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

V. The Questionable Fear of Declining Prices

People today are inclined to overvalue the significance of recent accomplishments in clarifying the business cycle problem and to undervalue the Currency School's tremendous contribution. The benefit which practical cyclical policy could derive from the old Currency School theoreticians has still not been fully exploited. Modern cyclical theory has contributed little to practical policy that could not have been learned from the Currency Theory.

Unfortunately, economic theory is weakest precisely where help is most needed—in analyzing the effects of declining prices. A general decline in prices has always been considered unfortunate. Yet today, even more than ever before, the rigidity of wage rates and the costs of many other factors of production hamper an unbiased consideration of the problem. Therefore, it would certainly be timely now to investigate thoroughly the effects of declining money prices and to analyze the widely held idea that declining prices are incompatible with the increased production of goods and services and an improvement in general welfare. The investigation should include a discussion of whether it is true that only inflationistic steps permit the progressive accumulation of capital and productive facilities. So long as this naïve inflationist theory of development is firmly held, proposals for using credit expansion to produce a boom will continue to be successful.

The Currency Theory described some time ago the necessary connection between credit expansion and the cycle of economic changes. Its chain of reasoning was only concerned with a credit expansion limited to one nation. It did not do justice to the situation, of special importance in our age of attempted cooperation among the banks of issue, in which all countries expanded equally. In spite of the Currency Theory's explanation, the banks of issue have persistently advised further expansion of credit.

This strong drive on the part of the banks of issue may be traced back to the prevailing idea that rising prices are useful and absolutely necessary for “progress” and to the belief that credit expansion was a suitable method for keeping interest rates low. The relationship between the issue of fiduciary media and the formation of interest rates is sufficiently explained today, at least for the immediate requirements of determining economic policy. However, what still remains to be explained satisfactorily is the problem of generally declining prices.