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

A Critique of Monetarist and Keynesian Theories 583any case, as we have already argued, the indirect,underlying cause of economic maladjustments lies incredit expansion, which provokes a generalized malinvestmentof resources, which in turn creates unemployment.The more rigid the markets, the higher theunemployment.3. When economic agents enter into long-term contractsnegotiated in monetary units, they must be able toadequately predict changes in the purchasing powerof money. This last requirement appears the easiest tosatisfy, both when the purchasing power of the monetaryunit declines continuously, as has occurred sinceWorld War II, and when it gradually and predictablyrises, as would occur following the adoption of a policyto maintain the quantity of money in circulationconstant. In fact the condition is even more likely to bemet in the second case. 102102 See Hayek’s article, “On Neutral Money,” published as chapter 7 ofMoney, Capital and Fluctuations, pp. 159–62, esp. p. 161. This is the Englishtranslation of the original German article, “Über ‘Neutrales Geld’”in Zeitschrift für Nationalökonomie 4 (1933): 659–61. Donald C. Lavoie hasrevealed that at any rate, the disruptive effects a simple variation in thegeneral price level may provoke are less damaging and much easier topredict than those exerted on the productive structure by the type ofmonetary injection bank credit expansion entails:My own judgment would be that the price-level effects areless damaging and easier to adjust to than the injectioneffects; thus the optimal policy for monetary stability wouldbe as close to zero money growth as can be practicallyattained. In my view the gradual deflation that this policywould permit would be preferable to the relative price distortionwhich would be caused by attempting to injectenough money into the economy to keep the price level constant.He adds:Even gold money would undergo gradual increases in itssupply over time. Some have estimated that about a two percentincrease per year would be likely. To me this appears tobe the best we can do. (Don C. Lavoie, “Economic Calculation