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I: Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle - Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory 
On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory. Translated and with a Foreword by Bettina Bien Greaves,. Edited by Percy L. Greaves, Jr. (Indianapolis: Liberty Fund, 2011).
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Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle
Currency School’s Contribution
“Stabilization” of the purchasing power of the monetary unit would also lead, at the same time, to the ideal of an economy without any changes. In the stationary economy there would be no “ups” and “downs” of business. Then, the sequence of events would flow smoothly and steadily. Then, no unforeseen event would interrupt the provisioning of goods. Then, the acting individual would experience no disillusionment because events did not develop as he had assumed in planning his affairs to meet future demands.
First, we have seen that this ideal cannot be realized. Secondly, we have seen that this ideal is generally proposed as a goal only because the problems involved in the formation of purchasing power have not been thought through completely. Finally, we have seen that even if a stationary economy could actually be realized, it would certainly not accomplish what had been expected. Yet neither these facts nor the limiting of monetary policy to the maintenance of a “pure” gold standard means that the political slogan, “Eliminate the business cycle,” is without value.
It is true that some authors who dealt with these problems had a rather vague idea that the “stabilization of the price level” was the way to attain the goals they set for cyclical policy. Yet cyclical policy was not completely spent on fruitless attempts to fix the purchasing power of money. Witness the fact that steps were undertaken to curb the boom through banking policy, and thus to prevent the decline, which inevitably follows the upswing, from going as far as it would if matters were allowed to run their course. These efforts—undertaken with enthusiasm at a time when people did not realize that anything like stabilization of monetary value would ever be conceived of and sought after—led to measures that had far-reaching consequences.
We should not forget for a moment the contribution which the Currency School made to the clarification of our problem. Not only did it contribute theoretically and scientifically but it contributed also to practical policy. The recent theoretical treatment of the problem—in the study of events and statistical data and in politics—rests entirely on the accomplishments of the Currency School. We have not surpassed Lord Overstone1 so far as to be justified in disparaging his achievement.
Many modern students of cyclical movements are contemptuous of theory—not only of this or that theory but of all theories—and profess to let the facts speak for themselves. The delusion that theory must be distilled from the results of an impartial investigation of facts is more popular in cyclical theory than in any other field of economics. Yet, nowhere else is it clearer that there can be no understanding of the facts without theory.
Certainly it is no longer necessary to expose once more the errors in logic of the Historical-Empirical-Realistic approach to the “social sciences.” Only recently has this task been most thoroughly undertaken once more by competent scholars. Nevertheless, we continually encounter attempts to deal with the business cycle problem while presumably rejecting theory.
In taking this approach one falls prey to a delusion which is incomprehensible. It is assumed that data on economic fluctuations are given clearly, directly and in a way that cannot be disputed. Thus it remains for science merely to interpret these fluctuations—and for the art of politics simply to find ways and means to eliminate them.
Early Trade Cycle Theories
All business establishments do well at times and badly at others. There are times when the entrepreneur sees his profits increase daily more than he had anticipated and when, emboldened by these “windfalls,” he proceeds to expand his operations. Then, due to an abrupt change in conditions, severe disillusionment follows this upswing, serious losses materialize, long established firms collapse, until widespread pessimism sets in which may frequently last for years. Such were the experiences which had already been forced on the attention of the businessman in capitalistic economies, long before discussions of the crisis problem began to appear in the literature. The sudden turn from the very sharp rise in prosperity—at least what appeared to be prosperity—to a very severe drop in profit opportunities was too conspicuous not to attract general attention. Even those who wanted to have nothing to do with the business world’s “worship of filthy lucre” could not ignore the fact that people who were, or had been considered, rich yesterday were suddenly reduced to poverty, that factories were shut down, that construction projects were left uncompleted, and that workers could not find work. Naturally, nothing concerned the businessman more intimately than this very problem.
If an entrepreneur is asked what is going on here—leaving aside changes in the prices of individual commodities due to recognizable causes—he may very well reply that at times the entire “price level” tends upward and then at other times it tends downward. For inexplicable reasons, he would say, conditions arise under which it is impossible to dispose of all commodities, or almost all commodities, except at a loss. And what is most curious is that these depressing times always come when least expected, just when all business had been improving for some time so that people finally believed that a new age of steady and rapid progress was emerging.
Eventually, it must have become obvious to the more keenly thinking businessman that the genesis of the crisis should be sought in the preceding boom. The scientific investigator, whose view is naturally focused on the longer period, soon realized that economic upswings and downturns alternated with seeming regularity. Once this was established, the problem was halfway exposed and scientists began to ask questions as to how this apparent regularity might be explained and understood.
