandoned these very aspects of the Löschian system. I further argue that Lösch’s theoretical reflections on spatial aspects of money also reflect

*Abstract prepared for the 23rd Annual Conference of the European Society for the History of Economic Thought (ESHET) in Lille, at Science Po Lille, on 23-25 May 2019. The title is inspired by Kregel’s (1985) classic paper and its lesser-known antecedent (Kregel, 1982). Preliminary and incomplete—Please do not cite without permission. †Corresponding author: School of Public & International Affairs, Virginia Tech, 140 Otey St. (Office 213), Blacksburg, VA 24601-0113, USA. Web: globalforum.vt.edu. Email: [email protected] (David Bieri). primary elements of a ‘credit view’ which was slowly establishing itself in the waning years of the Weimar Republic. Indeed, Lösch’s treatment of money also forms a central pillar of his ambition to develop a ‘theory of the business cycle in space’ where the main focus is not on the location choice per se, but on the effects of the reciprocal links between trade flows and financial flows on endogenously determ- ined economic regions. In these aspects, Lösch relies mainly on Gottfried Haberler’s synthesis of international business cycle theory of the late 1930s, but also draws from Hans Neisser’s work on money and credit, particularly with regard to the impact of monetary policy on the business cycle. On these grounds alone, the lack of recognition of Lösch’s contributions to a spatially-oriented theory of money, let alone his (albeit rudimentary) attempt to link real and monetary elements in a synthesis of the theory of space with the credit theory—quite consistent with ‘Ohlin’s dream’— represents a historical curiosity, if not a puzzle. Spatial economics without Lösch’s monetary theory, then, appears indeed akin to Hamlet without the prince.

Keywords: Monetary theory, spatial economics, credit view, hierarchy of money, neutrality of money. JEL classiﬁcation: G18, G28, E42, R1. “Das Geld nannte Schumpeter einmal eine kuriose Form der sozialen Abrechnung. In ihrer reinsten Ausprägung könnten wir uns diese Abrech- nung einfach über eine zentral Buchhaltung für die ganze Welt vollziehbar denken.” – August Lösch(1949, p.37)

“Die geographischen Zinsunterschiede sind ganz allgemein ein Spie- gelbild der räumlichen Organisation des Bankwesens und der regionalen Strukturunterschiede der Wirtschaft.” – August Lösch(1940b, p.26)

“[T]he true shifting of the price level occurs only with credit creation; that is, with a hierarchy of different kinds of money, whereas in a region with a uniform currency the price waves started by a shift in purchasing power necessarily sufﬁce for transfer.” –August Lösch(1954, p.227)

1 Introduction

The contemporary canon of spatial economics has enshrined the ‘classical dichotomy’ in that it treats the spheres of money and production as analytically distinct.1 As such, spatial theory upholds the neutrality of money in its most basic quantity-theory position, suggesting it is only the absolute price level, not relative prices and interest rates, and hence real output, that is affected by changes in the quantity of money.2 Spatial economists thus tend to treat the monetary system as the proverbial veil that renders money and ﬁnancial interrelations a source for short-term frictions at best, but not relevant to the determination of regional market (dis)equilibria. In short, real factors determine real regional variables. With monetary neutrality deeply embedded in its theoretical core, present-day mainstream spatial economics has little to say about money and its spatial consequences. Yet, such a disengagement with spatial phenomena of money and credit represents a break with the intellectual tradition of a long ancestry of spatial economists, stretching back almost two centuries to the seminal writings of Heinrich von Thünen and Wilhelm Roscher.3 Examining the monetary content of the work of August Lösch (1906–1945)—arguably the most prominent

1In 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. Walter Isard first introduces the expression ‘space-economy’ in his seminal QJE (1949) survey article of German location theory, bringing to the English-speaking literature a term that is clearly inspired by its German origin as Raumwirtschaft (cf. Weigmann, 1931; Hoover, 1938). See Meardon(2000) and Marchionni(2004) for the taxonomic subtleties in delineating the fields in the English-speaking literature, and Schmidt(2014) for those in the German literature. 2See Patinkin and Steiger(1989) and Klausinger(1990) for complementary overviews on the origins of the term ‘neutrality of money’. 3Detailed discussions of von Thünen’s monetary thought are the subject of Meltzer(1980); Gordon (1983); Blaug(1985); Neuberger(1997); Nellinger(2014). Roscher’s monetary writings are examined in Barkai(1989).

1 of the ‘younger’ German location theorists—I argue that his monumental Die räumliche Ordnung der Wirtschaft (Lösch, 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 an institutional order that is inherently hierarchical.4 In important ways, Die räumliche Ordnung adumbrates, particularly in its second edition, central elements of a more comprehensive treatise on monetary problems that Lösch intended to deal with in “my book on money” (Lösch, 1944, p.ix) which—because of his premature death in 1945—only appeared posthumously as a manuscript fragment Die Theorie der Währung (Lösch, 1949).5 Mostly couched in terms of spatial aspects of the transfer problem, both Die räumliche Ordnung and Die Theorie der Währung represent complementary elements of an ambitious theoretical attempt to realize ‘Ohlin’s dream’ in its entirety, i.e. the synthesis of real and monetary elements of general equilibrium in the dynamic setting of the ‘space-economy’ (cf. Trautwein, 2014a,b). It is critical here that we distinguish between the explicit elements of ‘Ohlin’s dream’ (cf. Ehnts and Trautwein, 2012) and the more encompassing notion of ‘Isard’s dream’ of a General Theory that returns space to the core of economic analysis (cf. Fujita, 1999; Fujita and Krugman, 2004). Viewed in this light, one of Lösch’s most original theoretical innovations that gradually and consistently emerges over the course of his work is to present the economic analysis of regions with a setting of spatial (monetary) macroeconomics; in the Löschian framework, the endogenous location choices of economic agents give rise to differentiated regions which are linked via interregional trade and cyclical dynamics arise from the process of adjustments to balance- of-payment disequilibria that, in turn, emerge from transfers across space. A particular feature of this approach is the fact that it highlights the importance of inter-regional capital ﬂows—an aspect of the region to which spatial economists have paid little attention since.6 Against the background of these largely ignored dimensions of Lösch’s work, I contend that the continued separation of monetary theory from price

4I will generally refer to the original German ﬁrst and second editions of Die räumliche Ordnung der Wirtschaft (1940b; 1944). The English translation was published posthumously as The Economics of Loca- tion (1954), translated and edited by William Woglom with scientiﬁc input from Wolfgang Stolper, a fellow student of Lösch’s under Schumpeter at Bonn and lifelong 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. 5Upon publication as an uncompleted manuscript in volume 62 of the Weltwirtschaftlichen Archivs in 1949, the editors translate Die Theorie der Währung as ‘Theory of Money’ and ‘Monetary Theory’ for the English summary that accompanies the document. By contrast, Stolper(2008) translates it as ‘Theory of Foreign Exchanges’ in keeping with the German distinction between ‘Geld’, ‘Kredit’, and ‘Währung’. 6Work in the Post Keynesian tradition by Dow(1986, 1987a, 1988) represents an important exception in this regard.

