# Schlesinger, Karl

# Schlesinger, Karl

Karl Schlesinger (1889-1938) was born in Budapest and died in Vienna, committing suicide on the day Hitler took possession of that city. (He had moved there after Bela Kun’s 1919 communist revolution in Hungary.) A wealthy financier and a member of many industrial and financial boards, Schlesinger was one of the very few important contemporary theoretical economists who was not part of the academic world; he never held an academic post but was an active and highly respected member of the Vienna Economic Society. Although his contributions to economics were greatly appreciated in Vienna, his important early work of 1914, Theorie der Geld- und Kreditwirtschaft (see 1914a), was not readily available at the time he moved there; its direct influence upon Viennese monetary theory was less than might have been expected.

In his 1914 book Schlesinger made extensive use of some simple mathematics, uncommon at that time in German economic writing, particularly in the field of monetary theory. His interest in mathematics led him to take instruction from A. Wald in the 1930s; he eventually proposed to Wald a problem relating to Walras’ production equations. This problem concerned Schlesinger’s modification of the Walras—Cassel system of production equations by introducing the notion that all factors of production—not only the scarce ones,—have to be considered and that whether a factor is scarce or free depends on the demand functions. This led to Wald’s famous work on the determinacy of the Walrasian system. [*See*Economic equilibrium.] (Schlesinger acknowledged that Zeuthen had earlier suggested a similar modification without, however, following up the matter.) These problems were discussed in Karl Menger’s mathematical colloquium under Menger’s continuing and stimulating guidance. Schlesinger also contributed to Menger’s work on the theory of returns.

Schlesinger’s *Theorie der Geld und Kreditwirtschaft* made him the only immediate follower of Walras, other than Wicksell, to advance Walras’ theory of money. Schlesinger stressed that in addition to the indirect utility of money derived from its ability ultimately to provide desired consumers’ goods, cash balances also have a direct utility. He introduced a probabilistic approach to monetary theory by distinguishing between fixed and uncertain future due dates for payments; the former offer no choice, while the latter permit the individual to maximize utility by choosing appropriately between holding cash and purchasing goods. He further showed that if the number of transactions increases, it is possible to economize in the relative size of cash balances, although this will not be the case if only the magnitude of transactions increases. Schlesinger derived an excess demand equation for money that is virtually identical with the one commonly ascribed to Keynes. [See Money.] He also was probably the first to develop the notion of the equilibrium rate of interest [see Interest].

Schlesinger was one of the first economists to expound the purchasing power parity theory. In his pamphlet on the variations in the value of money (1916), he stated the theorem that the parity of a country’s currency is determined by the quotient of the domestic and foreign general price levels. The equilibrium rate of exchange can only be changed if foreign borrowings are used to reduce the indebtedness of the bank of issue.

In 1931 Schlesinger published a lengthy review of F. Somary’s Bankpolitik (see 1931a), in which he presented a detailed mathematical analysis of the theory of credit creation by commercial banks, incorporating this theory into the general process of circulation. Assuming there are n equal banks, that deposits require some cash reserve, and that each individual pays partly in cash and partly by check, Schlesinger analyzed the effects of introducing new metal or new bank notes into the system. He traced the path that credit expansion follows until equilibrium is reached and derived formulas for debtors, creditors, and the system as a whole. He also considered the flow of checks back to their starting point. Several of his restrictive assumptions can be relaxed, but the whole approach is an early model for careful, rigorous analysis of monetary operations. [See Banking.]

During the international financial crisis of the 1930s Schlesinger proposed that the Austrian government control capital movements, but he was strictly opposed to exchange control as then practiced.

Schlesinger’s most significant contributions were to monetary theory, but this work was widely neglected, which caused Schumpeter to comment that “in our field first-class performance is neither a necessary nor a sufficient condition for success” (1954, p. 1082, note 5). More recently, however, he has been given more credit, especially by V. Wagner and D. Patinkin. In addition to his analytical contributions to the numerous discussions about capital theory, business cycles, and general equilibrium theory conducted among economists in Vienna—frequently at odd hours in coffee houses—Schlesinger had important economic insights in which his great experience as a financier and administrator provided a valuable counterweight to his theoretical analysis. Thus, his considerable influence on Viennese economics was far greater than his few publications might indicate.

Oskar Morgenstern

[*See also the biographies of*Wald and Walras.]

## WORKS BY SCHLESINGER

1914*a* Theorie der Geld-und Kreditwirtschaft. Munich: Duncker ‖ Humblot.

(1914*b*) 1959 Basic Principles of the Money Economy. International Economic Papers 9:20-38.→This is a partial translation of Theorie der Geld—und Kreditwirtschaft.

1916 Die Veranderungen des Geldwertes im Kriege. Vienna: Manz.

1931*a* [A Book Review of] Bankpolitik, by Felix Somary. Archiv fur Sozialwissenschaft und Sozialpolitik 66: 1-35.

1931*b* Das “Rätsel” der französischen Goldpolitik. Zeit-schrift für Nationalokonomie 2:387-407.

1935 Über die Produktionsgleichungen der bkonomischen Wertlehre. Ergebnisse eines mathematischen Kolloquiums 6:10-11.

1936 Ein Beitrag zu Mengers “Bemerkungen zu den Ertragsgesetzen.” Zeitschrift fur ’Nationalokonomie 7: 398-400.

## SUPPLEMENTARY BIBLIOGRAPHY

Ellis, Howard S. 1934 German Monetary Theory, 1905-1933. Harvard Economic Studies, Vol. 44. Cambridge, Mass.: Harvard Univ. Press.

Marget, Arthur W. 1931 Léon Walras and the “Cash-balance Approach” to the Problem of the Value of Money. Journal of Political Economy 39:569-600.

Patinkin, Don (1956) 1965 Money, Interest, and Prices: An Integration of Monetary and Value Theory. 2d ed. New York: Harper.

Schumpeter, Joseph A. (1954) 1960 History of Economic Analysis. Edited by E. B. Schumpeter. New York: Oxford Univ. Press.

Wagner, Valentin F. 1937 Geschichte der Kredit-theorien: Eine dogmenhritische Darstellung. Vienna: Springer.

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**Schlesinger, Karl**