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

504 Money, Bank Credit, and Economic CyclesCONCLUSIONIn light of the theoretical analysis carried out and the historicalexperience accumulated, it is surprising that at thedawn of the twenty-first century doubts still exist with respectto the recessive nature of credit expansion. We have seen thatstages of boom, crisis, and recession recur with great regularity,and we have examined the key role bank credit expansionplays in these stages. Despite these truths, a large number oftheorists persist in denying that economic crises stem from anunderlying theoretical cause. These theorists fail to realize thattheir own analysis (be it Keynesian, monetarist, or of anyother tendency) relies on the implicit assumption that themonetary factors related to credit play a leading role. Thesefactors are fundamental to understanding the expansion andinitial boom, that excessive, continuous increase which invariablytakes place in the stock market, and, with the arrival ofthe crisis, the inevitable credit squeeze and recession, whichparticularly affects capital-goods industries.Furthermore it should be obvious that such cycles perpetuallyrecur due to an institutional cause, one capable ofaccounting for this inherent behavior of (hampered) marketeconomies. As we have been arguing from the beginning ofchapter 1, the cause lies in the privilege granted to bankers,allowing them, in violation of traditional legal principles, toloan out the money placed with them on demand deposit,thus operating with a fractional reserve. Governments havealso taken advantage of this privilege in order to obtain easyfinancing in moments of difficulty, and later, via central banks,to guarantee easy credit terms and inflationary liquidity,which until now have been considered necessary and favorableas a stimulus of economic development.The “gag rule” which has generally been imposed on theAustrian theory of the business cycle is highly significant, asis the widespread public ignorance of the functioning of thefinancial system. It is as if the two corresponded to an unspokenstrategy to avoid change, a strategy which may originatefrom the desire of many theorists to maintain a justification forgovernment intervention in financial and banking markets,