2 theory in spatial economic thought represents a radical departure from the field’s intellectual origins. Indeed, in re-conceptualizing and fusing together in a revolutionary way key elements of interregional trade theory and location theory, Lösch’s treatment of monetary aspects of the space economy opens up a spatialized interpretation of the non-neutrality of money. In its engagement with regional aspects of money and credit, an important focus of my argument is the fact that, as one of Joseph Schumpeter’s most prom- ising students, Lösch represents an important branch in the long lineage of 20th century Continental monetary thought. For our purposes here, I pay particular attention to Lösch’s(1940a,b,c,d, 1944, 1949) analysis of the spatial consequences of monetary-financial arrangements. In this context, I suggest that Schumpeter’s own monetary insights have shaped Lösch’s thinking on spatial aspects of money and credit to a significant degree—after all, Lösch’s own intellectual formation and greatest theoretical insights take place under under Schumpeter’s close watch and guidance over the course of well over a decade, from the early 1930s right until his untimely death in 1945—a period during which Schumpeter worked most intensively on his troubled grand treatise on money, Das Wesen des Geldes (1970 [1943]). At the same time, Lösch’s work on monetary issues also shows clear marks of the theoretical imprint of his other academic advisors, Walter Eucken on monetary order and policy and, to a lesser extent, Arthur Spiethoff on credit markets and banking. Beyond the direct influence of his mentors, Lösch’s monetary thought more generally reflects the central topics of interwar (Ger- man) monetary theory, ranging from monetary reform to the nacent traces of a ‘credit view’ that emerged during the waning years of the Weimar Republic, with Hahn, Lautenbach, and Neisser among its strongest exponents. On these grounds, the lack of recognition of Lösch’s contributions to monetary theory, let alone his attempt to link the real and financial in a synthesis of location theory with modern credit theory represents a historical curiosity, if not puzzle. While the originality of Lösch’s œuvre beyond locational problems is well-documented (Stolper, 1954; Funck and Parr, 1978a; Blum, Funck, Kowalski, Kuklinski, and Rothengatter, 2007), his contributions outside of location theory generally have not been absorbed into the main theoretical corpus of modern spatial economics. With regard to the neglect of his monetary thought in particular, my overall argument in this paper thus echoes both Ponsard’s(2007) and Bröcker’s(2014) sentiment in suggesting that Lösch is a famous, though partly misjudged, and—in monetary matters—ignored economist. To paraphrase Kregel(1985), spatial economics without Lösch’s monetary theory is indeed like Hamlet without the prince. The balance of this paper is organised as follows. Section2 sets the scene with brief genealogy of monetary thought in spatial economics, retracing some of the key intellectual developments that have induced ‘monetary am-

3 nesia’ in this ﬁeld of the discipline. Section4 then examines Lösch’s central views on money, credit and banking within a broader context of his intellectual environment in which Schumpeter’s monetary tradition and the empirical business cycle tradition of the Kiel School played important roles. In section5, I then discuss the core of Lösch’s regional monetary theory as it is laid out in Die Theorie der Währung, paying particular attention distributional aspects of the spatial non-neutrality of money. Some concluding thoughts follow in section6.

2 Monetary analysis and the space economy

While the recent crisis has been a stark reminder of the heterogenous consequences of monetary-financial developments across regions, it seems somewhat paradoxically that the orthodox canon of spatial economic analysis remains firmly grounded in the classical dichotomy.7 Yet, over seven decades age, Lösch had already articulated his insights on the spatial nature of monetary phenomena, consistent with Schumpeter’s vision of placing the element of money “on the very ground floor of our analytic structure, abandoning the idea that all essential features of economic life can be represented by a barter-economy model” (Schumpeter, 1954, p.278). Indeed, in the sense of Schumpeter’s distinction between real analysis and monetary analysis, Lösch’s work consistently rejects the (classical) notion of treating money as the proverbial ‘veil’ behind which the fundamental exchange processes of a barter economy take place. In this sense, monetary analysis in the Löschian system “spells denial of the proposition that [. . .] the element of money is of secondary importance in the explanation of the economic process” (Schumpeter, 1954, p.277).8

2.1 Monetary amnesia: Walrasianism in space The great ﬁnancial market crisis of 2008 (GFC) and the subsequent recession not only led to major distortions in the world economy, but also shook the theoretical world view of the vast majority of mainstream economists into its very foundations. In addition to questioning the belief in the self-regulatory capacity of ﬁnancial markets, this also includes the inconvenient realization that the theoretical canon of economic thinking in modern economics—both

7The 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(1987b) and Bieri and Schaeffer(2015) for comprehensive surveys of the literature on the treatment of money in spatial economics. 8See Klausinger(1990) on more detail of the early usage of the term ‘veil of money’ in Schumpeter’s work.

4 in its neo-classical as well as neo-Keynesian style—has analytically neglected the interdependence between the sphere of money and that of the real economy. Despite several attempts at synthesis in the postwar period, the classical dichotomy and its axiomatic role in the Walrasian-based logic of theory formation still constitute the intellectual pegs, without their deep anchoring the complex framework of the now partially discredited, dynamically stochastic general equilibrium models (DSGE Models) would collapse.9 In many ways, since the crisis, the central elements of the orthodox monetary theory (the determination of the monetary base by the central bank in the IS-LM model, its relationship to the money multiplier, the role of credit in DSGE consensus and the mainstream metallist approach to the creation of the money) are difficult to reconcile with economic reality, if ever they were (Goodhart, 2009; Lavoie, 2015). It is true that during the Patinkin controversy over half a century ago at least the possibility was raised that the Classical System was inconsistent and indeterminate, which from today’s point of view—despite the greatest theoretical efforts in the recent so-called macro-finance literature in which existing models are retrofitted with financial frictions retrofit—nothing has changed significantly.10 The integration of money and value theory is still a seemingly distant goal, if it is perceived as such at all. To put it in a somewhat con- densed way, it seems as though one has somehow accepted Karl Brunner’s insight that “classical theory is composed of two unrelated segments. One contains a theory of a real economy and the other, a theory of a monetary economy—and there is no simple step from one to the other. They are two completely different theories with different implications, each one appropri- ate for its specific range of phenomena” (Brunner, 1951, p.173). Even a good decade after the financial market crisis, relatively little has changed in the deep anchoring of mainstream economics in the idea that money—financial frictions or not—is merely to be regarded as a veil behind which the real relations of production and exchange take place. Al- though Joseph Schumpeter and Hyman Minsky were made accessible to the general public in view of the theoretical neglects of the discipline following the crisis, in one central respect the great master and his pupil have not yet been justified; namely, inasmuch as even in the latest research in the field of macrofinance—that is, the merging of financial market theory with macroeconomics—real analysis still dominates rather than monetary analysis.11

9This includes Woodford’s “New Neoclassical Synthesis” which must be rated as only partially suc- cessful in this regard. See Boianovsky and Trautwein(2006b). 10See (Bieri, 1963) for a contemporary assessment of the Patinkin controversy and its relevance to the classical dichotomy. 11Monetary frictions that are consistent with the neoclassical dichotomy include the slow adjustment

5 In any case, the GFC has impressively demonstrated that money and credit are certainly not neutral in the short and medium term. On the one hand, the extraordinary intervention measures of the central banks have created a policy environment under historically unique interest conditions, whereby many of the money-theoretical discussions that have long since been over- come have been brought to the fore again. For example, the policy of “quantitative easing” has reinvented not only the central bank’s balance sheet as an instrument of monetary policy, but has also revitalized the dogmatic discussion of quantity theory (Marcuzzo, 2017).12 On the other hand, however, the intellectual follow-up to the crisis has also led to an intensification in dealing with a very wide range of issues concern- ing income and wealth distribution. As much as the subject of convergence— supported by the geopolitical facts of the postwar period—dominated the neoclassical underlying discourse, especially in the growth and financial market theory until the crisis, it has been the divergence since the global implo- sion of 2008 and, since Piketty and Zucman’s (2014) landmark publication, of course, the issue of distributional inequality at the level of individual in- comes that has been capturing economists of all stripes on a grand scale. What used to be regarded as the benefice of (radical) heterodoxy or of the disciplinary peripheries (e.g. the history of economic ideas) has now become fully embraced by the mainstream again. As such, theoretical and empirical distribution questions have also been rediscovered in monetary theory; is monetary policy actually income neutral or is there so far insufficiently researched redistribution through credit- dependent transmission channels? Is it possible that national monetary policy will therefore lead to (unintentional) regional income and wealth redistribution? Can government intervention in the credit market possibly also be re- sponsible for welfare-relevant interregional resource transfers?

