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

Additional Considerations on the Theory of the Business Cycle 429Hence it is not surprising that F.A. Hayek and the othertheorists of his school during the latter half of the 1920s, uponexamining the expansionary monetary policy of the UnitedStates (which, nonetheless, given the increase in productivity,did not manifest itself as a rise in prices), were the only onescapable not only of correctly interpreting the largely artificialnature of the expansionary American boom and its accompanyingimpact in the form of what appeared to be unlimitedgrowth in the New York stock market indexes, but also of predicting,against the tide and to the surprise of all, the arrival ofthe Great Depression of 1929. 28 Therefore we can concludewith Fritz Machlup that28 See Mark Skousen, “Who Predicted the 1929 Crash?” included in TheMeaning of Ludwig von Mises, Jeffrey M. Herbener, ed. (Amsterdam:Kluwer Academic Publishers, 1993), pp. 247–84. Lionel Robbins, in his“Foreword” to the first edition of Prices and Production (p. xii), alsoexpressly refers to the prediction of Mises and Hayek of the arrival ofthe Great Depression. This prediction appeared in writing in an articleby Hayek published in 1929 in Monatsberichte des Österreichischen Institutsfür Konjunkturforschung. More recently, in 1975, Hayek was questionedon this subject and answered the following (Gold & SilverNewsletter [Newport Beach, Calif.: Monex International, June 1975]):I was one of the only ones to predict what was going to happen.In early 1929, when I made this forecast, I was living inEurope which was then going through a period of depression.I said that there [would be] no hope of a recovery in Europeuntil interest rates fell, and interest rates would not fall untilthe American boom collapses, which I said was likely to happenwithin the next few months. What made me expect this,of course, is one of my main theoretical beliefs, that you cannotindefinitely maintain an inflationary boom. Such a boomcreates all kinds of artificial jobs that might keep going for afairly long time but sooner or later must collapse. Also, I wasconvinced after 1927, when the Federal Reserve made anattempt to stave off a collapse by credit expansion, the boomhad become a typically inflationary one. So in early 1929 therewas every sign that the boom was going to break down. Iknew by then that the Americans could not prolong this sortof expansion indefinitely, and as soon as the Federal Reservewas no longer to feed it by more inflation, the thing wouldcollapse. In addition, you must remember that at the time theFederal Reserve was not only unwilling but was unable to