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

432 Money, Bank Credit, and Economic Cycles10HOW TO AVOID BUSINESS CYCLES: PREVENTION OFAND RECOVERY FROM THE ECONOMIC CRISISAt this point we can easily deduce that once banks haveinitiated a policy of credit expansion, or the money supply hasincreased in the form of new loans granted without the supportof new voluntary saving, processes which eventuallyprovoke a crisis and recession are spontaneously triggered.Thus financial crises and economic recessions cannot be avoidedwhen credit expansion has taken place. The only possiblemeasure is to prevent the process from beginning, by precludingthe adoption of policies of credit expansion or of growth inthe money supply in the shape of new bank loans. The finalchapter of this book contains an explanation of the institutionalmodifications necessary to immunize modern economiesagainst the successive stages of boom and recession they regularlyundergo. These institutional reforms essentially involverestoring banking to the traditional legal principles which regulatethe contract of irregular deposit of fungible goods andwhich require the continuous maintenance of the tantundem; inother words, a 100-percent reserve requirement for demanddeposits and equivalents. This is the only way to guaranteethat the system will not independently initiate any creditexpansion unbacked by real saving, and that the loans grantedwill always originate from a prior increase in society’s voluntarysaving. Thus entrepreneurs will only undertake thelengthening of the productive structure when they are able tocomplete and maintain it. In this way, the absence of systematicdiscoordination between the entrepreneurial decisions ofinvestors and those of the other economic agents with respectto the amount and proportion of their income they wish to consumeand save will be guaranteed.increases mean profit increases for the entrepreneurs as long as costs—for labor as well as for capital—are not fully raised accordingly.” HenceMurray Rothbard concludes that the important factor is not so much theevolution of the general price level, but whether via a policy of creditexpansion the interest rate is reduced to a level lower than the onewhich would prevail in a free market in the absence of such a policy(Man, Economy, and State, pp. 862–63).