The Causes of the Economic Crisis and Other Essays Before and After the Great Depression

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. Practically no one has dared to maintain that it would be desirable to have higher interest rates sooner.2 People, who sought cheap credit, clamored for the establishment of credit-issuing banks and for these banks to reduce interest rates. Every measure seized upon to avoid “raising the discount rate” has had its roots in the concept that credit must be made “easy.” The fact that reducing interest rates through credit expansion must lead to price increases has generally been ignored. However, the cheap money policy would not have been abandoned even if this had been recognized.

Public opinion is not committed to one single view with respect to the height of prices as it is in the case of interest rates. Concerning prices, there have always been two different views: On the one side, the demand of producers for higher prices and, on the other side, the demand of consumers for lower prices. Governments and political parties have championed both demands, if not at the same time, then shifting from time to time according to the groups of voters whose favors they court at the moment. First one slogan, then another is inscribed on their banners, depending on the temporary shift of prices desired. If prices are going up, they crusade against the rising cost of living. If prices are falling, they profess their desire to do everything possible to assure “reasonable” prices for producers. Still, when it comes to trying to reduce prices, they generally sponsor programs which cannot attain that goal. No one wants to adopt the only effective means—the limitation of circulation credit—because they do not want to drive interest rates up.3 In times of declining prices, however, they have been more than ready to adopt credit expansion measures, as this goal is attainable by the means already desired, i.e., by reducing interest rates.

Today, those who would seek to expand circulation credit counter objections by explaining that they only want to adjust for the decline in prices that has already taken place in recent years, or at least to prevent a further decline in prices. Thus, it is claimed, such expansion introduces nothing new. Similar arguments were also heard [during the nineteenth century] at the time of the drive for bimetallism.

• 2That has always been so; public opinion has always sided with the debtors. (See Jeremy Bentham, Defence of Usury, 2nd ed. [London, 1790], pp. 102ff.). The idea that the creditors are the idle rich, hardhearted exploiters of workers, and that the debtors are the unfortunate poor, has not been abandoned even in this age of bonds, bank deposits and savings accounts.
• 3An extreme example: the discount policy of the German Reichsbank in the time of inflation. See Frank Graham, Exchange, Prices and Production in Hyper-Inflation Germany, 1920–1923 (Princeton, N.J., 1930), pp. 65ff.