Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

xxviMoney, Bank Credit, and Economic Cyclesrequests for loans from Spanish banks (mainly to finance realestatespeculation), loans which these banks have granted bycreating the money ex nihilo while European central bankerslooked on unperturbed. When faced with the rise in prices,the European Central Bank has remained faithful to its mandateand has tried to maintain interest rates as long as possible,despite the difficulties of those members of the MonetaryUnion which, like Spain, are now discovering that much oftheir investment in real estate was in error and are heading fora lengthy and painful reorganization of their real economy.Under these circumstances, the most appropriate policywould be to liberalize the economy at all levels (especially inthe labor market) to permit the rapid reallocation of productivefactors (particularly labor) to profitable sectors. Likewise,it is essential to reduce public spending and taxes, in order toincrease the available income of heavily-indebted economicagents who need to repay their loans as soon as possible. Economicagents in general and companies in particular can onlyrehabilitate their finances by cutting costs (especially laborcosts) and paying off loans. Essential to this aim are a veryflexible labor market and a much more austere public sector.These factors are fundamental if the market is to reveal asquickly as possible the real value of the investment goods producedin error and thus lay the foundation for a healthy, sustainedeconomic recovery in a future which, for the good ofall, I hope is not long in coming.We must not forget that a central feature of the recentperiod of artificial expansion was a gradual corruption, on theAmerican continent as well as in Europe, of the traditionalprinciples of accounting as practiced globally for centuries. Tobe specific, acceptance of the International Accounting Standards(IAS) and their incorporation into law in differentcountries (in Spain via the new General Accounting Plan, ineffect as of January 1, 2008) have meant the abandonment ofthe traditional principle of prudence and its replacement by