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

Additional Considerations on the Theory of the Business Cycle 439manipulated. Indeed in the recovery phase the interestrate in the credit market will spontaneously tendto decline, given the drop in the price of consumergoods and the increase in saving brought about by thereorganization the recession entails. Nevertheless anymanipulation of the market rate of interest is counterproductiveand exerts a negative effect on the liquidationprocess or generates new entrepreneurial errors.In fact we can conclude with Hayek that any policywhich tends to maintain interest rates at a fixed levelwill be highly detrimental to the stability of the economy,since interest rates must evolve spontaneouslyaccording to the real preferences of economic agentswith respect to saving and consumption:[T]he tendency to keep the rates of interest stable,and especially to keep them low as long aspossible, must appear as the arch-enemy of stability,causing in the end much greater fluctuations,probably even of the rate of interest, thanare really necessary. Perhaps it should berepeated that this applies especially to the doctrine,now so widely accepted, that interest ratesshould be kept low till “full employment” ingeneral is reached. 37(e) Finally any policy involving the creation of artificialjobs through public works or other investment projectsfinanced by the government should be avoided. Itis evident that if such projects are financed by taxes orvia the issuance of public debt, they will simply drawresources away from those areas of the economywhere consumers desire them and toward the publicworks financed by the government, thus creating anew layer of widespread malinvestment. Moreover ifthese works or “investments” are financed throughthe mere creation of new money, generalized malinvestmentalso takes place, in the sense that, if workers37 Hayek, Profits, Interest and Investment, p. 70.