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

434 Money, Bank Credit, and Economic Cyclesthe beginning of the readjustment are naturally followed by adrop in the interest rate. This drop arises from the reductionand even the disappearance of the premium based on theexpectation of a decrease in the purchasing power of money,and also from the increased relative saving the recession provokes.The slowing of the frantic pace at which goods andservices from the final stage are consumed, together with therise in saving and the reorganization of the productive structureat all levels, furthers the recovery. Its effects initiallyappear in stock markets, which are generally the first toundergo a certain improvement. Moreover the real growth inwages which takes place during the stage of recovery sets the“Ricardo Effect” in motion, thus reviving investment in thestages furthest from consumption, where labor and productiveresources are again employed. In this spontaneous mannerthe recovery concludes. It can be strengthened and maintainedindefinitely in the absence of a new stage of creditexpansion unbacked by real saving, an event which is usuallyrepeated, giving rise to new recurring crises. 32Nevertheless now that we have established that economiccrises cannot be avoided once the seeds of them are sown, andthat the only alternative is to prevent them, what would be themost appropriate policy to apply once an inevitable crisis andrecession have hit? The answer is simple if we remember theorigin of the crisis and what the crisis implies: the need toreadjust the productive structure and adapt it to consumers’32 A detailed study of recovery and its different phases can be found onpp. 38–82 of Hayek’s book, Profits, Interest and Investment. See also pp.315–17 of Skousen’s book, The Structure of Production, where Skousenrefers to a statement of Hayek’s, according to which:It is a well-known fact that in a slump the revival of finaldemand is generally an effect rather than a cause of therevival in the upper reaches of the stream of production—activities generated by savings seeking investment and by thenecessity of making up for postponed renewals and replacements.(Skousen, The Structure of Production, p. 315)Hayek made this astute observation in the journal, The Economist, in anarticle printed June 11, 1983 and entitled “The Keynes Centenary: TheAustrian Critic,” no. 7293, p. 46.