2.2 Was it all in Lösch? In this article I want to show that these and similar questions are not en- tirely new, but were already intensively discussed during the inter-war period in the space economics of August Lösch (1906-1945). In particular, a re- evaluation of Lösch’s monetary theory works—with special consideration of his main work, Die räumliche Ordnung der Wirtschaft (1940b; 1944) and his of nominal quantities, such as, for example, sticky prices, and money illusion. Importantly, this form of monetary non-neutrality 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. 12In 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).

6 posthumous fragment, “Die Theorie der Währung” (1949)—explain that with Lösch, in many respects, one of the most important founders of modern economics is to consider monetary and lending-theoretical elements as integral aspects of the understanding of spatial imbalances and regional economic distributional issues. However, these important components of Lösch’s system are now almost completely forgotten. But a new examination of Lösch’s monetary theoretical considerations should make it clear that questions about the spatial (non) neutrality of money, as well as its endogenous creation, are central elements of the theory formation that have been lost in modern economics. As mentioned briefly above, the financial market crisis has indeed created a significant renewed interest in spatial aspects of monetary phenomena, such as trying to assign the differences of regional price level dynamics to their monetary origins (Del Negro and Otrok, 2007; Beckworth, 2010; Fielding and Shields, 2011). In a large part of this literature, old monetary issues, albeit not always explicit, appear in new clothes. These are not only questions about the inviolability of the money multiplier and the realization that the regional money creation “by the push of a button” is done by commercial banks, but also to questions about the distributional consequences, the transfer of monetary shocks in space. The post-crisis reality of the central banks and their “unconventional monetary policy” gave rise to a veritable flood of theoretical and empirical work that—almost exclusively without jeopardizing the analytic vocabulary of the micro-founded DSGE models—examines the redistribution consequences of the new monetary policy. In this literature, as already mentioned, redistribution occurs through financial frictions or price distortions that lead to relative asset prices and income streams (e.g. Brunner- meier and Sannikov, 2012; Auclert, 2017). A not inconsiderable part of this new literature also has an explicit spatial view of the character of the income and wealth distribution characterized by the monetary transmission channel (Hurst, Keys, Seru, and Vavra, 2016; Beraja, Fuster, Hurst, and Vavra, 2019). In addition to the spatial effects of endogenous money and monetary policy, the geographic origins of macrofinance, i.e. the regional links between macroeconomic and financial flows—that is, the core of Lösch’s work on money and cyclical fluctuations—are being rediscovered. Against this background, the recent finding by Acemoglu, Ozdaglar, and Tahbaz-Salehi(2015) that “the role of the input-output and the geographic networks in the propagation of industry-level (micro) shocks suggests that this network may also play a role in the amplification of macro shocks—such as aggregate demand, monetary and financial shocks—which appears to be a general understudied area” seems both banal as well as central. Similarly, Ozdagli and Weber(2017) point out that regional production networks could play an important role in a spatially differentiated monetary policy transmission mechanism to the real

7 economy. This one is thus tempted—to paraphrase Krugman(2002)—to ask the question, “was it all in Lösch"? As will be discussed in more detail in below, Lösch recognized that money and credit always and everywhere had local consequences. Exemplary for this position, one of the central themes of Die Theorie der Währung is Lösch’s contention that the spatial differences in changes in purchasing power were, above all, a phenomenon with monetary origins. Thus, from today’s perspective, one particularly important element of the purview of Löschian monetary analysis in modern spatial economics would concerns itself with a particular aspect of the transfer problem, i.e. the post-crisis adjustment mechanism to regional balance-of-payments disequilibria and the spatial effects of monetary policy. In this vein, I am suggesting that the recent financial crisis could not only be viewed as a ‘Minsky moment’, but also a ‘Lösch moment’ in so far as the disparate regional impacts of the financial dislocations during the crisis were a powerful reminder that the intersectoral flow of funds—always and everywhere—constitutes a local phenomenon with real effects across space (See also Bieri, 2017b,a). What applies to the above-mentioned anchoring the classic dichotomy in contemporary canon of mainstream economics, is especially true in the case of spatial economics which has—not least because of its national or even international dimension in matters of monetary policy—completely turned its back on issues of money and credit. The spatial theory thus confirms the neutrality of money in its most basic set theoretical position, which implies that only the absolute price level, not relative prices and interest rates, and thus real production, is influenced by changes in the money stock.13 Spa- tial economics therefore tends to consider the monetary system as the proverbial veil that money and financial relationships makes at best a source of short-term disorders, but not relevant to the determination of regional (dis)equilibria. In short, real factors determine real regional variables. Since the neutrality of money is deeply embedded in its theoretical core, today’s economics have little to say about money and its spatial effects. Thus, one of Lösch’s most original theoretical innovations, which gradually and consistently emerges in the course of his work, is the economic analysis of regions as part of a spatial (monetary) macroeconomics; in the Löschian system, the endogenous siting of economic agents creates differentiated regions linked by interregional trade, whose cyclical dynamics derive from the process of adjusting balance of payments (in) balances, which in turn stem from transfers in space. In these aspects, Lösch relies above all on Gottfried Haberler’s synthesis of the business cycle theory of the late 1930s, but also—especially with regard to the role of capital flows and changes in

13See Patinkin and Steiger(1989) and and Klausinger(1990) for supplementary reviews of the origins of the concept of “neutrality of money".

8 price levels as the catalyst of cycles—on Hans Neisser’s work.14 A special feature of Lösch’s approach is the fact that he emphasizes the importance of interregional capital ﬂows—an aspect of the region to which regional economists have since paid little attention.15

3 Spatial economics in retrospect

Beyond documenting how the monetary content of August Lösch’s spatial system completely disappeared from spatial economics, a related aim of this paper is to show that this development has its origins in the microfoundations- equilibrium transformation of the main corpus of orthodox economic theory, which now provides most of the epistemological and methodological underpinnings of contemporary spatial economics. In this context, I adopt Storper’s(2013) label to describe the dominant perspective in contemporary regional economics as ‘new neoclassical urban economics’ (NNUE). Un- der the NNUE paradigm, spatial heterogeneity of economic activity exclusively emerges from the optimal location choices of atomistic, representative agents (households, ﬁrms) and their respective interaction with the econom- ies of agglomeration in equilibrium. As such, spatial economists’ increasingly anaemic engagement with monetary issues during the discipline’s post-war half-century is but a direct consequence of the axiomatic embedding of the neutrality of money in the NNUE framework. With regard to Schumpeter’s(1954) distinction between real and monetary analysis, then, spatial economics today has completely turned its back on the latter, solely relying on the former which rests on the idea that all economic phenomena of the region can be represented by a barter-economy model that is fully described in terms of goods and services, and not monetary relations. In the mainstream of spatial economics, in other words, there is no theoretical place for the analysis of money, credit and banking. While this does not deny money some spatially non-neutral effects, the sanctity of the neoclassical dichotomy in spatial economics implies that all spatial phenomena for which money matters are exclusively attributed to some form of monetary frictions. Today, the analytical approaches of the contemporary regional mainstream— irrespective of whether they are subsumed under the heading of the NNUE or its trade-theoretic, neoclassical cousin, Krugman’s New Economic Geography (NEG)—are exclusively concerned with the study of real problems of a spatial barter economy in which money plays only a perfunctory role.

14See Boianovsky and Trautwein(2006a) on how Haberler brought about “consensus” in the economic theory of his time, and in particular, Trautwein(2017b,a) for conjunctural theoretical similarities and divergences in Haberler and Neisser. 15Work in the Post Keynesian tradition by Dow(1986, 1987a, 1988) represents an important exception in this regard.

