AUSTRIANS vs. MONETARISTS ON MONEY & CREDIT

This paper focuses on the differences between the Austrian School's (Au) and the Monetarist's (Mt) position on Monetary theory. It will be shown that Au have a complete micro outlook that is not in the quantity theory tradition. Au reject central banking and coordinated monetary policy in favor of a system of free banking in which there is no government money. To Au, central banking, with its monopoly of government issued currency, not only allows commercial banks to expand credit beyond prudent limits, but also is responsible for the artificial lowering of market interest rates, followed by abnormally high investment demand, causing more volatile business cycles. In contrast, Mt do have a macro outlook that is in the quantity theory tradition. They believe in central banking, but want to limit discretionary monetary policy by using a growth rule. They focus on the aggregate price level and believe in the long run neutrality of money.