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

430 Money, Bank Credit, and Economic Cycles[t]he creation of new circulating media so as to keep constanta price level which would otherwise have fallen inresponse to technical progress, may have the same unstabilizingeffect on the supply of money capital that has beendescribed before, and thus be liable to lead to a crisis. Inspite of their stabilizing effect on the price level, the emergenceof the new circulating media in the form of moneycapital may cause roundabout processes of production to beundertaken which cannot in the long run be maintained. 29Though in the past these considerations could be thoughtof little practical importance, given the chronic increase in thegeneral price level in western economies, today they are againsignificant and demonstrate that even with a policy of monetary“stability” guaranteed by central banks, in an environmentof soaring productivity economic crises will inevitablycontinue the expansion because the gold standard set a limitto the possible expansion. Under the gold standard, therefore,an inflationary boom could not last very long.This entire process, which Austrian economists found so easy to understandand predict because they already had the necessary analyticaltools, took place in an environment in which the general price level ofconsumer goods not only did not rise, but tended to fall slightly. In factin the 1920s the general price level in the United States was very stable:the index went from 93.4 (100 in the base year, 1926) in June 1921, to 104.5in November 1925, and fell again to 95.2 in June 1929. However duringthis seven-year period, the money supply grew from 45.3 to 73.2 trilliondollars, i.e., more than 61 percent. See Rothbard, America’s Great Depression,pp. 88 and 154. Rothbard, with his natural insight, concludes:The ideal of a stable price level is relatively innocuous duringa price rise when it can aid sound money advocates in tryingto check the boom; but it is highly mischievous when pricesare tending to sag, and the stabilizationists call for inflation.And yet, stabilization is always a more popular rallying crywhen prices are falling. (p. 158)Incidentally a great parallel exists between the situation Hayekdescribed and that which is developing seventy years later, at the timeof this writing (1997). Thus the American economic and stock-marketboom may soon very possibly reverse in the form of a worldwide recession(which has already begun to manifest itself in Asian markets).29 Machlup, The Stock Market, Credit and Capital Formation, p. 177.