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

428 Money, Bank Credit, and Economic Cyclesof stabilizing the purchasing power of the monetary unit isincompatible with the necessary function of money withrespect to coordinating the decisions and behaviors of economicagents at different points in time. Hayek explains thatif the quantity of money in circulation remains constant, thenin order to maintain intertemporal equilibrium among theactions of the different economic agents, widespread growthin the productivity of the economic system must give rise to adrop in the price of consumer goods and services, i.e., in thegeneral price level. Thus a policy which prevents an upsurgein productivity from reducing the price of consumer goodsand services inevitably generates expectations on the maintenanceof the price level in the future. These expectationsinvariably lead to an artificial lengthening of the productivestructure, a modification bound to reverse in the form of arecession. Although in 1928 Hayek had yet to make his polishedcontributions of the 1930s, writings which we have usedin our analysis and which make this phenomenon much easierto understand, it is especially commendable that at thatpoint he arrived at the following conclusion (in his ownwords):[I]t must be assumed, in sharpest contradiction to the prevailingview, that it is not a deficiency in the stability of thepurchasing power of money that constitutes one of the mostimportant sources of disturbances of the economy from theside of money. On the contrary, it is the tendency peculiar toall commodity currencies to stabilize the purchasing powerof money even when the general state of supply is changing,a tendency alien to all the fundamental determinants of economicactivity. 2727 F.A. Hayek, “Intertemporal Price Equilibrium and Movements in theValue of Money,” p. 97; italics removed. Even more specifically, Hayekconcludes that[t]here is no basis in economic theory for the view that thequantity of money must be adjusted to changes in the economyif economic equilibrium is to be maintained or—whatsignifies the same—if monetary disturbances to the economyare to be prevented. (p. 106)