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

A Critique of Monetarist and Keynesian Theories 533service). Nevertheless its use as a supposed aid to explainingeconomic processes has proven highly detrimental to theprogress of economic thought, since it prevents analysis ofunderlying microeconomic factors, forces a mechanistic interpretationof the relationship between the money supply and thegeneral price level, and in short, masks the true microeconomiceffects monetary variations exert on the real productive structure.The harmful, false notion that money is neutral results.However, as early as 1912, Ludwig von Mises demonstratedthat all increases in the money supply invariably modify thestructure of relative prices of goods and services. Aside fromthe purely imaginary case in which the new money is evenlydistributed among all economic agents, it is always injected intothe economy in a sequential manner and at various specificpoints (via public expenditure, credit expansion, or the discoveryof new gold reserves in particular places). To the extent thisoccurs, only certain people will be the first to receive the newmonetary units and have the chance to purchase new goodsand services at prices not yet affected by monetary growth.Thus begins a process of income redistribution in which the firstto receive the monetary units benefit from the situation at theexpense of all other economic agents, who find themselves purchasinggoods and services at rising prices before any of thenewly-created monetary units reach their pockets. This processof income redistribution not only inevitably alters the “structure”of economic agents’ value scales but also their weights inthe market, which can only lead to changes in society’s entirestructure of relative prices. The specific characteristics of thesechanges in cases where monetary growth derives from creditexpansion have been covered in detail in previous chapters. 3535 Mises, The Theory of Money and Credit, p. 162 ff. Mises concludes:The prices of commodities after the rise of prices will not bearthe same relation to each other as before its commencement;the decrease in the purchasing power of money will not beuniform with regard to different economic goods. (p. 163)Before Mises, the same idea was also expressed by Cantillon, Hume,and Thornton, among others. For instance, see “Of Money,” one ofHume’s essays contained in Essays, pp. 286ff. Hume takes the idea fromCantillon who was the first one to express it in his Essai sur la nature ducommerce en général, chap. VII, part II, pp. 232–39.