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

466 Money, Bank Credit, and Economic CyclesAlthough many additional considerations regarding theevolution of the stock market during the business cycle couldbe presented, the most important idea is this: in general, nosignificant, continuous rise in the price of securities can beaccounted for by an improvement in production conditionsnor by an increase in voluntary saving; such a rise can only beindefinitely maintained as a result of inflationary growth incredit expansion. A sustained improvement in the economyand an increase in voluntary saving generate a greater monetaryinflux into the stock market, but this inflow is slower andmore gradual and is rapidly absorbed by the new securitiesissued by companies with an aim to finance their new investmentprojects. Only continuous, disproportionate growth inthe money supply in the form of credit expansion can feed thespeculative mania (or “irrational exuberance”) which characterizesall stock market booms. 70the price of the listed securities which correspond to the companies closestto the last stage in the productive structure, with an increase in theprice of the securities which correspond to the companies which operatefurthest from consumption. As Fritz Machlup indicates,A shift of demand from consumers’ goods to securities is“saving.” It is usually assumed that a significant price shifttakes place not only between consumers’ goods and securitiesbut also between consumers’ goods and producers’ goods. Itmay seem strange that the price fall in consumers’ goodsshould correspond on the other side to price rises in two categoriesof things at the same time. But there is nothing complicatedabout this, for the rise in price of titles to capitalgoods may actually involve the rise in prices of the capitalgoods themselves. (Machlup, The Stock Market, Credit and CapitalFormation, pp. 70–71)70 A continual rise of stock prices cannot be explained byimproved conditions of production or by increased voluntarysavings, but only by an inflationary credit supply. A lastingboom can result only from inflationary credit supply. (Ibid.,pp. 99 and 290)