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

Additional Considerations on the Theory of the Business Cycle 447This whole process of deliberate deflation contributesnothing and merely subjects the economic system tounnecessary pressure. Regrettably, politicians’ lack oftheoretical knowledge has led them on various historicaloccasions to deliberately initiate such a process. 4646 The most typical examples of deflation deliberately initiated by governmentsare found in the United Kingdom: first, following theNapoleonic wars, and then, as mentioned above, under the auspices ofWinston Churchill in 1925 when, despite the tremendous inflationwhich affected pound sterling notes in World War I, he decided torestore the currency’s prewar parity with gold. In short Churchill blatantlydisregarded the advice Ricardo had given 100 years earlier in avery similar situation, following the Napoleonic wars: “I should neveradvise a government to restore a currency which had been depreciated30 per cent to par.” Letter from David Ricardo to John Wheatley, datedSeptember 18, 1821, The Works of David Ricardo, Piero Sraffa, ed. (Cambridge:Cambridge University Press, 1952), vol. 9, p. 73. Ludwig vonMises, in reference to these two historical cases, states:The outstanding examples were provided by Great Britain’sreturn, both after the wartime inflation of the Napoleonicwars and after that of the first World War, to the prewar goldparity of the sterling. In each case Parliament and Cabinetadopted the deflationist policy without having weighed thepros and cons of the two methods open for a return to thegold standard. In the second decade of the nineteenth centurythey could be exonerated, as at that time monetary theory hadnot yet clarified the problems involved. More than a hundredyears later it was simply a display of inexcusable ignorance ofeconomics as well as of monetary history. (Mises, HumanAction, pp. 567–68 and also p. 784)F.A. Hayek points out the grave error of returning to the pre-World War Iparity between gold and the pound and also mentions that this policywas implemented slowly and gradually, instead of in the form of a rapidshock, as took place in the United States between 1920 and 1921. Hayekconcludes:Though the clear determination of the government to restorethe gold standard made it possible to do so as early as 1925,internal prices and wages were then still far from beingadapted to the international level. To maintain this parity, aslow and highly painful process of deflation was initiated,bringing lasting and extensive unemployment, to be abandonedonly when it became intolerable when intensified by