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

444 Money, Bank Credit, and Economic Cycles12THE NECESSARY TIGHTENING OF CREDIT INTHE RECESSION STAGE: CRITICISM OF THETHEORY OF “SECONDARY DEPRESSION”We will now consider three different types of deflation,defined as any decrease in the quantity of money “in circulation.”42 Deflation consists of a drop in the money supply or arise in the demand for money, and other things being equal, ittends to cause an increase in the purchasing power of themonetary unit (i.e., a decline in the “general price level”).Nevertheless it is important to avoid confusing deflation withits most typical, pronounced effect (the fall in the generalprice level), given that in certain cases the prices of goods andservices decrease in the absence of deflation. As we have seen,this is part of the healthy growth process of an economywhose productivity is improving due to the incorporation ofnew technologies and to capital accumulation which arisesfrom the entrepreneurial spirit and from the natural increase inthe voluntary saving of its agents. We studied this process inprevious sections, and without any decrease in the quantity ofmoney in circulation, it gives rise to a widespread increase inthe production of consumer goods and services, which canonly be sold at lower prices. Thus the process results in a realrise in wages and in the income of the other original means ofonly mean that the seed would already be sown for new disturbancesand new crises. The only way permanently to“mobilise” all available resources is, therefore, not to use artificialstimulants—whether during the crisis or thereafter—but to leave it to time to effect a permanent cure by the slowprocess of adapting the structure of production to the meansavailable for capital purposes. (Hayek, Prices and Production,pp. 98–99)Mark Skousen also makes some very shrewd observations on this subjectin his book, The Structure of Production, pp. 289–90.42 This expression, though quite vivid, is not theoretically rigorous, sincemoney is never “in circulation,” but always forms part of the cash balancesof someone.