The Stock Market, Credit, and Capital Formation

The book was originally published in 1931 in German. It was one of the series of tracts issued under the name of Beitrage Zur Konjunkturforschung by the Austrian Institute for Trade Cycle Research of which F.A. Hayek was the director. The book made its appearance not very long after the stock market crash of 1929 and the latter event had a strong bearing on its subject matter. 

Fritz Machlup is a champion of the stock exchange and the book solidly refutes most of the charges that are commonly made against it. The most serious of such charges is that the stock exchange absorbs capital either permanently or temporarily and thus deprives the industries of capital. Machlup answers this charge by pointing out that there may be a permanent absorption of money capital only where this absorption is productive, i.e., where it leads to the formation of new real capital. When new issues are sold in the Stock market, the proceeds of the sale are utilized in the purchase of machinery and other forms of capital goods. In all other cases of security transactions which do not involve any new issues of securities, there is a mere transfer of funds from one person to another. B receives what A pays. The proceeds of the sale of securities by a speculator who withdraws from the stock market flow back into the economic system.