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

452 Money, Bank Credit, and Economic Cyclesthan the reduction in the price of consumer goods andservices, if such a reduction takes place. Consequently,in relative terms, the wages and income of the originalmeans of production will decline, leading to anincreased hiring of workers over machines and a massivetransfer of workers toward the stages closest toconsumption. In other words the credit squeeze reinforcesand accelerates the necessary “flattening” of theproductive structure, a process which accompanies therecession. It is essential that labor markets be flexible inevery aspect, in order to facilitate the massive transfersof productive resources and labor. The sooner the readjustmentis completed and the effect of loans grantedfor erroneous investment projects is eliminated, thesooner the foundations of the subsequent recovery willbe laid. The recovery will be characterized by a restorationof the relative price of the original means of production,i.e., by a decrease in the price of consumergoods and services. This reduction in the price of consumergoods and services will be greater, in relativeterms, than the drop in wages, due to an increase insociety’s general saving, which will again stimulategrowth in the capital goods stages. This growth will beachievable, given that it will originate from a rise involuntary saving. As Wilhelm Röpke reasonably concludes,this third type of deflation (the result of thecredit squeeze that follows the crisis)is the unavoidable reaction to the inflation of theboom and must not be counteracted, otherwise aprolongation and aggravation of the crisis willensue, as the experiences in the United States in1930 have shown. 50Under certain conditions, government and union intervention,along with the institutional rigidity of the markets,may prevent the necessary readjustments which precede any50 Wilhelm Röpke, Crises and Cycles (London: William Hodge, 1936), p.120.