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

752 Money, Bank Credit, and Economic Cyclesmaking certain reductions in nominal wages necessary (in anycase, these would generally be smaller than the drop in thegeneral price level). 51Finally, we should point out that the chief virtue in therigidity of the proposed monetary system is that it would completelyprevent sudden contractions or decreases in the moneysupply such as inevitably occur now in the recession stagewhich in the economic cycle follows every expansion. Thusperhaps the greatest advantage of the reform we suggest isthat it would totally eliminate the credit squeeze which succeedsevery boom and is one of the clearest signs of the economiccrises that repetitively grip our economies. The worldwidestock of gold is unchanging and has accumulated overthe history of civilization. Hence it is inconceivable that itsvolume will suddenly plunge at some future point. One of the51 Mises, in the memorandum which he prepared for the League ofNations, and which we mentioned earlier in this chapter, expresses theabove ideas brilliantly and concisely:[I]f all expansion of credit by the banks had been effectivelyprecluded, the world would have had a monetary system inwhich—even apart from the discoveries of gold in California,Australia, and South Africa—prices would have shown ageneral tendency to fall. The majority of our contemporarieswill find a sufficient ground for regarding such a monetarysystem as bad in itself, since they are wedded to the belief thatgood business and high prices are one and the same thing. But that isprejudice. If we had had slowly falling prices for eighty years ormore, we would have become accustomed to look forimprovements in the standard of living and increases in realincome through falling prices with stable or falling moneyincome, rather than through increases in money income. Atany rate, a solution to the difficult problem of reforming ourmonetary and credit system must not be rejected offhandmerely for the reason that it involves a continuous fall in theprice level. Above all, we must not allow ourselves to beinfluenced by the evil consequences of the recent rapid fall inprices. A slow and steady decline of prices cannot in any sense becompared with what is happening under the present system:namely, sudden and big rises in the price level, followed by equallysudden and sharp falls. (Mises, Money, Method, and the MarketProcess, pp. 90–91; italics added)