Ludwig von Mises shows the inevitability of economic slumps after a period of credit expansion (1951)

Found in Economic Freedom and Interventionism

In the article "Inflation Must End in a Slump," written in 1951, the Austrian economist Ludwig von Mises (1881-1973) noted that all periods of government induced credit expansion must end in an economic crisis.

This country, and with it most of the Western world, is presently going through a period of inflation and credit expansion. As the quantity of money in circulation and deposits subject to check increases, there prevails a general tendency for the prices of commodities and services to rise. Business is booming. Yet such a boom, artificially engineered by monetary and credit expansion, cannot last forever. It must come to an end sooner or later. For paper money and bank deposits are not a proper substitute for nonexisting capital goods. Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.

A key insight of the Austrian school of economics is that a credit expansion can lead to a boom in one sector of the market. Inevitably, the bad investments made in this sector are shown to be unsustainable and there is a slump or recession. As the U.S. and the rest of world go through a classic boom and economic collapse we turn again to Liberty Fund’s “Library of the Works of Ludwig von Mises”. Here is an article he wrote in 1951, some two years after his magnum opus Human Action appeared, where is lays out his case in a more popular form. The money sentences are “Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.”