9 3.1 Beyond location theory The editorial to the silver jubilee edition of the Journal of Regional Science (2010) may lead even the most neutral observer to the seemingly inevitable but er- roneous conclusion that the NNUE-NEG majority view represents something of a natural outcome in the evolutionary development of spatial economics in general, and locational theorizing in particular. Certainly, much of the se- ductiveness of such a perspective derives from depicting the neoclassical core of NNUE-NEG as the inescapable endpoint that anchors a long arc of almost two centuries of steady intellectual progress, tracing out a smooth trajectory that begins with von Thünen and Weber and extends—via Lösch, Isard and his student William Alonso—to Edward Glaeser and Paul Krugman, two of the contemporary high priests of the majority NNUE-NEG view. While it is true that much of spatial economics today has been, and con- tinues to be, dominated by NNUE-NEG epistemology and methodology, it would be both wrong and historiographically inaccurate to suggest that the central objective of 20th century spatial economics “was to rewrite neoclassical competitive equilibrium theory in terms of spatial coordinates [. . .] to form an intellectual amalgam focused on identifying the regularities of the neoclassical space-economy” (Scott, 2000, p.486). Indeed, I suggest that it is difficult to defend the claim that the elegant shorthand of the neoclassically-inspired microeconomic core of mainstream spatial economics represent unequivocal, linear signs of theoretical progress in the sense of Lösch’s original project. In light of the fact of how much the general equilibrium approach to spatial problems draws on location-theoretic approaches developed by German spatial economists, we must momentarily engage with this body of literature and evaluate its broader placement in the history of economic ideas. Specifically, we must address the particular claim that the writings of von Thünen, Weber, and—for our purposes here—most importantly, Lösch trace out a coherent evolutionary course of economic ideas which culminates in NNUE-NEG theorizing. The German hegemony of location theory has become received wisdom ever since it was first established in Isard’s(1949) famous Krankenpflegerge- schichte that portrays the location theoretic pedigree of German economists as an almost linear intellectual progression that begins with von Thünen and ends with Lösch (cf. Bröcker, 2014).16 And it is Blaug’s(1979, 1997) authorit- ative history of spatial economic thought that cements Isard’s narrative pro- claiming “an effective German monopoly of spatial economics in the interwar period and an extraordinary German preoccupation with the subject for an entire century after Thünen . . . [with] August Lösch’s Räumliche Ordnung der Wirtschaft(1940) [standing] at the very pinnacle of a century of theorizing

16Add reference to Isard(2003).

10 about the economic problems of space” (Blaug, 1979, p.22). In so far as the analytical abstraction of von Thünen’s(1826) magnum opus Der isolierte Staat is more reminiscent of the writings of Ricardo than of the analytical methods that emerged with the older German Historical School, von Thünen can be thought of as a ‘German classical economist’ (Hutchison, 1962; Blaug, 1985). Yet, for our purposes here, it would be inaccurate to lump together—merely by extension—the later generation of German location theorists, i.e., Weber, Weber, Oskar Englander, Andreas Predöhl, Hans Ritschl, Hans Weigmann, and eventually Lösch, under the heading ‘neoclassical’ simply for temporal reasons or on the grounds of their innovations in moving the (mathematical) analysis of location problems from Weber’s partial equilibrium approach to the comprehensive spatial general equilibrium developed by Lösch. Undoubtedly, at the time of the ‘formalist revolution’ (Blaug, 1998, 2003) during the 1950s and 1960s, the rapid introduction of linear programming among regional economists led to a particularly rapid absorption of the most important elements of neoclassical theory, in particular the spatial equilibrium properties of production theory in the exchange economy. led into the corpus of the Raumwirtschaftslehre (Beckmann, 1955, 1960).17 At the same time, however, this does not imply that modern descend- ants of classical location theory are inherently neoclassical by pedigree, or that they even form a coherent economic school of thought. It is in this sense that the highly abstract, hypothetico-deductive method of studying locational problems of this group of German spatial thinkers, including Lösch, ought not be automatically associated with neoclassical, marginalist thought, let alone be equated as the intellectual origins of neoliberal spatial policy doctrine.18 Indeed, Bröcker’s(2014, 2015) careful re-evaluation of Isard’s account of spatial economics in the German tradition convincingly shows that, while Lösch was standing on the shoulders of giants in developing his ambitious theory, it was—by an epistemological measure—not those of von Thünen, Launhardt or even Weber, but those of but those of Ohlin and Edward Cham- berlin (or possibly Joan Robinson), and—as I argue in this paper—on monetary matters, Lösch was carried by the efforts of his teachers and mentors, Eucken, Spiethoff and, above all, Schumpeter. The following section develops this argument in more detail, highlighting the importance of the intellectual soil on which Lösch’s theoretical creativity and empirical genius was able to ﬂourish. 17For references, see the comprehensive, chronological historical bibliography in Ponsard(1983, pp. 195–227). 18See Lawson(2013) for an extensive discussion of the interpretational ambiguity of the term ‘neoclassical’, including its oft-asserted link to neoliberal thought.

11 Table 1: Cumulative index frequency of monetary terms in spatial economics textbooks

Index term Balance of Capital Interest Monetary Author Publication Year Banks∗ Credit† Finance§ Money] payments ﬂows‡ rates¶ policy[ Lösch The Economics of Location1 1954 5 1 4 10 1 6 0 15 Hoover The Location of Economic Activity 1948 2 0 0 2 0 6 0 0 Isard Methods of Regional Analysis2 1960 Richardson Regional Economics 1978 1 0 0 1 0 0 0 0 Fujita Urban Economic Theory 1989 0 0 0 0 0 0 0 0 Fujita, Krugman, and The Spatial Economy 2001 0 0 0 0 0 0 0 0 Venables Fujita and Thisse Economics of Agglomeration 2002 12 Isard, Azis, Drennan, Methods of Interregional and Re- Miller, Saltzman, and 1998 gional Analysis Thorbecke Combes, Duranton, and Economic Geography 2008 0 0 0 0 0 0 0 0 Gobillon

Brakman, Garretsen, The New Introduction to Geo- 2009 0 1 0 0 0 0 0 0 and van Marrewijk graphical Economics McDonald and McMil- Urban Economics and Real Estate 2010 len O’Sullivan Urban Economics 2011 0 0 1 0 0 0 0 0 Ioannides From Neighborhoods to Nations 2012 Modern Urban and Regional Eco- McCann 2013 1 0 0 1 2 1 0 0 nomics

Notes: Notes: 1also covers the 2nd edition of Lösch’s (1940b) German original Die räumliche Ordnung der Wirtschaft. The English translation was published posthumously; 2also covers Isard’s (1956) Location and Space-Economy. ∗includes the search terms “banking”; †includes “credit creation”, “mortgage credit”; ‡includes “capital adjustment” and “gold movements”; §includes “financial markets” and “financial services”; ¶includes “interest differentials” and “interest rate parity”; ]includes “neutrality of money”; [includes “central bank”, “Federal Reserve Bank”, “Federal Reserve System” or “money supply”. Sources: Author and Bieri and Schaeffer(2015). 3.2 The fluttering veil in spatial economics textbooks Against the background of the Schumpeterian distinction introduced above, and certainly in light of the stark financial convulsions of the recent economic crisis, it is appears as somewhat of a paradox that the orthodox canon of regional analysis is exclusively conducted in terms of real analysis. In many ways, the neoclassical paradigm and its dichotomy are currently perhaps even more strongly anchored in regional science and urban economics that they are in the macroeconomic mainstream where the financial crisis has provided a certain momentum to a critical re-examination of the key tenets upon which the received wisdom of contemporary theorizing rests. Indeed, a cursory survey of leading spatial economics text books of the post-war period reveals that treatment of monetary phenomena have increasingly become marginalized in more recent years and they are altogether ab- sent from the leading texts of regional science broadly defined. In terms of the Schumpeterian distinction, the analytical approaches of the contemporary regional mainstream—irrespective of whether they are subsumed under the heading of the “New Urban Economics” or the “New Economic Geography”—are exclusively concerned with the study of “real” problems of a spatial barter economy in which money plays only a perfunctory role. Table1 illustrates this lack of coverage of “monetary analysis” in standard texts of regional science and urban economics by tabulating the simple cumulative frequency of the indexed terms “banks/banking”, “credit”, “finance”, “interest rate”, “money” or “monetary policy” in a selection of standard textbooks, across all subfields in spatial economics ranging from regional science to urban economics and economy geography. While the early foundational texts by Lösch(1954) and Isard(1956) certainly include at least a modicum of monetary analysis, recent texts in urban and regional economics have completely abandoned any coverage of regional or spatial aspects of the monetary-financial system. From the well-established teaching material by O’Sullivan(2011) and McCann(2013) to the increasingly popular teachings of the new geographical economics, codified by Combes, Duranton, and Gobillon(2008) or Brakman, Garretsen, and van Marrewijk (2009), modern teaching in regional science appears exclusively anchored in the real analysis of the barter-based paradigm of the space economy. In the mainstream of spatial economics, in other words, there is no theoretical place for the analysis of money, credit and banking. While this does not deny money some spatially non-neutral effects, the sanctity of the neoclassical dichotomy in regional science implies that all spatial phenomena for which money matters are exclusively attributed to some form of monetary frictions.

