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

Additional Considerations on the Theory of the Business Cycle 425artificially expanded and the quantity of money in circulationremains more or less constant, growth in voluntary savinggives rise to a widening (lateral) and lengthening (longitudinal)of the capital goods stages in the productive structure.These stages can be completed with no problem, and onceconcluded, they yield a new rise in the quantity and quality offinal consumer goods and services. This increased productionof consumer goods and services must be sold to a decreasedmonetary demand (which has fallen by precisely the amountsaving has risen), and consequently the unit prices of consumergoods and services tend to decline. This reduction isalways more rapid than the possible drop in the nominalincome of the owners of the original means of production,whose income therefore increases very significantly in realterms.The issue we now raise is whether or not a policy aimed atincreasing the money supply by credit expansion or anotherprocedure, and at maintaining the price level of consumer goodsand services constant, triggers the processes which lead tointertemporal discoordination among the different economicagents, and ultimately, to economic crisis and recession. TheAmerican economy faced such a situation throughout the1920s, when dramatic growth in productivity was neverthelessnot accompanied by the natural decline in the prices ofconsumer goods and services. These prices did not fall, due tothe expansionary policy of the American banking system, apolicy orchestrated by the Federal Reserve to stabilize the purchasingpower of money (i.e., to prevent it from rising). 25through the serious banking, stock market, and financial crises whichhave erupted in Asian markets. [The evolution of the world economysince 1998 has confirmed entirely the analysis of this book as alreadymentioned in its Preface to the 2nd English edition.]25 See, for example, Murray N. Rothbard’s detailed analysis of this historicalperiod in his notable book, America’s Great Depression, 5th ed.(Auburn, Ala.: Ludwig von Mises Institute, 2000). Mises (Human Action,p. 561) indicates that in the past, economic crises have generally hit duringperiods of continual improvement in productivity, due to the factthat