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

400 Money, Bank Credit, and Economic Cyclesthe six phenomena we explained in chapter 5, which alwaystend to spontaneously reverse the initial consequences of allcredit expansion in the market. However, while this proceduremay postpone the depression, and may even do so forrelatively long periods of time, 2 this strategy is condemned toinevitable failure and involves a huge additional cost: once therecession hits, it will be much deeper and much more painfuland prolonged. 32 Hayek himself, while commenting on the eruption of the economic crisisat the end of the 1970s, admitted:[m]y expectation was that the inflationary boom would lastfive or six years, as the historical ones had done, forgettingthat then their termination was due to the gold standard. Ifyou had no gold standard—if you could continue inflating formuch longer—it was very difficult to predict how long itwould last. Of course, it has lasted very much longer than Iexpected. The end result was the same.Hayek is referring to the inflationary process which in the 1960s and1970s spread throughout the world and was encouraged by historicalcircumstances which, like the Vietnam War and other events, fosteredalmost unlimited credit expansion worldwide, thus triggering a processthat would later give rise to the severe stagflation and high unemploymentof the late 1970s and early 1980s. See Hayek on Hayek: An AutobiographicalDialogue, Stephen Kresge and Leif Wenar, eds. (London: Routledge,1994), p. 145.3 Murray Rothbard assesses the possibility of deferring the arrival of thedepression in the following terms:Why do booms, historically, continue for several years? Whatdelays the reversion process? The answer is that as the boombegins to peter out from an injection of credit expansion, thebanks inject a further dose. In short, the only way to avert theonset of the depression-adjustment process is to continueinflating money and credit. For only continual doses of newmoney on the credit market will keep the boom going and thenew stages profitable. Furthermore, only ever increasing dosescan step up the boom, can lower interest rates further, andexpand the production structure, for as the prices rise, moreand more money will be needed to perform the same amountof work. . . . But it is clear that prolonging the boom by everlarger doses of credit expansion will have only one result: tomake the inevitably ensuing depression longer and more grueling.(Rothbard, Man, Economy, and State, pp. 861–62)