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

Additional Considerations on the Theory of the Business Cycle 475which gives rise to an artificial boom and to the business cycle,from the mere creation of new money and the placing of it inthe hands of the state, a procedure which exerts the effectstypical of an inflationary tax. 79Another final consideration relates to the internationalnature of business cycles. Economies as internationally integratedas modern ones usually are initiate credit expansionprocesses simultaneously, and the effects spread rapidly to allthe world’s markets. While the gold standard prevailed, eachcountry’s capacity for domestic credit expansion was automaticallylimited, and this limit was determined by the invariableoutflow of gold from the relatively more inflationaryeconomies. With the abandonment of the gold standard, thearrival of flexible exchange rates and the triumph of monetarynationalism, each country became able to freely adopt creditexpansion policies, triggering an inflationary contest which pittedall countries against all others. Only a very large and integratedeconomic area comprising various nations which haverenounced credit expansion and maintain among themselvesfixed exchange rates will be able to free itself, relatively speaking(not completely), from the damaging effects of a generalexpansion of credit initiated outside its borders. Neverthelessthe effects of inflation may be felt even inside this area if a flexibleexchange rate is not established between it and the countriesoutside of it which suffer a process of monetary expansion.It is true that fixed exchange rates act as an (imperfect)substitute for the limits the gold standard set on each country’sability to independently expand its money supply in theform of loans. However this is consistent with the fact that thenegative effect external expansion has on nations with moreprudent monetary policies can only be lessened by the establishmentof flexible exchange rates.79 The massive increase in budget deficits was a common characteristicof the 1980s (especially in Spain), and it served to prolong expansionaryperiods and to postpone and aggravate subsequent recessions. The negativeeffects of these indirectly-monetized deficits have combined withthe harmful effects of credit expansion, and the result has been evengreater maladjustments in the allocation of resources and a delay in thebeginning of the necessary readjustment.