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

Additional Considerations on the Theory of the Business Cycle 491terms of justifying credit expansion with the supposedly beneficialgoal of keeping the general price level constant. Accordingto Hawtrey,The American experiment in stabilization from 1922 to 1928showed that early treatment could shake a tendency eitherto inflation or to depression in a few months, before anyserious damage had been done. The American experimentwas a great advance upon the practice of the 19th century. 98The policy of credit expansion which was deliberatelyadopted to keep the general price level stable initially provokeda boom. This boom, along with a lack of the analyticaltools necessary to comprehend that the plan would actuallycause a deep depression, led authorities to go ahead with thepolicy, which as we know, was doomed to fail. 99The eruption of the crisis surprised monetarists (Fisher,Hawtrey, etc.), who, imbued with a mechanistic concept of thequantity theory of money, believed that once the money supplyhad been increased, its impact on prices would becomestable and irreversible. These theorists did not realize that the98 Ralph G. Hawtrey, The Art of Central Banking (London: Longman,1932), p. 300. Rothbard describes Hawtrey as “one of the evil geniusesof the 1920s.” Rothbard, America’s Great Depression, p. 159. The most seriouserror committed by Fisher, Hawtrey, and the rest of the “stabilizing”theorists is their failure to understand that the principal function ofmoney is to serve as a vehicle for the creative exercise of entrepreneurshipby leaving all creative possibilities for human action open withrespect to the future. Therefore the demand for money and the purchasingpower of money must never cease to vary. As Mises states,With the real universe of action and unceasing change, withthe economic system which cannot be rigid, neither neutralityof money nor stability of its purchasing power are compatible.A world of the kind which the necessary requirementsof neutral and stable money presuppose would be aworld without action. (Mises, Human Action, p. 419)99 According to Phillips, McManus, and Nelson, “The end result of whatwas probably the greatest price-level stabilization experiment in historyproved to be, simply, the greatest depression.” Phillips, McManus, andNelson, Banking and the Business Cycle, p. 176.