13 4 German monetary theory, the Kiel tradition, and the Freiburg School

Lösch’s long-standing interest in international monetary problems—as his life-long friend and fellow Schumpeter student Wolfgang Stolper(2008) points out—spans his entire career, beginning with his ﬁrst publication on the transfer problem (Lösch, 1930)—a paper that was born out of a term paper for an Eucken seminar while still at Freiburg. While it takes more than a decade for Lösch’s two other discussions of the transfer problem (Lösch, 1941, 1943) to be published, both Die räumliche Ordnung der Wirtschaft and Die Theorie der Währung—most of which had been completed by 1942—deploy the transfer problem as their most important theoretical lens. In section5, I will return to this prominence of the transfer problem in the Löschian system as a tool for the analysis of spatial (monetary) effects in the adjustment of regional balance-of-payment disequilibria.19

4.1 Lösch’s Schumpeterian heritage In 1931, after graduating in economics at the Albert-Ludwigs-Universität Freiburg where Eucken was his mentor, Lösch came under Spiethoff’s and, more closely, under Schumpeter’s tutelage at the Rheinische Friedrich-Wilhelms- Universität Bonn from where he obtained his doctorate a year later and in 1936 his habilitation. From the beginning of his arrival at Bonn, Lösch became closely involved in the legendary Schumpeter Seminar of 1931 which— according to Lösch’s own diaries (partly published in Riegger, 1971)—was not only brimming with the intellectual energy of his fellow students, but also enjoyed a unique social environment and camaraderie that was actively fostered by Schumpeter himself. While Schumpeter was clearly the main attraction for Lösch and his fellow students, Spiethoff, Herbert von Beckerath, and Karl Friedrich Rößle contrib- uted their important share to the congeniality of the intellectual and social atmosphere at Bonn during the Schumpeter years (Allen, 1991; Stolper, 1998). One of the youngest members of the seminar, Lösch completely immersed himself in his new academic surroundings, soaking up the atmosphere at every step. It is precisely during this period that Schumpeter worked most intensively on his grand treatise on money, Das Wesen des Geldes (1970 [1943]), which, over the course of its forty year gestation period, experienced an inordinate amount of trials and misadventures and was only published posthumously.20

19See also Bieri(2017a), Bieri(forthcoming), and Bieri(2019) for more biographical details of Lösch’s intellectual formation. 20See Kulla(1989); Stolper(1989); Messori(1997); Alvarado(2014) for a detailed chronology and com-

14 Indeed, there is no doubt that Schumpeter’s own monetary insights that he wrested out of his intense struggle with Das Wesen have left deep imprints in the monetary thought of many of his students, including Lösch’s. In addition to Lösch and Stolper, at least three of the lesser known 1931 Seminar participants end up making signiﬁcant contributions to monetary matters, to varying degrees under Schumpeter’s immediate direction in the following years: Kuschmann(1933), Bode(1935), and Wiebel(1936).

4.2 In the Zeitgeist of interwar macroeconomics Beyond Schumpeter’s direct influence, Lösch’s broader intellectual formation takes place during the waning years of the Weimar Republic, a period of intense economic discourse and debate in Germany. In what follows, I argue that Lösch’s work must also be valuated against the theoretical developments in macroeconomics of his time. In this sense, Lösch is clearly a child of his time in a double sense of the meaning. First, there is the well-known dra- matic impact and hardship associated with his brave decision to embrace “internal emigration” under the NS regime and the cruel and tragic consequences for his career, and ultimately, his life (e.g. Zottmann, 1949; Funck and Parr, 1978b; Barnes, 2015). At a different level, the corpus of his work, if viewed in its entirety, renders visible a unique cross section of the Zeitgeist of (mostly German) macroeconomic thought. Table2 provides an overview of Lösch main publications broadly grouped by topic, rather than in strict chronological order. Beginning with a review in Schmollers Jahrbuch on the interwar debate on the transfer problem of German war reparations (Lösch, 1930), topics in trade theory and international economics in some sense form the backbone of much of Lösch’s work throughout his short career.21 In parallel, his work on the business cycle theory forms the second main pillar of his research, culminating with his brave inversion of the Malthusian argument of the economic basis of demographic changes in his 1936 Habil- itationsschrift under Spiethoff and Schumpeter. In an extension of this work which he first introduces to an American audience during the 1936 meetings of the Econometric Society in Chicago, his QJE article (Lösch, 1937) makes the causal claim of demographic origins of conjunctural developments by staking it on detailed empirical macro data, in the best sense of the tradition of the Insitute für Weltwirtschaft at Kiel where he would become a member of the scientific staff in 1940 under Andreas Predöhl’s (controversial) directorship.22 plementary interpretations of Schumpeter’s struggle with Das Wesen, the origins of which can be traced back to his Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908). 21See section5 for more discussion of the role of the transfer problem in Lösch’s work. 22See Hagemann(1997) for an overview of the pioneering empirical macroeconomics at the Institut für Weltwirtschaft (IfW) at Christian-Albrechts-Universität Kiel during the interwar period, and particularly

15 Lösch’s work on population waves and the business cycle is also interesting for another reason, namely in that it anticipates much of what, within little more than a year of the publication of his QJE article, would become the main argument of Alvin Hansen’s(1939) secular stagnation hypothesis formulated in his 1938 AEA presidential address.23 And then there is Lösch’s work on money, credit and banking which is the main focus of my paper here. Importantly, as I have argued above, this strand of his work also appears very much as a product of his time, with monetary matters—particularly those in combination with the German debate on business cycles and the Great Depression (e.g. Hagemann, 1994; Klausinger, 1995)—very much at the center of the macroeconomic discourse of the time. Viewed in this light, then, I want to argue that the true nature of Lösch’s genius lies not so much in his seemingly insular contribution to the analysis of locational problems, but rather in an ambitious spatial synthesis of the main macroeconomic questions of his time. Indeed, much beyond the commonly emphasized developments in location theory, Lösch’s formative years were some of the most active years in German economic theorizing since the Methodenstreit. It was a period that not only witnessed important contributions in the development of monetary theory, but also in the advancement of (empirical) research on the business cycle and the analysis of long-run development of the capitalist system, including questions over expansionist policies that in some regards anticipate the policy activism of Keynes’ General Theory (see Hagemann(1999) for a historical overview). Part of this debate on the role of the state in economic affairs also brought forth a set of social liberal arguments that would become associated with Eucken, Franz Böhm, Leonhard Miksch, and Hans Großmann-Doerth of the Freiburg School—a veritable school of thought in the Schumpeterian sense (in that it had a master, disciples and intellectual community) which, by the eve of World War II, would prepare under the heading of Ordoliberalism the intellectual foundations for Germany’s post-war Social Market Economy and the resultant Wirtschaftswunder under the Erhard administration.24 With Eucken as his teacher at Freiburg and lifelong supporter, it is far from a coincidence that the German title of Lösch’s magnus opus is Die räumliche Ordnung der Wirtschaft—a connection that has largely gone unnoticed, not at least because this carefully chosen title quite literally was lost in translation with the publication of the English version as The Economics of Location (1954). the rise and fall of the Kiel school that was associated with the IfW’s Astwik Division (Abteilung für Statistische Weltwirtschaftskunde und internationale Konjunkturforschung) under Adolf Löwe. See also Omland(2009) for a more general history of the IfW during the NS period. 23See Dockès(2015) and Backhouse and Boianovsky(2016) for complementary accounts of the secular stagnation debate in historical perspective. 24See Rieter and Schmolz(1993), Sally(1996) and Tribe(2007) for good overviews.

