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I. The Acceptance of the Circulation Credit Theory of Business Cycles
It is frequently claimed that if the causes of cyclical changes were understood, economic programs suitable for smoothing out cyclical “waves” would be adopted.* The upswing would then be throttled down in time to soften the decline that inevitably follows in its wake. As a result, economic development would proceed at a more even pace. The boom's accompanying side effects, considered by many to be undesirable, would then be substantially, perhaps entirely, eliminated. Most significantly, however, the losses inflicted by the crisis and by the decline, which almost everyone deplores, would be considerably reduced, or even completely avoided.
For many people, this prospect has little appeal. In their opinion, the disadvantages of the depression are not too high a price to pay for the prosperity of the upswing. They say that not everything produced during the boom period is malinvestment, which must be liquidated by the crisis. In their opinion, some of the fruits of the boom remain and the progressing economy cannot do without them. However, most economists have looked on the elimination of cyclical changes as both desirable and necessary. Some came to this position because they thought that, if the economy were spared the shock of recurring crises every few years, it would help to preserve the capitalistic system of which they approved. Others have welcomed the prospect of an age without crises precisely because they saw—in an economy that was not disturbed by business fluctuations—no difficulties in the elimination of the entrepreneurs who, in their view, were merely the superfluous beneficiaries of the efforts of others.
Whether these authors looked on the prospect of smoothing out cyclical waves as favorable or unfavorable, all were of the opinion that a more thorough examination of the cause of periodic economic changes would help produce an age of less severe fluctuations. Were they right?
Economic theory cannot answer this question—it is not a theoretical problem. It is a problem of economic policy or, more precisely, of economic history. Although their measures may produce badly muddled results, the persons responsible for directing the course of economic policy are better informed today concerning the consequences of an expansion of circulation credit than were their earlier counterparts, especially those on the European continent. Yet, the question remains. Will measures be introduced again in the future which must lead via a boom to a bust?
The Circulation Credit (Monetary) Theory of the Trade Cycle must be considered the currently prevailing doctrine of cyclical change. Even persons, who hold another theory, find it necessary to make concessions to the Circulation Credit Theory. Every suggestion made for counteracting the present economic crisis uses reasoning developed by the Circulation Credit Theory. Some insist on rescuing every price from momentary distress, even if such distress comes in the upswing following a new crisis. To do this, they would “prime the pump” by further expanding the quantity of fiduciary media. Others oppose such artificial stimulation, because they want to avoid the illusory credit expansion induced prosperity and the crisis that will inevitably follow.
However, even those who advocate programs to spark and stimulate a boom recognize, if they are not completely hopeless dilettantes and ignoramuses, the conclusiveness of the Circulation Credit Theory's reasoning. They do not contest the truth of the Circulation Credit Theory's objections to their position. Instead, they try to ward them off by pointing out that they propose only a “moderate,” a carefully prescribed “dosage” of credit expansion or “monetary creation” which, they say, would merely soften, or bring to a halt, the further decline of prices. Even the term “re-deflation,”1 newly introduced in this connection with such enthusiasm, implies recognition of the Circulation Credit Theory. However, there are also fallacies implied in the use of this term.
- *. [Mises's contribution to a Festschrift for Arthur Spiethoff, Die Stellung und der nächste Zukunft der Konjunkturforschung, pp. 175–80 (Munich: Duncker and Humblot, 1933). All the contributors were asked to address themselves to the same topic. Another translation of this article, by Joseph R. Stromberg, then a doctoral candidate in history at the University of Florida, appeared in The Libertarian Forum (June 1975). This is a completely different translation, made by Bettina Bien Greaves and edited by Percy L. Greaves.—Ed.]
- 1. [The more modern term for what Mises apparently meant by “re-deflation” is undoubtedly “reflation.”—Ed.]