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

402 Money, Bank Credit, and Economic Cycles(a) The rate at which credit expansion accelerates eitherslows down or stops, due to the fear, experienced bybankers and economic authorities, that a crisis willerupt and that the subsequent depression may beeven more acute if inflation continues to mount. Themoment credit expansion ceases to increase at a growingrate, begins to increase at a steady rate, or is completelyhalted, the six microeconomic processes whichlead to the crisis and the readjustment of the productivestructure are set in motion.(b) Credit expansion is maintained at a rate of growthwhich, nevertheless, does not accelerate fast enoughto prevent the effects of reversion in each time period.In this case, despite continual increases in the moneysupply in the shape of loans, the six effects describedwill inevitably develop. Thus the crisis and economicrecession will hit. There will be a sharp rise in theprices of consumer goods; simultaneous inflation andcrisis; depression; and hence, high rates of unemployment.To the great surprise of Keynesian theorists,the western world has already experienced suchcircumstances and did so both in the inflationarydepression of the late 1970s and, to a lesser extent, inthe economic recession of the early 1990s. Thedescriptive term used to refer to them is stagflation. 55 Mark Skousen correctly indicates that, in relative terms, stagflation is auniversal phenomenon, considering that in all recessions the price of consumergoods climbs more (or falls less) in relative terms than the price ofthe factors of production. Widespread growth in the nominal prices ofconsumer goods during a phase of recession first took place in the depressionof the 1970s, and later in the recession of the 1990s. It sprang fromthe fact that the credit expansion which fed both processes was greatenough in the different stages of the cycle to create and maintain expectationsof inflation in the market of consumer goods and services evenduring the deepest stages of the depression (apart from the typicalrecent phenomena of relentless growth in public spending and in thedeficit, and of massive social transfer payments which foster directgrowth in the demand for, and therefore, in the prices of consumergoods and services). See Skousen, The Structure of Production, pp. 313–15.