The Freeman 1972 - The Ludwig von Mises Institute

1972 BLOOD FROM TURNIPS 375credit expansions will lead to aspiral of economic prosperity.The error concerning the circulationof money is one of mistakingeffect for cause. Money is amedium of exchange, as Law believed,but it is also a market commoditywhich takes on value inexchange.I 7 Therefore if people donot circulate their money, it canonly be because they anticipatethat it will be worth more in exchangeat a later time. On theother hand, if people believe thattheir money will lose value in thefuture, they will circulate it in thepresent. 18 Thus circulation isneither an index of prosperity, norof adversity: it is not wise to circulatemoney in a deflating market,and the circulation of moneyin an inflating economy is not' asign of prosperity, but rather ofsickness. There are times whenmoney must not circulate.The second error is an extensionof the first: that successive creditexpansions (i.e., lowering the interestrate and loaning moremoney) will lead to a spiral ofeconomic prosperity: that moneycan create business, which wouldincrease production, which wouldresult in greater tax revenues andfoster a new credit expansion,which would create new business,and so on. Law's error may bepointed out with two observations:(a) If the old debt is paid off beforethe new credit expansiontakes place, there has been no netgain for the economy. Consumptionmust be curtailed and savingsinvested in order to finance suchprogress. It is only a question ofwhen one is going to curtail consumptionand invest savings - nowor later. (b) If the old debt is notpaid off, and a new credit expansionis made, the net result is ahigher price level for everyone asprices are bid up with the extramoney available. This bidding upof prices, however, does not affecteveryone equally:While the process is under way,some people enjoy the. benefit ofhigher prices for the goods or servicesthey sell, while the prices of thethings they buy have not yet risenor have not risen to the same extent.On the other hand, there are peoplewho are in the unhappy situation ofselling commodities and serviceswhose prices have not yet risen ornot in the same degree as the pricesof the goods they must buy for theirdaily consumption. For the formerthe progressive rise in prices is aboon, for the latter a calamity. Besides,the debtors are favored at theexpense of the creditors. 19This process may continue for alonger or shorter period of time.How long it lasts depends on psychologicalfactors. It will last aslong as the people maintain con-