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

Additional Considerations on the Theory of the Business Cycle 457necessary to highlight the way in which the current monetarysystem, based on credit expansion, has made it customary forbooms and crises to disturb economic development. In otherwords, it appears as if “manic-depressive” behavior wererequired of a market economy.Indeed businessmen, journalists, politicians, union members,and economic agents in general have come to considerthe artificial expansionary phase characteristic of a boom to bethe normal stage of prosperity, which should be sought andmaintained in any way possible. By the same token, expansion’sinevitable consequences, i.e., crisis and recession, areconsidered a very negative stage which should be avoided atall costs. 55 Economic agents do not recognize the recession asthe inevitable result of artificial expansion, and they fail torealize it has the virtue of revealing the errors committed andfacilitating the recovery and readjustment of the productivestructure.Furthermore credit expansion excessively and unjustifiablyforces economic agents’ reflexes and the pace at whichthey work. While the expansion lasts, people’s capacity forwork is pushed to the limit and their entrepreneurial spiritbecomes corrupted. Psychological stress and wear follow andare of high human and personal cost. Moreover the newmoney created via the expansionary granting of loans is usedwould not arise regularly, nor would they be as geographically widespreadas they normally are.55 The boom is called good business, prosperity, and upswing.Its unavoidable aftermath, the readjustment of conditions tothe real data of the market, is called crisis, slump, bad business,depression. People rebel against the insight that the disturbingelement is to be seen in the malinvestment and theoverconsumption of the boom period and that such an artificiallyinduced boom is doomed. (Mises, Human Action, p. 575)Thus it is a grave error to believe real wealth is destroyed by the stockmarket crash which announces the crisis. On the contrary, the economicdestruction takes place much earlier, in the form of generalized malinvestmentduring the previous stage, the credit boom. The fall in thestock market merely indicates economic agents have finally taken noticeof this phenomenon. See also section 14.