16 Table 2: Lösch’s key works by ﬁeld

Field Publication Year Outlet Eine Auseinandersetzung über das Transferproblem 1930 SJfGVV Wo gilt das Theorem der komparativen Kosten? 1938 WWA Eine neue Theorie des internationalen Handels 1939 WWA Die Lehre vom Transfer – neu gefaßt 1941 JfNS

Trade theory, Um eine neue Transfertheorie: Zur Verteidigung der al- international macro 1943 JfNS ten Lehre durch Fritz Meyer Bevölkerungswellen und Wechsellagen 1936 G Fischer Die Vergreisung—wirtschaftlich gesehen 1936 SJfGVV

Wirtschaftsschwankungen als Folge von Bevölkerungs- 1936 SJfGVV wellen Population Cycles as a Cause of Business Cycles 1937 QJE 1937 SJfGVV

Business cycle theory Noch einmal: Bevölkerungswellen und Wechsellagen

Das Problem der Wechselwirkung zwischen 1938 WWA Bevölkerungs- und Wirtschaftsentwicklung Beiträge zur Standorttheorie 1938 SJfGVV The Nature of Economic Regions 1939 SEJ Die räumliche Ordnung der Wirtschaft: Eine Untersuchung 1940/44 G Fischer Spatial über Standort, Wirtschaftsgebiete und internationalen Handel economics, location theory Economics of Location 1954 Yale Die englischen Zwangskredite 1940 Die Bank Verrechnung und Goldwährung – Ein Vergleich 1940 Die Bank Die Geographie des Zinses 1940 Die Bank Bemerkungen zum Währungsplan vom Keynes 1943 UP

Money, credit, and banking Geographie der Preise 1944 UP Theorie der Währung: Ein Fragment 1949 WWA

Notes: JfNS: Jahrbücher für Nationalökonomie und Statistik; QJE: Quarterly Journal of Economics; SJfGVV: Schmollers Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft; SEJ: Southern Economic Journal; WWA: Weltwirtschaﬂiches Archiv; UP: Unpublished. Sources: Bieri(2019).

17 Beyond Eucken’s intellectual influence on Die räumliche Ordnung, Lösch’s diaries also reveal that he received critical private financial support from Eucken with out which it is highly probable that the publication of the first edition might not have happened. Additional influences of Eucken and his Freiburg colleagues, particularly as it pertains to Lösch’s thinking on monetary order, have left important marks on Theorie der Währung, as is discussed in more detail below. In light of the above aim to argue for a re-evaluation of Lösch’s work on money as a particular product of its time, Rieter and Schmolz(1993, p.90) provide additional support in favour of such an endeavour in their schematic classification of German economics between 1933 and 1945 into five main schools of thought or fields (‘historical-holistic strand’, ‘historical- neoclassical synthesis’, ‘individualistic-neoclassical strand’, ‘macro- and monetary research’, and ‘exile’). In this setting, Lösch is grouped—along with Föhl, Gestrich, Lautenbach, and Stucken—under the heading ‘macro- and monetary research’—a field that in Rieter and Schmolz’s(1993) taxonomy has its main linkages and intellectual connections to Keynesianism on the one hand, and to the ordoliberalism of the Freiburg School and the Aus- trian School (both part of the ‘individualistic-neoclassical strand’) on the other hand. [INCOMPLETE: Discuss Garvy(1975), Backhaus(1983), Hudson(1985), Back- haus(1997), Laidler and Stadler(1998), Klausinger(1999), and Laidler(2012) regarding neglected contributions to monetary theory by German economists during the interwar period. Also Trautwein(2000) and Arestis and Mihailov (2011) on the ‘credit view’ of money.] In the next section, we now turn to the core of the Löschian monetary systems which—as is later developed in more detail by Isard—hinges on the understanding that the structure of regional economic activity is influenced by how institutional components of the monetary-financial system promote the interregional mobility of funds and, by extension, the mobility of funds among the various sectors of the space-economy.

5 Economics, not geometry: Löschian monetary analysis in space

With regard to Lösch’s(1940b,d, 1949) pioneering analysis of the spatial consequences of monetary-financial arrangements, this section attempts to demonstrate specific aspects of hitherto neglected important theoretical insights for theorizing the flow of credit money across space. Throughout, I will take the position that these lesser-known aspects of Lösch’s work are broadly consistent with a spatialised version of contemporary issues in monetary the-

18 ory, in particular with regard to some particular aspects of Post Keynesian monetary theory in so far as it concerns liquidity preference, the loan-to- deposit causality, and circuitist notions of the flow of funds.25. As briefly hinted at above, Die Theorie der Währung was published only posthumously as a 52-page fragment in Band 62 of the Weltwirtschaftliches Archiv, the first volume after the journal’s four year post-war hiatus. Its prominent placement in this volume—a collection that, in addition to an obituary by the managing editor, his former IfW co-worker and collaborator Anton Zottmann(1949), contained at least three important contributions on monetary matters (Mackenroth, 1949; Pedersen, 1949; Schneider, 1949)—perhaps permits some speculative inference on the possible relevance of this aspect of Lösch’s work. Indeed, Lösch’s own diaries suggests that, while the manuscript had been mostly completed by 1942, the author himself was bitterly disappointed about the fact that he was prevented by the privations of war from working more intensely on issues of the international monetary order. Indeed, in some of his last personal notes, Lösch even expresses the feeling that the ideas in his unpublished book on money, particularly those with regard to a new world monetary order, were anticipating those of the Keynes Plan and those of Harry Dexter White presented at the UN Monetary and Financial Confer- ence at Bretton Woods in 1944.

5.1 Hierarchy, order, and endogenous money A key feature that the Löschian systems shares with (contemporary Post) Keynesian monetary theory pertains to their respective characterisation of the monetary-financial system as a hierarchical order. A further particularity of this view is the observation that the ‘hierarchy of monies’ is a hybrid, that is part public (‘outside money’, a net asset to the private sector) and part private (‘inside money’).26 It has both public and private liabilities that circulate as money.27 Indeed, two specific aspects of Lösch’s analysis of the spatial consequences of monetary-financial arrangements provide a useful lens for linking the hierarchy of money to the spatial structure of the financial system.28 First, Lösch(1949) recognizes that money and credit are always and every-

25See, for example, Dow and Earl(1982), Arestis(1988, 1996), and Chick and Tily(2014) 26The 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. 27See Bell(2001) and Mehrling(2011, 2013) for a discussion of this hierarchical hybridity of modern money in a contemporary context. 28This section is based on Bieri(2017b).

