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

Additional Considerations on the Theory of the Business Cycle 437reorganize. The granting of new loans simply postponesthe eruption of the crisis, while making the necessarysubsequent readjustment much more severeand difficult. Furthermore, the systematic concessionof new loans to repay the old ones delays the painfulinvestment liquidations, postponing, even indefinitely,the arrival of the recovery. Therefore any policyof further credit expansion should be avoided.(b) Also very harmful are the inappropriately-namedpolicies of “full employment,” which are intended toguarantee jobs to all workers. As Hayek very clearlystates,[A]ll attempts to create full employment withthe existing distribution of labour betweenindustries will come up against the difficultythat with full employment people will want alarger share of the total output in the form ofconsumers’ goods than is being produced in thatform. 35Thus it is impossible for a government policy ofspending and credit expansion to successfully protectall current jobs if workers spend their income, originatingfrom credit expansion and artificial demandfrom the public sector, in a way that requires a differentproductive structure, i.e., one incapable of keepingthem in their current jobs. Any policy of artificiallypreserving jobs which is financed with inflation orcredit expansion is self-destructive, insofar as consumersspend the new money created, once it reaches35 Hayek, Profits, Interest and Investment, p. 60. Hayek also mentions thatthe rate of unemployment fails to reflect differences between the variousstages in production processes. He points out that normally, in the deepeststage of the crisis, up to 25 or 30 percent of workers who dedicatetheir efforts to the stages furthest from consumption may be unemployed,while unemployment among workers from the stages closest toconsumption is noticeably reduced, and may reach 5 or 10 percent. Seealso footnote 2 on pp. 59–60 of Hayek’s book.