Theoretical analysis was able to reject, as completely false, two attempts to explain the crisis—the theories of general overproduction and of underconsumption. These two doctrines have disappeared from serious scientific discussion. They persist today only outside the realm of science—the theory of general overproduction, among the ideas held by the average citizen; and the underconsumption theory, in Marxist literature.
It was not so easy to criticize a third group of attempted explanations, those which sought to trace economic fluctuations back to periodical changes in natural phenomena affecting agricultural production. These doctrines cannot be reached by theoretical inquiry alone. Conceivably such events may occur and reoccur at regular intervals. Whether this actually is the case can be shown only by attempts to verify the theory through observation. So far, however, none of these “weather theories”2 has successfully passed this test.
A whole series of a very different sort of attempts to explain the crisis are based on a definite irregularity in the psychological and intellectual talents of people. This irregularity is expressed in the economy by a change from confidence over the future, which inspires the boom, to despondency, which leads to the crisis and to stagnation of business. Or else this irregularity appears as a shift from boldly striking out in new directions to quietly following along already well-worn paths.
What should be pointed out about these doctrines and about the many other similar theories based on psychological variations is, first of all, that they do not explain. They merely pose the problem in a different way. They are not able to trace the change in business conditions back to a previously established and identified phenomenon. From the periodical fluctuations in psychological and intellectual data alone, without any further observation concerning the field of labor in the social or other sciences, we learn that such economic shifts as these may also be conceived of in a different way. So long as the course of such changes appears plausible only because of economic fluctuations between boom and bust, psychological and other related theories of the crisis amount to no more than tracing one unknown factor back to something else equally unknown.
The Circulation Credit Theory
Of all the theories of the trade cycle, only one has achieved and retained the rank of a fully-developed economic doctrine. That is the theory advanced by the Currency School, the theory which traces the cause of changes in business conditions to the phenomenon of circulation credit. All other theories of the crisis, even when they try to differ in other respects from the line of reasoning adopted by the Currency School, return again and again to follow in its footsteps. Thus, our attention is constantly being directed to observations which seem to corroborate the Currency School’s interpretation.
In fact, it may be said that the Circulation Credit Theory of the Trade Cycle3 is now accepted by all writers in the field and that the other theories advanced today aim only at explaining why the volume of circulation credit granted by the banks varies from time to time. All attempts to study the course of business fluctuations empirically and statistically, as well as all efforts to influence the shape of changes in business conditions by political action, are based on the Circulation Credit Theory of the Trade Cycle.
To show that an investigation of business cycles is not dealing with an imaginary problem, it is necessary to formulate a cycle theory that recognizes a cyclical regularity of changes in business conditions. If we could not find a satisfactory theory of cyclical changes, then the question would remain as to whether or not each individual crisis arose from a special cause which we would have to track down first. Originally, economics approached the problem of the crisis by trying to trace all crises back to specific “visible” and “spectacular” causes such as war, cataclysms of nature, adjustments to new economic data—for example, changes in consumption and technology, or the discovery of easier and more favorable methods of production. Crises which could not be explained in this way became the specific “problem of the crisis.”
Neither the fact that unexplained crises still recur again and again nor the fact that they are always preceded by a distinct boom period is sufficient to prove with certainty that the problem to be dealt with is a unique phenomenon originating from one specific cause. Recurrences do not appear at regular intervals. And it is not hard to believe that the more a crisis contrasts with conditions in the immediately preceding period, the more severe it is considered to be. It might be assumed, therefore, that there is no specific “problem of the crisis” at all, and that the still unexplained crises must be explained by various special causes somewhat like the “crisis” which central European agriculture has faced since the rise of competition from the tilling of richer soil in eastern Europe and overseas, or the “crisis” of the European cotton industry at the time of the American Civil War. What is true of the crisis can also be applied to the boom. Here again, instead of seeking a general boom theory we could look for special causes for each individual boom.
Neither the connection between boom and bust nor the cyclical change of business conditions is a fact that can be established independent of theory. Only theory, business cycle theory, permits us to detect the wavy outline of a cycle in the tangled confusion of events.4
[1. ][Lord Samuel Jones Loyd Overstone (1796–1883), an early opponent of inconvertible paper money and a leading proponent of the principles of Peel’s Act of 1844 limiting the use of bank-notes, intended to eliminate business cycles.—Ed.]
[2. ]Regarding the theories of Wm. Stanley Jevons, Henry L. Moore and Wm. Beveridge, see Wesley Clair Mitchell’s Business Cycles, New York: National Bureau of Economic Research, 1927, pp. 12ff.
[3. ]As mentioned above, the most commonly used name for this theory is the “Monetary Theory.” For a number of reasons the designation “Circulation Credit Theory” is preferable.
[4. ]If expressions such as cycle, wave, etc., are used in business cycle theory, they are merely illustrations to simplify the presentation. One cannot and should not expect more from a simile which, as such, must always fall short of reality.