Freedom, Society, and State - Ludwig von Mises Institute

ere d t t e x pan s ton ereate s rna linvestrn e n t s t hat wi lIsur ­
face as soon as the policy ceases. If the government
des i res to avoid the depressionary effects inherent in
the re-adjustment process, it will have to try to
shore-up the malinvestments by continuing the influx of
new money. But, as Hayek points out, "inflation acts
as a stimulus to business only insofar as it is unforeseen."(66)
If the prices are rising at, say, five percen
t per year, people will soon come to expect future
price rises of five percent and ma"ke adjustments in
ant i c i pat ion 0 f tho s e inc rea s e s • Conseq ue n t 1y, for
the policy of credit expansion to be successful it must
be more than expected. Iff i ve percent is expected
the government must expand the money supply by, say,
seven percent. But then seven percent will come to be
expected, forcing the government to expand the money
supply by, say ten percent .. Clearly, if the policy of
credit expansion is not terminated it will lead to what
the Austrians refer to as the "crack-up boom," i.e.,
the point where the "prices at which people would be
prepared to part with 'real goods' discount to such an
extent the expected progress in the fall of purchasing
power that nobody has sufficIent cash at hand to pay
for them." But once this point is reached "The monetary
system breaks down; all transactions in the money
co nee r ned c e a s e; a pan i c ma k esits purchas i ng power
van i sh al together. People return ei ther to barter or
to the use of another kind of money."(67) This point
was reached at several tImes in the past including 1781
colonial America, 1796 France, 1920 Russia, and 1923
Germany.
The Austrians believe that their theory was borne
out by the depression of the 1930's. Between July 1921
and July 1929, they note, the supply of money in the
United States increased from $45.3 billion to $73.3
b ill ion, 0 ran inc rea s e if 61.8 per cen t . Meanwh i Ie,
product i on of such durable goods as iron and steel increased
by 160 percent and production of non-durable
goo d s r 0 s e b y 6 0 per c e n t. Conseq ue n t I y, the genera 1
pr ice level rose only slightly. What is of importance
for the Austrians, however, is not the aggregate
pr ice level but the changes in the prices between the
consumer and capital goods industries. Credit expans
ion, say the Austr ians, forced the interest rate below
what it would have been on the unhampered market. ThIS
caused the bulk of the new money to enter the capital
goods market, forcing prIces in those industries to
rise. Since the existing consumption/savings proportions
were pulled out of balance wIth the social rate
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