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

A Critique of Monetarist and Keynesian Theories 581In short, Austrians believe money is never neutral (not inthe short, medium, nor long run), and institutions that dealwith it (banks in particular) must be founded on universallegal principles which prevent a “falsification” of relativeprices due to strictly monetary factors. Such falsifications leadto the widespread malinvestment of resources, and inevitably,to crisis and recession. Thus Austrian theorists consider thefollowing to be the three essential principles of macroeconomicpolicy, in order of importance:1. The quantity of money must remain as constant aspossible (i.e., as in a pure gold standard), and creditexpansion must be particularly avoided. These objectivesrequire a return to the traditional legal principleswhich govern the monetary bank-deposit contract andthe establishment of a 100-percent reserve requirementin banking.2. Every attempt should be made to insure that the relativeprices of different goods, services, resources, andfactors of production remain flexible. In general thegreater the credit and monetary expansion, the morerigid relative prices will tend to be, the more peoplewill fail to recognize the true cost of a lack of flexibility,and the more corrupt the habits of economicagents will become. Agents will eventually come toaccept the misconceived idea that the vital adjustmentscan and should always take the form of anincrease in the quantity of money in circulation. In(Roger W. Garrison, “Time and Money: The Universals ofMacroeconomic Theorizing,” Journal of Macroeconomics 6, no.2 [Spring, 1984]: 203)According to Garrison, the Austrians adopt a healthy middle ground inthe area of expectations as well:Assuming either superrational expectations or subrationalexpectations detract from the equally crucial role played bythe market process itself, which alone can continuouslyinform expectations, and subtracts from the plausibility of thetheory in which these unlikely expectational schemes areemployed. (Garrison, “What About Expectations?” p. 22.)