ABSTRACT
This chapter discusses Schumpeter’s analysis of banking, credit, money and the price level starts with a brief review of the historical record on movements in the price level, which serves to put the period examined by Schumpeter in Business Cycles within a longer historical context. It considers the possible systematic factors behind the price revolution of the twentieth century, and examines Schumpeter's distinctive theory of banking, credit and money. When banks extend credit to entrepreneurs to finance innovations, the money supply expands without any change in production or the income velocity of money and prices rise to offset the money supply changes. Expansion of credit to entrepreneurs and competition from entrepreneurs for means of production leads to inflation, but the inflation is only temporary as the profitable output from the innovation allows the entrepreneur to repay the loan and withdraw the extra purchasing power from the economy.
