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

490 Money, Bank Credit, and Economic Cyclesa poor allocation of resources in the productive structure andsubsequently, a deep depression. This is what actually happened.Indeed the goal of stability in the general price level ofconsumer goods was very nearly achieved throughout the1920s, at the cost of great credit expansion. This generated aboom which, in keeping with our theoretical predictions,affected mainly capital goods industries. Thus the price ofsecurities increased four-fold in the stock market, and whilethe production of goods for current consumption grew by 60percent throughout the period, the production of durable consumergoods, iron, steel, and other fixed capital goodsincreased by 160 percent. 97Another fact which illustrates the Austrian theory of thecycle is the following: during the 1920s wages rose mainly inthe capital goods industries. Over an eight-year period theyincreased in this sector by around 12 percent, in real terms,while they showed an average of 5 percent real growth in theconsumer goods industries. In certain capital goods industrieswages rose even more. For instance, they increased by 22 percentin the chemical industry and by 25 percent in the iron andsteel industry.Apart from John Maynard Keynes and Irving Fisher,Ralph Hawtrey, the British Treasury’s Director of FinancialStudies, was another particularly influential economist in97 In other words high “inflation” was definitely a factor during thisperiod, but it manifested itself in the sector of financial assets and capitalgoods, not in the consumer goods sector (Rothbard, America’s GreatDepression, p. 154). In his article, “The Federal Reserve as a CartelizationDevice: The Early Years: 1913–1930,” chapter 4 in Money in Crisis, BarryN. Siegel, ed., pp. 89–136, Murray Rothbard offers us a fascinatingaccount of the development of the Federal Reserve’s policy from 1913 to1930, together with an analysis of the close, expansion-related cooperationbetween Strong, governor of the Federal Reserve, and MontaguNorman, governor of the Bank of England. The large-scale open marketoperations of the 1920s followed. Their purpose was to inflate the Americanmoney supply in order to help the United Kingdom resolve its selfinflicteddeflation problem.