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

Additional Considerations on the Theory of the Business Cycle 463what specific circumstances the artificial nature of the expansionwill become evident in the stock market, ultimately settingoff a crisis. However the stock market will definitely offer thefirst sign that the expansion is artificial and has “feet of clay,”and then quite possibly, the slightest trigger will set off a stockmarket crash. 64 The crash will take place as soon as economicagents begin to doubt the continuance of the expansionaryprocess, observe a slowdown or halt in credit expansion andin short, become convinced that a crisis and recession willappear in the near future. At that point the fate of the stockmarket is sealed.The first symptoms of a stock market crisis seriouslyfrighten politicians, economic authorities and the public ingeneral, and a widespread clamor in favor of enough furthercredit expansion to consolidate and maintain the high stockmarket indexes is usually heard. High security prices are mistakenlyviewed as a sign of good economic “health,” andtherefore it is wrongly believed that all possible measuresshould be taken to prevent the stock market from collapsing. 6564 Regardless of its specific historical trigger, the stock market crisis willerupt after credit expansion decreases, since, as Fritz Machlup states,The most probable result in this case is a quick recession ofsecurity prices. For higher stock prices will invite a new supplyof securities, and the corporations, which want to takeadvantage of the higher prices in order to draw funds fromthe stock exchange and use them for real investment, will findthat there are no additional funds to be had. (Machlup, TheStock Market, Credit and Capital Formation, p. 90)65 We make no mention of the unquestionable fact that the interests ofmany speculative security holders are behind a large part of the “publicclamor” in favor of institutional support of the stock market. Likewise itis highly significant that when a stock market crisis erupts, the mediaalmost unanimously convey “reassuring” messages which insist thephenomenon is transient and “unjustified” and advise the public notonly to refrain from getting rid of their stocks, but also to take advantageof the situation to acquire more securities at a good price. The discordantvoices of those who view the situation differently and believe itis wisest to sell (voices which, in crisis situations, represent precisely themajority of those who go to the market) are always discreetly and convenientlysilenced.