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 credit expansion which evokes the upswing always originates from the idea that business stagnation must be overcome by “easy money.” Attempts to demonstrate that this is not the case have been in vain. If anyone argues that lower interest rates have not been constantly portrayed as the ideal goal for economic policy, it can only be due to lack of knowledge concerning economic history and recent economic literature.

It is generally recognized that the social consequences of changes in the value of money—apart from the effect such changes have on the value of monetary obligations—may be attributed solely to the fact that these changes are not effected equally and simultaneously with respect to all goods and services. That is, not all prices rise to the same extent and at the same time. Hardly anyone disputes this today.

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.

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.

1. The Cause of Our Difficulties

The severe convulsions of the economy are the inevitable result of policies which hamper market activity, the regulator of capitalistic production.

1. Role of Interest Rates

In our economic system, times of good business commonly alternate more or less regularly with times of bad business. Decline follows economic upswing, upswing follows decline, and so on. The attention of economic theory has quite understandably been greatly stimulated by this problem of cyclical changes in business conditions. In the beginning, several hypotheses were set forth, which could not stand up under critical examination.

The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the “natural rate of interest” through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings.

1. The Marxian “Anarchy of Production” Myth*

The Marxian critique censures the capitalistic social order for the anarchy and planlessness of its production methods. Allegedly, every entrepreneur produces blindly, guided only by his desire for profit, without any concern as to whether his action satisfies a need.