19 where fundamentally hierarchical in nature and that all money is credit money, even state money. The modern monetary system is not only hierarchical in finance, but it is also hierarchical in power—a property that Lösch repeatedly highlights by referring to the Federal Reserve’s ability to operate with discre- tion with regard to what it considers adequate collateral for interbank clear- ing. Table3 illustrates the hierarchy of money in the Löschian system as a spatial monetary order where money and credit are created by different financial institutions at separate levels of the hierarchy. The Löschian monetary pyramid can be read both institutionally and, perhaps more importantly, in a functional manner, i.e., in terms of what constitutes money and credit as an accepted mean of settlement. In fact, with regard to the spatial propagation of changes in the price level, Lösch observes that the “shifting of the price level occurs only with credit creation; that is, with a hierarchy of different kinds of money, whereas in a region with a uniform currency, the price waves started by a shift in purchasing power necessarily suffice for transfer” (Lösch, 1954, p.227). A central feature of this monetary hierarchy is the fact that the distinctions between money and credit are not strict and largely depend on the specific vantage point from within each layer of the system. In this system, gold and deposits at the Bank for International Settlements are the ultimate money because they are the ultimate means of international payment. Currencies, both international money and national money, are deemed a form of credit insofar as they are promises to pay gold. Similarly, further down the hierarchy, bank deposits are viewed as a form of private credit money, effectively promises to pay currency on demand and thus twice removed from the promises to pay ultimate money. Private money in the form of debt obligations or securities is then a promise to pay currency or deposits over some specific time horizon. Another crucial feature of this hierarchical view of money lies in the fact that at each layer the ‘moneyness of credit’ depends on the credibility of the promise by a given issuer to convert a specific form of credit into the next higher form of money. In other words, what counts as money and what counts as credit depends on the layer of the hierarchy under consideration, on what counts as ultimate means of settlement. The translated and augmented version of Lösch’s original table in the bottom panel of Table3 reveals that the Löschian monetary hierarchy maps directly into a Post Keynesian-Minskian perspective of monetary hybridity according to which the credit pyramid os- cillates between a condition where money is ‘scarce’ and one where credit is ‘elastic’.29 Second, Lösch’s(1940b,d) work on financial markets acknowledges the importance of capital flows throughout the urban hierarchy, highlighting the spatial relationship between financial variables and institutional functions,

29Cf. Wray(2009) and Mehrling(2013) for a dicussion of this point in a contemporary context.

20 Table 3: Hierarchical money in the Löschian system

Translated (and augmented) version:   1. Highest-order money: Global money (Currency: Gold;  † ∗  credit money: BIS )     2. High-order money: International money‡ (£, Reichsmark)     3. Mid-order money:  National money High-powered      money (currency,      central bank re-       serves), occasionally    Outside money       equivalent regional      money Regional  4. Lower-order money:  money (‘partial  Private credit money National commercial      money’)  and retail banks,       regional and local       (community) banks   5. Lowest-order money:  Private money Private or ﬁscal debt       obligations, in partic-    Inside money    ular commercial pa-   per

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 such as financial regulation.30 Another important, related perspective that is consistent with Lösch’s work comes from Minsky’s(1991, 1993) re-emphasis of Keynes’(1930) fundamental insight that the non-neutrality of money needs to be a “deep part of the system, not an afterthought in a capitalist economy” (Minsky, 1996, p.78).31 In terms of its analytical approach, Die Theorie der Währung could even be said to include certain proto-Minskian elements, in particular its balance- sheet perspective that adopts a flow-of-funds perspective of interlocking balance sheets. As Minsky(2008) reminds us much later, the key to this method is to look at all actors in the economy (households, firms, governments and the financial sector) “as if they were banks”, each with a balance sheet of cash inflows and cash outflows and each bound by the ‘survival constraint’ (that is the requirement that cash outflow not exceed cash inflow). The moneyflow economy then arises in aggregate from the interconnection of all balance sheets, which, in turn, gives rise to the ‘fundamental instability of a credit economy’ (Hawtrey, 1919; Minsky, 1977, 1993).

5.2 Transfer and the regional balance of payments as an analytical tool As previously noted, the transfer problem is not only the subject of Lösch ﬁrst publication (Lösch, 1930), it also remains one of his preferred analytical tools for examining economic linkages across space, including Die Theorie der Währung. Yet, his 1930 article is not only important for that reason alone. Pub- lished in one of the most established disciplinary outlets of its time (Schmollers Jahrbuch), the 24-year old Lösch is still a student at Freiburg when—clearly motivated by his teacher’s writings on the subject (Eucken, 1925, 1926, 1929)— he takes on a major debate of his time, while showing signs of an intellectual emancipation in substance by positing himself—at least in part—against the views of Eucken (and Keynes) in support of Ohlin. The debate on the transfer problem is commonly framed as a dispute between (a still classical) Keynes and Ohlin over relative size and nature of secondary burden of the transfer, i.e. direction in which relative purchasing power will be affected due to a shift in the international terms of trade.32 Prior to the Keynes-Ohlin exchange in the Economic Journal in 1929, however, there is a very active debate in the German-speaking literature that deals—under

30Indeed, Post Keynesian monetary thinkers assign functional and institutional variation one of the most influential pathways for change in real-financial linkages (e.g. Dow, 1982; Chick and Dow, 1988, 1996). 31Indeed, the similarities between Lösch’s monetary thought and that of Minsky are probably far from coincidental; as figure ?? illustrates, both were students of Schumpeter’s (Lösch at Bonn, and Minsky at Harvard). 32See Eichengreen(1987) and chapters 1 and 2 in Brakman and van Marrewijk(1998) for a good overview of the standard interpretation of the Keynes-Ohlin debate.

22 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.

the particular rubric of the economic impact of reparations payment modal- ities under the Dawes’ Plan of 1924—with the central issues of the transfer problem (e.g. von Mühlenfels, 1926, 1930). Furthermore, the Keynes-Ohlin debate also generated an Austrian strand of the discussion involving Haberler (1930b,a), Machlup(1930) and Ohlin and Morgenstern(1930) that deserves a separate mention for its focus on the (monetary) nature of the transmission mechanism of the transfer. [INCOMPLETE: Discuss ﬁgure1 and add important link also to Stolper and Tiebout(1978 [1954]) and to Miksch(1949a,b, 1951)]

5.3 Non-neutral money and spatial distribution: Contempor- ary relevance With regard to monetary-financial linkages of transfers, it is particularly worth highlighting that Lösch identifies two separate pathways for monetary quantities to interact with the rest of the economy, namely, via the price level of financial assets and via the price level of real assets. In this formulation, the

23 spatial non-neutrality of money will be due to the difference in how money enters into the determination of each price level. Instead of making the non- neutrality of money dependent on (real or informational) frictions, this set-up is essentially ‘Keynesian’ in that the determination of the two price levels crit- ically depends on the existence of both capital and nonmonetary assets, the interaction between prices for investment goods and those for capital goods, and the conditions for external finance.33 “If everything occurred at the same time there would be no development. If everything existed in the same place there would could be no particularity. Only space makes possible the particular, which then unfolds in time.” – Lösch(1954, p.508, emphasis in the original) “The neo-classical economist thinks of a position of equilibrium as a position towards which an economy is tending to move as time goes by. But it is impossible for a system to get into a position of equilibrium, for the very nature of equilibrium is that the system is already in it, and has been in it for a certain length of past time. Time is unlike space in two very striking respects. In space, bodies moving from A to B may pass bodies moving from B to A, but in time the strictest possible rule of one-way traffic is always in force. And in space the distance from A to B is of the same order of magnitude (whatever allowance you like to make for the Trade Winds) as the distance from B to A; but in time the distance from to-day to to-morrow is twenty-four hours, while the distance from to-day to yesterday is infinite, as the poets have often remarked. Therefore a space metaphor applied to time is a very tricky knife to handle, and the concept of equilibrium often cuts the arm that wields it.” – Robinson(1953, p.85, emphasis in the original)

[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). — INCOMPLETE: Discuss figure1] Table4 summarizes our preceding discussion in terms of the most important conceptual differences between the orthodox view of money in regional science and its Löschian alternative. In particular, table4 compares these competing paradigms of monetary theorizing along key dimensions, namely, money, interest, prices, and the nature and structure of financial intermediation. Indeed, of the “continuing muddles in monetary theory”, as

33See, 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.

