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4. The Current Status of Business Cycle Research and Its Prospects for the Immediate Future (1933)

IV. The Effect of Lower than Unhampered Market Interest Rates

The causal connection [between credit expansion and rising prices] is denied still more intensely if the proposal for limiting credit expansion is tied in with certain anticipations. If the entrepreneurs expect low interest rates to continue, they will use the low interest rates as a basis for their computations. Only then will entrepreneurs allow themselves to be tempted, by the offer of more ample and cheaper credit, to consider business enterprises which would not appear profitable at the higher interest rates that would prevail on the unaltered loan market.

If it is publicly proclaimed that care will be taken to stop the creation of additional credit in time, then the hoped-for gains must fail to appear. No entrepreneur will want to embark on a new business if it is clear to him in advance that the business cannot be carried through to completion successfully. The failure of recent pump-priming attempts and statements of the authorities responsible for banking policy make it evident that the time of cheap money will very soon come to an end. If there is talk of restriction in the future, one cannot continue to “prime the pump” with credit expansion.

Economists have long known that every expansion of credit must someday come to an end and that, when the creation of additional credit stops, this stoppage must cause a sudden change in business conditions. A glance at the daily and weekly press in the “boom” years since the middle of the last century shows that this understanding was by no means limited to a few persons. Still the speculators, averse to theory as such, did not know it, and they continued to engage in new enterprises. However, if the governments were to let it be known that the credit expansion would continue only a little longer, then its intention to stop expanding would not be concealed from anyone.