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

Additional Considerations on the Theory of the Business Cycle 501first proposition. Wainhouse’s second proposition is that modificationsin the supply of credit give rise to changes in theinterest rate, and that the two are inversely related. Abundantempirical evidence also exists to support this second proposition.Wainhouse’s third proposition states that changes in therate at which loans are granted cause an increase in the outputof intermediate goods, an idea he believes is also corroboratedby the evidence he analyzes. The last three propositions Wainhouseempirically tests are these: that the ratio of the price ofintermediate goods to the price of consumer goods rises followingthe beginning of credit expansion; that in the expansionprocess the price of the goods closest to final consumptiontends to decrease in relation to the price of intermediategoods; and lastly, that in the final stage of expansion the priceof consumer goods increases more rapidly than that of intermediategoods, thus reversing the initial trend. Wainhousealso believes that in general these last three propositions agreewith the empirical data, and he therefore concludes that thedata supports the theoretical propositions of the AustrianSchool of economics. Wainhouse leaves three propositionsuntested, thus leaving open an important field of possiblefuture study for econometricians. 114Causality: A Personal Viewpoint,” Journal of Economic Dynamics and Control2, no. 4 (November 1980): 330ff.114 In his book, Prices in Recession and Recovery (New York: NationalBureau of Economic Research, 1936), Frederick C. Mills presents anotherrelevant empirical study which centers on the years of the Great Depression.Here Mills empirically confirms that the evolution of relativeprices during the period of crisis, recession, and recovery which followedthe crash of 1929 closely resembled that outlined by the Austriantheory of the business cycle. Specifically, Mills concludes that during thedepression “Raw materials dropped precipitously; manufacturedgoods, customarily sluggish in their response to a downward pressureof values, lagged behind.” With respect to consumer goods, Mills statesthat they “fell less than did the average of all commodity prices.”Regarding the recovery of 1934–1936, Mills indicates that “the prices ofindustrial raw materials, together with relatively high prices of finishedgoods, put manufacturers in an advantageous position on the operatingside” (pp. 25–26, see also pp. 96–97, 151, 157–58 and 222).A helpful evaluation of Mills’s writings appears in Skousen’s book,The Structure of Production, pp. 58–60.