The full paragraph from which this quotation was taken can be be viewed below (front page quote in bold):
In the conduct of business, reflections concerning the secular trend of
prices do not play any role whatever. Entrepreneurs and investors do not
bother about secular trends. What guides their actions is their opinion about
the movement of prices in the coming weeks, months, or at most years. They
do not heed the general movement of all prices. What matters for them is
the existence of discrepancies between the prices of the complementary factors
of production and the anticipated prices of the products. No businessman
embarks upon a definite production project because he believes that the prices,
i.e., the prices of all goods and services, will rise. He engages himself
if he believes that he can profit from a difference between the prices of
goods of various orders. In a world with a secular tendency toward falling
prices, such opportunities for earning profit will appear in the same way
in which they appear in a world with a secular trend toward rising prices.
The expectation of a general progressive upward movement of all prices does
not bring about intensified production and improvement in well-being. It
results in the “flight to real values,” in
the crack-up boom and the complete breakdown of the monetary system.
If the opinion that the prices of all commodities will drop becomes general,
the short-term market rate of interest is lowered by the amount of the
negative price premium. Thus the entrepreneur employing borrowed funds
is secured against the consequences of such a drop in prices to the same
extent to which, under conditions of rising prices, the lender is secured
through the price premium against the consequences of falling purchasing
power.
A secular tendency toward a rise in the monetary unit’s purchasing
power would require rules of thumb on the part of businessmen and investors
other than those developed under the secular tendency toward a fall in
its purchasing power. But it would certainly not influence substantially
the course of economic affairs. It would not remove the urge of people
to improve their material well-being as far as possible by an appropriate
arrangement of production. It would not deprive the economic system of
the factors making for material improvement, namely, the striving of enterprising
promoters after profit and the readiness of the public to buy those commodities
which are apt to provide them the greatest satisfaction at the lowest costs.
Such observations are certainly not a plea for a policy of deflation.
They imply merely a refutation of the ineradicable inflationist fables.
They unmask the illusiveness of Lord Keynes’s doctrine that the source
of poverty and distress, of depression of trade, and of unemployment is
to be seen in a “contractionist pressure.” It is not true that “a
deflationary pressure . . . would have . . . prevented the development
of modern industry.” It is not true that credit expansion brings
about the “miracle . . . of turning a stone into bread.”
Economics recommends neither inflationary nor deflationary policy.
It does not urge the governments to tamper with the market’s choice
of a medium of exchange. It establishes only the following truths:
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