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

Additional Considerations on the Theory of the Business Cycle 489F.A. Hayek himself was a qualified first-hand witness ofthe expansionary credit policy the Federal Reserve followed inthe 1920s. Indeed between 1923 and 1924 he spent fifteenmonths studying in situ the monetary policy of the U.S. FederalReserve. One outcome of that stay was his article onAmerican monetary policy following the crisis of 1920. 95 Inthis article Hayek critically analyzes the Federal Reserve’sobjective, according to whichAny rise in the index by a definite percentage is immediatelyto be met with a rise in the discount rate or otherrestrictions on credit, and every fall in the general price levelby a reduction of the discount rate. 96Hayek indicates that the proposal to stabilize the generalprice level originated with Irving Fisher in the United Statesand J.M. Keynes and Ralph Hawtrey in England, and thatvarious economists, headed by Benjamin M. Anderson,fiercely criticized it. Hayek’s essential theoretical objection tothe stabilization project is that, when the general price levelis declining, attempts at stabilization invariably take theform of credit expansion, which inevitably provokes a boom,completely overlook and fail to grasp the influence such expansionexerts on the productive structure.95 F.A. Hayek, “The Monetary Policy of the United States after theRecovery from the 1920 Crisis,” chapter 1 of Money, Capital and Fluctuations,pp. 5–32. This article is an extract from a much more extensiveGerman version which appeared in 1925 in Zeitschrift für Volkswirtschaftund Sozialpolitik (no. 5, 1925, vols. 1–3, pp. 25–63, and vols. 4–6, pp.254–317). It is important to point out that it is in note 4 of this article (pp.27–28) that Hayek first presents the fundamental argument which helater develops in detail in Prices and Production and which he bases onthe work of Mises. Moreover note 12 of this article contains Hayek’s firstexplicit statement in favor of reestablishing a 100-percent reserverequirement for banking. Hayek concludes:The problem of the prevention of crises would have receiveda radical solution if the basic concept of Peel’s Act had beenconsistently developed into the prescription of 100-percentgold cover for bank deposits as well as notes. (p. 29)96 Hayek, Money, Capital and Fluctuations, p. 17.