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The Theory of Money & Credit

From 1926 to 1929 the attention of the world was chiefly focused upon the question of American prosperity. As in all previous booms brought about by expansion of credit, it was then believed that the prosperity would last forever, and the warnings of the economists were disregarded. The turn of the tide in 1929 and the subsequent severe economic crisis were not a surprise for economists; they had foreseen them, even if they had not been able to predict the exact date of their occurrence.

The remarkable thing in that situation was not the fact that we passed through a period of credit-expansion that had been followed by a period of depression, but the way in which governments are reacted to these circumstances. The universal endeavour had been made, in the midst of the general fall of prices, to ward off the fall in money wages, and to employ public resources on the one hand to bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes. This had the consequence of eliminating just those forces which in previous times of depression have eventually effected the adjustment of prices and wages to the existing circumstances and so paved the way for recovery. The unwelcome truth has been ignored that stabilization of wages must mean increasing unemployment and the perpetuation of the disproportion between prices and costs and between outputs and sales which is the symptom of a crisis.

This attitude was dictated by purely political considerations. Governments did not want to cause unrest among the masses of their wage-earning subjects. They did not dare to oppose the doctrine that regards high wages as the most important economic ideal and believes that trade-union policy and government intervention can maintain the level of wages during a period of falling prices. And governments therefore did everything to lessen or remove entirely the pressure exerted by circumstances upon the level of wages. In order to prevent the underbidding of trade-union wages, they gave unemployment benefit to the growing masses of those out of work and they prevented the central banks from raising the rate of interest and restricting credit and so giving free play to the purging process of the crisis.

When governments do not feel strong enough to procure by taxation or borrowing the resources to meet what they regard as irreducible expenditure, or, alternatively, so to restrict their expenditure that they are able to make do with the revenue that they have, recourse on their part to the issue of inconvertible notes and a consequent fall in the value of money is something that has occurred more than once in European and American history. But the motive for recent experiments in depreciation has been by no means fiscal. The gold content of the monetary unit has been reduced in order to maintain the domestic wage-level and price level, and in order to secure advantages for home industry against its competitors in international trade. Demands for such action are no new thing either in Europe or in America. But in all previous cases, with a few significant exceptions, those who have made these demands have not had the power to secure their fulfilment. In this case, however, Great Britain began by abandoning the old gold content of the pound. Instead of preserving its gold-value by employing the customary and never-failing remedy of raising the bank rate, the government and parliament of the United Kingdom, with bank-rate at 4! per cent, preferred to stop the redemption of notes at the old legal parity and so to cause a considerable fall in the value of sterling. The object was to prevent a further fall of prices in England and above all, apparently, to avoid a situation in which reductions of wages would be necessary.

Click here to open "The Theory of Money & Credit" by Ludwig von Mises (PDF 25MB)

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