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

494 Money, Bank Credit, and Economic CyclesTHE ECONOMIC RECESSIONS OF THE LATE 1970S AND EARLY 1990SThe most characteristic feature of the business cycleswhich have followed World War II is that they have originatedin deliberately inflationary policies directed and coordinatedby central banks. During the post-war decades and well intothe late sixties Keynesian theory led to the belief that an“expansive” fiscal and monetary policy could avert any crisis.Grim reality sank in with the arrival of severe recession in the1970s, when stagflation undermined and discredited Keynesianassumptions. Moreover the 1970s and the emergence ofstagflation actually marked the rebirth of interest in Austrianeconomics, and Hayek received the 1974 Nobel Prize in Economicsprecisely for his studies on the theory of the businesscycle. As a matter of fact, the crisis and stagflation of the seventieswere a “trial by fire” which Keynesians did not survive,and which earned great recognition for Austrian School theorists,who had been predicting it for some time. Their onlyerror, as Hayek admits, lay in their initial misjudgment of theduration of the inflationary process, which, unrestricted by oldgold-standard requirements, was prolonged by additionaldoses of credit expansion and spanned two decades. The resultother interventionary measures. In contrast to the myth oflaissez-faire, we have shown how government interventiongenerated the unsound boom of the 1920’s, and howHoover’s new departure aggravated the Great Depression bymassive measures of interference. The guilt for the GreatDepression must, at long last, be lifted from the shoulders ofthe free market economy, and placed where it properlybelongs: at the doors of politicians, bureaucrats, and the massof “enlightened” economists. And in any other depression,past or future, the story will be the same. (Rothbard, America’sGreat Depression, p. 295)We have not yet mentioned the European side of the Great Depression,an analysis of which appears in Lionel Robbins’s book, The Great Depression(1934). In a more recent work, The Credit-Anstalt Crisis of 1931 (Cambridge:Cambridge University Press, 1991), Aurel Schubert provides aclear account of the crisis of the Austrian banking system (though theunderlying theory at times leaves much to be desired).