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

Additional Considerations on the Theory of the Business Cycle 405will ensue when the hyperinflation process destroysthe purchasing power of the monetary unit and economicagents spontaneously start to use anothertype of money. At that point the six microeconomicreversion effects we are familiar with will appear inall of their intensity, as will an acute economicdepression, which to the painful readjustment of atotally distorted productive system will add thetremendous cost and social harm involved in any generalfailure of the monetary system. 77 Ludwig von Mises examines this process in his analysis of thehyperinflation which assailed Germany from 1920 to 1923. Misesconcludes:Suppose the banks still did not want to give up the race? Suppose,in order to depress the loan rate, they wanted to satisfythe continuously expanding desire for credit by issuing stillmore circulation credit? Then they would only hasten theend, the collapse of the entire system of fiduciary media. Theinflation can continue only so long as the conviction persiststhat it will one day cease. Once people are persuaded that theinflation will not stop, they turn from the use of this money.They flee then to “real values,” foreign money, the preciousmetals, and barter. (Mises, “Monetary Stabilization and CyclicalPolicy,” p. 129)Later, in Human Action, Mises states:The boom can last only as long as the credit expansion progressesat an ever-accelerated pace. The boom comes to anend as soon as additional quantities of fiduciary media are nolonger thrown upon the loan market. But it could not last forevereven if inflation and credit expansion were to go on endlessly.It would then encounter the barriers which prevent theboundless expansion of circulation credit. It would lead to thecrack-up boom and breakdown of the whole monetary system.(p. 555)The classical treatment of Germany’s hyperinflation process is the oneBresciani-Turroni gives in The Economics of Inflation: A Study of CurrencyDepreciation in Post-War Germany. See also Richard M. Ebeling, “TheGreat Austrian Inflation,” The Freeman (April 2006): 2–3.