The Causes of the Economic Crisis - Ludwig von Mises Institute

230 Pages·2006·1 MB·English

T C
HE AUSES OF THE
E C
CONOMIC RISIS
AND OTHER ESSAYS BEFORE
AND AFTER THE GREAT DEPRESSION
LUDWIG VON MISES
The Ludwig von Mises Institute
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T C
HE AUSES OF THE
E C
CONOMIC RISIS
AND OTHER ESSAYS BEFORE
AND AFTER THE GREAT DEPRESSION
LUDWIG VON MISES
Edited by Percy L. Greaves, Jr.
Ludwig
von Mises
Institute
AUBURN, ALABAMA
On the Manipulation of Money and Credit © 1978 by Liberty Fund, Inc.
Reprinted by permission.
Originally published as On the Manipulation of Money and Creditin 1978
by Free Market Books.
Translated from the original German by Bettina Bien Greaves and Percy L.
Greaves, Jr.
The Mises Institute would like to thank Bettina Bien Greaves for her sup-
port and interest in this new edition.
Foreword and new material copyright © 2006 by the Ludwig von Mises
Institute.
All rights reserved. No part of this book may be reproduced in any manner
whatsoever without written permission except in the case of quotes in the
context of reviews. For information write the Ludwig von Mises Institute,
518 West Magnolia Avenue, Auburn, Alabama 36832; www.mises.org.
ISBN: 1-933550-03-1
ISBN: 978-1-933550-03-9
C
ONTENTS
FOREWORDby Frank Shostak....................................................................xi
INTRODUCTIONby Percy L. Greaves, Jr. ............................................xiii
CHAPTER1—STABILIZATIONOFTHEMONETARYUNIT
—FROMTHEVIEWPOINTOFTHEORY(1923) ....................................1
I. The Outcome of Inflation ............................................................2
1. Monetary Depreciation............................................................2
2. Undesired Consequences ........................................................6
3. Effect on Interest Rates............................................................7
4. The Run from Money ..............................................................8
5. Effect of Speculation ................................................................9
6. Final Phases..............................................................................10
7. Greater Importance of Money to a Modern Economy ..12
II. The Emancipation of Monetary Value
From the Influence of Government ........................................14
1. Stop Presses and Credit Expansion ....................................14
2. Relationship of Monetary Unit to World Money
—Gold........................................................................................15
3. Trend of Depreciation............................................................16
III. The Return to Gold ....................................................................18
1. Eminence of Gold....................................................................18
2. Sufficiency of Available Gold................................................19
IV. The Money Relation ....................................................................21
1. Victory and Inflation..............................................................21
2. Establishing Gold “Ratio” ......................................................22
V. Comments on the “Balance of Payments” Doctrine ..........25
1. Refined Quantity Theory of Money....................................25
v
vi— The Causes of the Economic Crisis
2. Purchasing Power Parity..................................................26
3. Foreign Exchange Rates ..................................................27
4. Foreign Exchange Regulations ......................................29
VI. The Inflationist Argument ..................................................31
1. Substitute for Taxes..........................................................31
2. Financing Unpopular Expenditures..............................32
3. War Reparations................................................................34
4. The Alternatives................................................................35
5. The Government’s Dilemma..........................................37
VII. The New Monetary System ................................................39
1. First Steps ..........................................................................39
2. Market Interest Rates ......................................................41
VIII. The Ideological Meaning of Reform ..................................43
1. The Ideological Conflict..................................................43
Appendix: Balance of Payments and Foreign
Exchange Rates..................................................................44
CHAPTER2—MONETARYSTABILIZATIONANDCYCLICAL
POLICY(1928) ............................................................................53
A. Stabilization of the Purchasing Power of
the Monetary Unit ........................................................................57
I. The Problem ............................................................................57
1. “Stable Value” Money ......................................................57
2. Recent Proposals ..............................................................58
II. The Gold Standard..................................................................60
1. The Demand for Money..................................................60
2. Economizing on Money..................................................62
3. Interest on “Idle” Reserves..............................................65
4. Gold Still Money ..............................................................67
III. The “Manipulation of the Gold Standard” ......................68
1. Monetary Policy and Purchasing Power of Gold ......68
2. Changes in Purchasing Power of Gold ........................71
Contents — vii
IV. “Measuring” Changes in the Purchasing
Power of the Monetary Unit ................................................73
1. Imaginary Constructions................................................73
2. Index Numbers..................................................................77
V. Fisher’s Stabilization Plan......................................................80
1. Political Problem ..............................................................80
2. Multiple Commodity Standard......................................81
3. Price Premium ..................................................................82
4. Changes in Wealth and Income ....................................85
5. Uncompensatable Changes ............................................86
VI. Goods-Induced and Cash-Induced Changes in the
Purchasing Power of the Monetary Unit ..........................88
1. The Inherent Instability of Market Ratios ..................88
2. The Misplaced Partiality to Debtors ............................91
VII. The Goal of Monetary Policy ..............................................93
1. Liberalism and the Gold Standard................................93
2. “Pure” Gold Standard Disregarded ..............................94
3. The Index Standard..........................................................96
B. Cyclical Policy to Eliminate Economic Fluctuations ................97
I. Stabilization of the Purchasing Power
of the Monetary Unit and Elimination
of the Trade Cycle ............................................................97
