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

Additional Considerations on the Theory of the Business Cycle 433Assuming credit expansion has taken place in the past, weknow the economic crisis will inevitably hit, regardless of anyattempts to postpone its arrival through the injection of newdoses of credit expansion at a progressively increasing rate. Inany case the eruption of the crisis and recession ultimatelyconstitutes the beginning of the recovery. In other words theeconomic recession is the start of the recovery stage, since it isthe phase in which the errors committed are revealed, theinvestment projects launched in error are liquidated, and laborand the rest of the productive resources begin to be transferredtoward those sectors and stages where consumers value themmost. Just as a hangover is a sign of the body’s healthy reactionto the assault of alcohol, an economic recession marks thebeginning of the recovery period, which is as healthy and necessaryas it is painful. This period results in a productive structuremore in tune with the true wishes of consumers. 31The recession hits when credit expansion slows or stopsand as a result, the investment projects launched in error areliquidated, the productive structure narrows and its numberof stages declines, and workers and other original means ofproduction employed in the stages furthest from consumption,where they are no longer profitable, are laid off or nolonger demanded. Recovery is consolidated when economicagents, in general, and consumers, in particular, decide toreduce their consumption in relative terms and to increasetheir saving in order to repay their loans and face the newstage of economic uncertainty and recession. The boom and31 One point should be stressed: the depression phase is actuallythe recovery phase; . . . it is the time when bad investments areliquidated and mistaken entrepreneurs leave the market—thetime when “consumer sovereignty” and the free marketreassert themselves and establish once again an economy thatbenefits every participant to the maximum degree. Thedepression period ends when the free-market equilibrium hasbeen restored and expansionary distortion eliminated. (Rothbard,Man, Economy, and State, p. 860)Therefore even though upcoming Table VI-1 (pp. 506–07) distinguishesbetween the phases of “depression” and “recovery,” strictly speaking,the stage of depression marks the beginning of the true recovery.