24 Goodhart(2009) puts it, several are particularly relevant for the regional analysis of money because they are so deeply embedded in the theoretical fabric of NNUE-NEG view of money. Above all, this includes the analysis of the monetary base multiplier of bank deposits, the current three-equation neoclassical consensus, assuming perfect creditworthiness, and hence no need liquidity intermediation and the analysis of the evolution of money. For each of these dimensions of monetary analysis, the last column of table4 outlines a few high-level areas of theoretical and empirically inquiry that are implied by Lösch’s fragment Die Theorie der Währung. While too numerous to be elab- orated in detail, I shall briefly discuss a few of the topics for expositional purposes. For example, the financial crisis has reminded policy makers just how much the dynamics of regional cost of living adjustments depend on a clear understanding of house price movements, particularly in the U.S. where the recovery of house prices has shown substantial regional heterogeneity. Even in the absence of nominal exchange rate movements and trade barriers, some of the observed deviations from regional purchasing power party (PPP) are even more persistent that their international counterparts. Indeed, relative price levels among U.S. cities have historically shown mean reversions at an exceptionally slow rate, seemingly in contrast to recent evidence of falling transportation cost and the strong regional integration of the U.S. economy (e.g. Cecchetti, Mark, and Sonora, 2002; Chen, Choi, and Devereux, 2006). While non-traded local goods and services are one common real sector explanation for such deviations from PPP, the two-price level perspective of the Lösch view would suggest additional monetary phenomena, such as regional asset price inflation in the housing market, as an alternative causal pathway. Similarly, discussions about regional differences in interest rates commonly assume that such divergences strictly reflect real factors, above all the balance between ex ante saving and ex ante investment which drive equilibrium in the goods market. Thus, in the standard view of ‘real analysis’, by construc- tion, there is no difference between saving and financing (Borio and Disyatat, 2011; Borio, 2014). The monetary analysis of the Lösch view, by contrast, would highlight that such regional interest rate differentials could also represent a monetary phenomenon whereby variations in local credit conditions, not informational frictions, drive a wedge between the market rate and the (unobservable) natural rate. Over all, then, a return to the roots of Lösch’s work offers important op- portunities for the future of spatial economics, particularly in a rediscovery of the project’s ‘monetary macrofoundations’. In the wake of the financial crisis, geographers and economists alike have enthusiastically re-engaged with different spatial aspects of the monetary-financial system. Yet, while an increas- ing number of these contributions are focused on the ‘economic geography

25 Table 4: Key dimensions of the Lösch-Isard monetary space economy

Orthodox view (NUUE- Lösch-Isard credit view What are the (monetary) questions? NEG)∗ Nature of analysis “Real” “Monetary” Interaction between financial (i) Finance-growth nexus of regional development; Economic fluctuations None (some RBC aspects)† cycle, business cycle (ii) regional economic adjustment; (iii) geography of money and inflation (e.g. re- Money Neutral, exogenous‡ Non-neutral, endogenous gional money multiplier); (iv) optimal regional currency areas; (v) regional interest rate differentials; (vi) regional Interest Natural interest rate§ Market interest rates capital market integration; Two price levels (Financial (vii) regional cost of living differentials; (viii) spatial Prices One price level (real output) assets, real assets/output) purchasing power parity, law of one price; (ix) regional transmission mechanism of monet- 26 ary policy; (x) structure of financial intermediation Reduction of frictions, in- Credit creation, transfer of Financial intermediaries (e.g. spatial disparities in credit creation by non- formation asymmetries purchasing power depository financial institutions); (xi) regulatory ar- bitrage across space; (xii) regional deposit concentration; (xiii) spatial Deposits Sectoral endowments Created by loans disparities in the ‘moneyness’ of deposits; (xiv) regional discrepancies in liquidity prefer- Source of investments Savings Financing flows ence; (xv) regional flows of finance vs. collateral; (xvi) spatial distribution of credit subsidies; (xvii) regional balance of payments (BoP); Current account, net capital Flow of funds Gross capital flows (xviii) classical ‘transfer problem’ vs. monet- flows ary approach to BoP; (xix) regional reserve flows.

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. of money and finance’, neither geographers nor spatial economists actively engage with the macrofoundations of modern credit theories of money. As such, the treatment of money in economic geography remains trapped between two opposing views, neither of which take ‘macro seriously’. Economic geographers proper tend to remain singularly faithful to the Marxist view of the urbanization of capital—famously embodied in David Harvey(1985, 2006) three circuits of capital. In opposition to this view is the contemporary canon of geographical economists that has enshrined the classical dichotomy, treating the spheres of money and production as analytically distinct. Effectively a branch of applied microeconomics, mainstream spatial economics thus has little to say about money and its spatial consequences. Furthermore, as a related consequence of the neoclassical orthodoxy’s firm grip on spatial economics, the post-war literature has generally paid little attention to regional applications to business cycle analysis in the traditional sense of Spiethoff (1923) or Schumpeter(1939). A return to Lösch’s monetary ideas seems to suggest a first step in overcoming this theoretical impasse. In an extension of Schefold’s(1997) characterisation of Schumpeter as a ‘Walrasian Austrian’ and Keynes as a ‘Classical Marshallian’, Lösch might thus be viewed as more ‘Austrian’ than ‘Classical’ with respect to his monetary ideas in general and their positions on the non-neutrality in particular.34 Rather than emphasising his relevance in terms of location theory, this paper has argued that Lösch can be viewed as important node in a long lineage of continental of monetary theory, embodying at once both chartalist and metallist elements.35.

6 Outlook and conclusion

The total destruction and surrender of Germany after World War II marks a deep rupture in the intellectual history of German economic thought. In many ways, the collapse of the Third Reich also buried in its rubble two centuries of a rich tradition of German political economy that had—in contrast to the focus on value, production, and distribution of anglophone Classical political economy—at the core of its discourse concerns over human need and, above all, economic order (Tribe, 1988, 1995). Indeed, in terms of the discontinuities of German economy theory after the Second World War, Heuß(1998, p.349) suggests that Lösch—along with Wal- ter Eucken, Franz Böhm and Heinrich von Stackelberg—represent the “last

34The 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). 35The broad chartallism-metallism dual ﬁnds its earliest, modern systematization in von Mises (1917/18).

27 original German theoretical contributions” before economic theorizing post- war German came under the complete intellectual hegemony of anglo-saxon thought. Heuß’s (1998) counterfactual historical speculation in this regard goes as far as suggesting that the post-war course of international scientific development in economics would have remained unchanged even if German- language contributions would have never seen the light of day. In this vein, the present paper argues that the fate of Lösch’s all-but-forgotten treatise on money Die Theorie der Währung and the enduring monetary amnesia of contemporary spatial economics constitute an important case in point to re- engage with the rich tradition of German economic thought. In linking the structure of intersectoral money and credit flows with the structural relationships that govern the intersectoral flow of goods and services, the Löschian framework outlined in this paper aligns well with the renewed academic interest in modelling the pathways between financial markets and the macroeconomy.36 Furthermore, this paper thus implicitly identifies a research agenda associated with the development of a spatial theory of money and credit as key research frontier in spatial economics. While the fourth element of ‘Ohlin’s dream’—the synthesis of inter-regional and international trade with of monetary matters—may still be out of reach, re- engaging with August Lösch’s monetary thought promises to move us a significant piece closer in its direction.

36See Morley(2016) and Cochrane(2017) for an overview of the recent literature and theoretical debates on macro-ﬁnance linkages.

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