The 1920s was a period when price stabilization proposals a la Irving Fisher were influential in policy and central banking circles. Hayek and Mises were major critics of this approach and emphasized that such an approach to policy would not stabilize economic activity, but would in fact generate boom-bust cycles in an economy where increases in productivity should be working to lower costs and prices. The period now know as the “Great Moderation”, approximately 1981 -2001 was a period where inflation targeting, a modern variant of this approach to policy, greatly influenced monetary policy. While central bank policy during this period, judged by its criteria that a low rate of inflation was an acceptable target, appeared to be working just fine─inflation remained low, at least compared to the late 1960s and 1970s, and recessions were few and relatively mild─the period ended with back to back boom-bust which are best explained by Austrian Business Cycle Theory which clearly explains the causal process at work when central banks create credit (See “Natural Rates of Interest and Sustainable Growth” or “Hayek and the 21st Century Boom-Bust and Recession-Recovery”).
Rothbard very clearly lays out the argument in AGD (86):
Similarly, the designation of the 1920s as a period of inflationary boom may trouble those who think of inflation as a rise in prices. Prices generally remained stable and even fell slightly over the period.
But we must realize that two great forces were at work on prices during the 1920s—the monetary inflation which propelled prices upward and the increase in productivity which lowered costs and prices. In a purely free-market society, increasing productivity will increase the supply of goods and lower costs and prices, spreading the fruits of a higher standard of living to all consumers. But this tendency was offset by the monetary inflation which served to stabilize prices. Such stabilization was and is a goal desired by many, but it (a) prevented the fruits of a higher standard of living from being diffused as widely as it would have been in a free market; and (b) generated the boom and depression of the business cycle. For a hallmark of the inflationary boom is that prices are higher than they would have been in a free and unhampered market. Once again, statistics cannot discover the causal process at work [emphasis added].
