by David Chávez Salazar

In 1952, the British economist Marjorie Grice-Hutchinson discovered that the Spanish scholastics of the seventeenth century, gathered around the School of Salamanca, developed very similar ideas to those that centuries later would defend the Austrian School of Economics, such as the subjective theory of value, the dynamic vision of competition, the time preference principle, and the harmful effects of inflation.

However, this has not been the only contribution made by Spain to the consolidation of the Austrian School. In the mid-nineteenth century, we can find another antecedent in the work of Luis María Pastor Copo (1804-1872), a theoretician who formulated theories and economic policy proposals that demonstrate a knowledge of economics somewhat higher than what is usually assumed to the authors of that period. Unfortunately, very little has been written about him. Instead, he has been condemned to oblivion, even among liberal economists.

Our author was born in Barcelona to a modest family. After finishing his law degree, he successfully practiced the profession in several cities of the country, including Madrid, where his interest in economic issues awoke. Indeed, he was to become the most prominent member of the so-called “Spanish Economist School” (Escuela Economista Española), a school of thought inspired by the English classics and the French liberals led by Frédéric Bastiat.

The goal of this School was to “alter economic policy from the power.” Hence, Pastor came to occupy various positions in the public sphere, as director of the Salt Monopoly (1841-1846), deputy (1846-1857), Public Debt director (1847-1856), Finance Minister (1853), and senator several times until his death in 1872.

He disseminated his ideas through an extensive literature, in which similarities can be found with the discoveries that years later would make famous Austrian economists such as Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich Hayek. Here are just as some of his most important ideas.

Capital and Interest: Laying the Groundwork for Böhm-Bawerk

In his book Lecciones de Economía Política (Lessons in Political Economy, 1868), Pastor defines capital as “a pre-existing work, which serves to be invested in a later work. Or, what is more accurate, is the production that is renewed and accumulated to facilitate another successive production “.  Capital can be of two kinds: fixed and floating, the former is one that does not fall apart in the production process but can be used to produce several times (e.g. a machine or a building). The latter contributes to the creation of the final product, but “disappears” during the production process (e.g. oil used to lubricate a machine).

Production results from the combination of labor, land and capital. Many times, these three factors do not belong to a single owner. In that case, it is necessary that each factor receives a proportionate compensation according to the part that corresponds to it in the final product. The remuneration of labour is the wage, that of the land is the rent, and that of the capital, if it is fixed, the lease, and if it is floating, the interest, which also applies to money.

Interest charge has always been a controversial issue. Pastor defends it, explaining that when a saver has collected a considerable amount of money, instead of keeping it inert, it is legitimate to give it to another person so that the latter can invest it profitably. Because that investment might be very lucrative, it is fair that the person who loaned the money in the first place receives compensation for it. In his defence of interest, Pastor opposed the so-called usury laws promulgated in his days, which sought to ceilings on the interest rates charged by lenders. In his opinion, only the credit extension is what effectively contributes to interest reduction.

We can see that Pastor seems to raise an idea that would be developed years later by Austrian economist Eugen Böhm-Bawerk: that capital has a heterogeneous nature. On the one hand, it is a factor of production, on the other, a fund that generates interest. However, Pastor barely presented an explanation of the interest charged on the borrowed capital. Böhm-Bawerk went much further, since he devoted himself to the integral study of the phenomenon of interest.

Economic Cycles and Banking: Following in the Footsteps of Mises and Hayek (Before They Existed)

Pastor addresses these issues in several of his works: Filosofía del crédito (Philosophy of Credit, 1850), Libertad de bancos y cola del de España (Freedom of Banks and Tail of Bank of Spain, 1865), perhaps his most original work, Estudio de las crisis económicas (Study on Economic Crises, 1866), and Lecciones de Economía Política (Lessons on Political Economy, 1868).

Before setting out Pastor´s theory, it is important to point out the historical context. At the time of Pastor, the monetary and banking system was much freer than now: banks could issue their own banknotes, as long as they were backed by metallic reserves. The banknote carrier could go to his bank at any time to claim the metal, though. Yet, with passage of time, governments realized that they could take charge of banknotes issuance. For that, they established chartered banks that could issue banknotes with little or no metallic support.

In his economic crises research, Pastor discovered that these have four main characteristics: they always occur in countries that have banks privileged by the government, there is a progressive increase in the banknotes issuance and a decrease in metallic reserves, before the catastrophe there is an extraordinary prosperity period, and the outbreak of the crisis is due to the inability to comply with the liabilities made.

Therefore, Pastor deduces that economic crises have a monetary origin. He joins the pieces of his analysis in the following way: first, the privileged banks issue a considerable amount of banknotes, without the proper metallic support. The existence of these fiduciary leads to a credit supply expansion that, in turn, causes an artificial reduction in interest rates. Given this influx of cheap capital, entrepreneurs will develop all kinds of productive projects.

Welcome to the boom! That is, the state of apparent prosperity that precedes any crisis. To start new projects, entrepreneurs will demand more work, which will generate a wage rise and, as a result, consumer goods will become more expensive. Public opinion is th