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

496 Money, Bank Credit, and Economic Cyclesand spread throughout Japan, England, and the rest of theworld. Despite the stock market’s “warnings,” particularly thecollapse of the New York Stock Exchange on October 19, 1987,“Black Monday,” (when the New York Stock Exchange Indextumbled 22.6 percent), monetary authorities reacted by nervouslyinjecting massive new doses of credit into the economyto bolster stock market indexes.In an empirical study on the recession of the earlynineties, 104 W.N. Butos reveals that between 1983 and 1987 theaverage rate of annual growth in the reserves provided by theFederal Reserve to the American banking system increased by14.5 percent per year (i.e., from $25 billion in 1985 to over $40billion three years later). This led to great credit and monetaryexpansion, which in turn fed a considerable stock marketboom and all sorts of speculative financial operations. Moreoverthe economy entered a phase of marked expansionwhich entailed a substantial lengthening of the capital goodsstages and a spectacular increase in the production of durableconsumer goods. This stage has come to be called the“Golden Age” of the Reagan-Thatcher years, and it restedmainly on the shaky foundation of credit expansion. 105 Anempirical study by Arthur Middleton Hughes also confirms104 William N. Butos, “The Recession and Austrian Business Cycle Theory:An Empirical Perspective,” in Critical Review 7, nos. 2–3 (Spring andSummer, 1993). Butos concludes that the Austrian theory of the businesscycle provides a valid analytical explanation for the expansion of theeighties and the subsequent crisis of the early nineties. Another interestingarticle which applies the Austrian theory to the most recent economiccycle is Roger W. Garrison’s “The Roaring Twenties and the BullishEighties: The Role of Government in Boom and Bust,” Critical Review7, nos. 2–3 (Spring and Summer, 1993): 259–76. The money supply grewdramatically during the second half of the 1980s in Spain as well, whereit increased from thirty trillion pesetas to nearly sixty trillion between1986 and 1992, when a violent crisis erupted in Spain (“Banco deEspaña,” Boletín estadístico [August 1994]: 17).105 Margaret Thatcher herself eventually admitted, in her autobiography,that all of the economic problems of her administration emergedwhen money and credit were expanded too quickly and the prices ofconsumer goods rocketed. Thatcher, The Downing Street Years.