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

446 Money, Bank Credit, and Economic Cycles(a) The first type consists of policies adopted by publicauthorities to deliberately reduce the quantity ofmoney in circulation. Such policies have been implementedon various historical occasions 45 and trigger aprocess by which the purchasing power of the monetaryunit tends to increase. Moreover this forceddecrease in the quantity of money in circulation distortsthe structure of society’s productive stages.Indeed the reduction in the quantity of money initiallybrings about a decline in loan concession and anartificial increase in the market interest rate, which inturn leads to a flattening of the productive structure,a modification forced by strictly monetary factors(and not by the true desires of consumers). Consequentlymany profitable capital goods stages in theproductive structure erroneously appear unprofitable(especially those furthest from consumption and mostcapital-intensive). As a result the most specializedcompanies in capital-intensive sectors sustain widespreadaccounting losses. Furthermore in all sectorsthe reduced monetary demand is unaccompanied by aparallel, equally-rapid decline in costs, and thusaccounting losses arise and pessimism becomes generalized.In addition the increase in the purchasingpower of the monetary unit and the decrease in theproducts’ selling price cause a substantial rise in thereal income of the owners of the original means of production,who, to the extent their prices are rigid anddo not fall at the same rate as those of consumergoods, will tend to become unemployed. Therefore aprolonged, painful adjustment period begins and lastsuntil the entire productive structure and all originalfactors have adjusted to the new monetary conditions.45 For example on May 13, 1925, Winston Churchill, at that time Chancellorof the Exchequer of the United Kingdom, decided to restore thepre-World War I gold parity of the pound sterling. In other words, theparity which had existed since 1717, when Sir Isaac Newton fixed it at 1pound per 4.86 dollars of gold.