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

Additional Considerations on the Theory of the Business Cycle 445production, because although the income of workers and of theother owners of original factors may remain fairly constant innominal terms, the prices of the consumer goods and servicesworkers acquire drop considerably. In this case the decline in thegeneral price level is not monetary in origin, but real, 43 and itderives from the generalized increase in the productivity of theeconomy. Hence this phenomenon is completely unrelated todeflation as we have defined it, and is simply a sign of thehealthiest and most natural process of economic development.Nonetheless we will now examine three distinct types ofdeflation (strictly defined as any decline in the supply of orincrease in the demand for money) which have radically differentcauses and consequences. Let us analyze these types ofdeflation in detail: 4443 See the section entitled, “Cash-Induced and Goods-Induced Changesin Purchasing Power,” from chapter 17 of Mises, Human Action, 3rd ed.,pp. 419ff.44 In short we attempt to fill an important theoretical gap in the economictheory of deflation. In 1933 Ludwig von Mises revealed this gapwhen he stated,Unfortunately, economic theory is weakest precisely wherehelp is most needed—in analyzing the effects of decliningprices. . . . Yet today, even more than ever before, the rigidityof wage rates and the costs of many other factors of productionhamper an unbiased consideration of the problem.Therefore, it would certainly be timely now to investigatethoroughly the effects of declining money prices and to analyzethe widely held idea that declining prices are incompatiblewith the increased production of goods and services andan improvement in general welfare. The investigation shouldinclude a discussion of whether it is true that only inflationisticsteps permit the progressive accumulation of capital andproductive facilities. So long as this naive inflationist theoryof development is firmly held, proposals for using creditexpansion to produce a boom will continue to be successful.Ludwig von Mises, “Die Stellung und der nächste Zukunft der Konjunkturforschung,”published in Festschrift in honor of Arthur Spiethoff(Munich: Duncker and Humblot, 1933), pp. 175–80, and translated intoEnglish as “The Current Status of Business Cycle Research and itsProspects for the Immediate Future,” published in On the Manipulationof Money and Credit, pp. 207–13 (the excerpt is taken from pp. 212–13).