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

Additional Considerations on the Theory of the Business Cycle 483a now classic book on the subject. The panic was preceded byan expansion of credit and of the money supply, both in theform of bank bills and of loans, neither of which were backedby real saving. The newly-created Bank of the United Statesplayed a leading role in this process. This produced greatartificial economic expansion which was sharply interruptedin 1819, when the bank ceased to expand credit anddemanded the payment of other banks’ bills it possessed.The typical tightening of credit followed, along with a deep,widespread economic depression which halted the investmentprojects initiated during the boom and pushed up unemployment.892. The Crisis of 1825. This was essentially an English crisis.It was characterized by marked credit expansion, which wasused to finance a lengthening of the productive structure, i.e.,an addition to the stages furthest from consumption. Suchfinancing consisted basically of investments in the first railroadlines and in the development of the textile industry. In1825 the crisis erupted, triggering a depression which lasteduntil 1832.3. The Crisis of 1836. Banks began again to expand credit,and this led to a boom in which banking companies and corporationsmultiplied. New loans financed railroads, the ironand steel industry and coal, and the steam engine was developedas a new source of power. At the beginning of 1836 prices89 See Rothbard, The Panic of 1819: Reactions and Policies. Rothbard madeanother important contribution with this book: in it he revealed that thecrisis aroused a highly intellectual controversy regarding bank paper.Rothbard highlights the emergence of a large group of politicians, journalistsand economists who were able to correctly diagnose the originsof the crisis and to propose appropriate measures to prevent it fromrecurring in the future. All of this occurred years before Torrens and othersin England defined the essential principles of the Currency School.The following are among the most important figures who identifiedcredit expansion as the origin of economic evils: Thomas Jefferson,Thomas Randolph, Daniel Raymond, Senator Condy Raguet, JohnAdams, and Peter Paul de Grand, who even defended the call for banksto follow the model of the Bank of Amsterdam and to constantly maintaina 100-percent reserve ratio (p. 151).