1. Currency School’s Contribution....................................97
2. Early Trade Cycle Theories ............................................99
3. The Circulation Credit Theory....................................101
II. Circulation Credit Theory..................................................103
1. The Banking School Fallacy ........................................103
2. Early Effects of Credit Expansion......................................
3. Inevitable Effects of Credit Expansion
on Interest Rates ............................................................105
4. The Price Premium........................................................109
5. Malinvestment of Available Capital
Goods................................................................................109
viii— The Causes of the Economic Crisis
6. “Forced Savings”..............................................................111
7. A Habit-forming Policy ................................................113
8. The Inevitable Crisis and Cycle ..................................113
III. The Reappearance of Cycles ..............................................116
1. Metallic Standard Fluctuations....................................116
2. Infrequent Recurrences of Paper Money
Inflations..........................................................................117
3. The Cyclical Process of Credit Expansions ..............119
4. The Mania for Lower Interest Rates ..........................121
5. Free Banking....................................................................124
6. Government Intervention in Banking........................125
7. Intervention No Remedy..............................................127
IV. The Crisis Policy of the Currency School ......................128
1. The Inadequacy of the Currency School ..................128
2. “Booms” Favored............................................................130
V. Modern Cyclical Policy ........................................................132
1. Pre-World War I Policy ................................................132
2. Post-World War I Policies ............................................133
3. Empirical Studies............................................................135
4. Arbitrary Political Decisions........................................136
5. Sound Theory Essential................................................138
VI. Control of the Money Market ............................................140
1. International Competition or Cooperation..............140
2. “Boom” Promotion Problems ......................................142
3. Drive for Tighter Controls............................................144
VII. Business Forecasting for Cyclical Policy and the
Businessman ..........................................................................146
1. Contributions of Business Cycle
Research............................................................................146
2. Difficulties of Precise Prediction ................................148
VIII. The Aims and Method Cyclical Policy ............................149
1. Revised Currency School Theory ..............................149
Contents — ix
2. “Price Level” Stabilization ............................................151
3. International Complications........................................152
4. The Future........................................................................153
3—THECAUSESOFTHEECONOMICCRISIS(1931) ............................155
I. The Nature and Role of the Market ....................................155
1. The Marxian “Anarchy of Production” Myth..........155
2. The Role and Rule of Consumers..............................156
3. Production for Consumption......................................157
4. The Perniciousness of a “Producers’ Policy” ..........159
II. Cyclical Changes in Business Conditions ..........................160
1. Role of Interest Rates....................................................160
2. The Sequel of Credit Expansion ................................162
III. The Present Crisis ....................................................................163
A. Unemployment......................................................................164
1. The Market Wage Rate Process..................................164
2. The Labor Union Wage Rate Concept......................166
3. The Cause of Unemployment ....................................167
4. The Remedy for Mass Unemployment ....................168
5. The Effects of Government Intervention ................169
6. The Process of Progress ..............................................171
B. Price Declines and Price Supports....................................172
1. The Subsidization of Surpluses..................................172
2. The Need for Readjustments......................................173
C. Tax Policy..............................................................................174
1. The Anti-Capitalistic Mentality ................................174
D. Gold Production ..................................................................176
1. The Decline in Prices....................................................176
2. Inflation as a “Remedy”................................................178
IV. Is There a Way Out? ................................................................179
1. The Cause of Our Difficulties ....................................179
2. The Unwanted Solution ..............................................180