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

534 Money, Bank Credit, and Economic CyclesWhat policy do monetarists advocate to prevent andcounter crises and economic recessions? They generally confinethemselves to recommending policies that merely treatthe symptoms, not the ultimate causes, of crises. In otherwords they suggest increasing the quantity of money in circulation,and thus reinflating the economy to fight the monetarycontraction which, to a greater or lesser degree, always takesplace following the crisis. They fail to realize that this macroeconomicpolicy hinders the liquidation of projects launchedin error, prolongs the recession and may eventually lead tostagflation, a phase we have already analyzed. 36 In the longrun, as we know, the expansion of new loans during a crisiscan, at most, only postpone the inevitable arrival of therecession, making the subsequent readjustment even moresevere. As Hayek quite clearly states:Any attempt to combat the crisis by credit expansion will,therefore, not only be merely the treatment of symptoms ascauses, but may also prolong the depression by delaying theinevitable real adjustments. 37Finally, some monetarists propose the establishment of aconstitutional rule which would predetermine the growth ofthe money supply and “guarantee” monetary stability andeconomic growth. However this plan would also be ineffectivein averting economic crises if new doses of money continued,to any degree, to be injected into the system throughcredit expansion. In addition whenever a rise in general productivity“required” increased credit expansion to stabilize36 Hans F. Sennholz, Money and Freedom (Spring Mills, Penn.: LibertarianPress, 1985), pp. 38–39. Sennholz explains Friedman’s lack of a true theoryof the cycle and his attempt to disguise this gap by designing a policyaimed simply at breaking out of a recession by monetary means,without accounting for its causes.37 F.A. Hayek, “A Rejoinder to Mr. Keynes,” Economica 11, no. 34(November 1931): 398–404. Reprinted as chapter 5 of Friedrich A. Hayek:Critical Assessments, John Cunningham Wood and Ronald N. Woods,eds. (London and New York: Routledge, 1991), vol. 1, pp. 82–83; see alsoContra Keynes and Cambridge, pp. 159–64.