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

464 Money, Bank Credit, and Economic CyclesIndeed neither the public nor the majority of specialists wishto accept that the stock market decline is the initial warning ofthe inevitable recession and that stock market indexes cannotremain unchanged in the absence of new doses of credit. 66Such credit would only postpone the crisis and make theeventual recession much more severe.When the crisis erupts, the stock market also acts as anindicator of its development. Other things being equal,indexes corresponding to the securities of companies thatoperate in the stages furthest from consumption reflect a moredramatic fall in market prices than those which representcompanies that produce consumer goods and services. This isthe stock market’s confirmation of the fact that the greatestentrepreneurial errors have been committed in the capitalgoods stages and of the necessity to liquidate these errors,save what can be saved and transfer the correspondingresources and original means of production toward othercompanies closer to consumption.Once the recession period has begun, market sluggishnesswill continue for the duration of the readjustment process,indicating not only that this process is still painfully inmotion, but also that market interest rates have risen to theirpre-credit-expansion level (or even to a higher level, if, as usuallyoccurs, they incorporate an additional premium for riskand inflation). 67 In any case, market sluggishness will last as66 Hence, for example, just prior to the stock market crash of October 24,1929, Irving Fisher himself confidently stated, on October 17, 1929, “Weare in a ‘higher plateau’ of stock exchange prices,” that a fully consolidatedlevel had been reached and would never necessarily drop. See theremarks he made to the Commercial & Financial Chronicle, remarks whichappeared on October 26, 1929, pp. 2618–19. Cited by Benjamin M.Anderson, Economics and the Public Welfare: A Financial and Economic Historyof the United States, 1914–1946 (Indianapolis, Ind.: Liberty Press,1979), p. 210. Wesley C. Mitchell, R.G. Hawtrey and even John MaynardKeynes committed the same error as Fisher. See Skousen, “Who Predictedthe 1929 Crash?” pp. 254–57 (see also footnote 100 below).67 This is clearly seen on the Stock Exchange which discountsfuture yield streams on the basis of the present rate of interest.A sensitive and well-informed market witnessing the