Hayek’s neglected truths about credit, capital and the trade cycle

Last night, I caught up with Martin Wolf’s November programmes for Radio 4 Analysis, which you can find here. He offered a predictable blend of commentators calling for more money printing, world central banking and greater global governance. It prompted me to look out Monetary Theory and the Trade Cycle (1933).

Hayek wrote (emphasis mine):

It is a curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the present working of our monetary organization exclusively responsible for our present plight. And the same stabilizers who believed that nothing was wrong with the boom and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling.The same superficial view,which sees no other harmful effect of a credit expansion but the rise of the price level, now believes that our only difficulty is a fall in the price level, caused by credit contraction.

All eerily familiar. And:

We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

The truths set out by Hayek in that crucial essay – and in Prices and Production in the same PDF – are ever more relevant today. Yet, despite the evidence of the intervening 80 years, the Keynesians, and indeed the Monetarists, continue to peddle their interventionist policies and monetary statism. Their intellectual bankruptcy is plain but still institutions are regarded as august which hawk their poor ideas about money and bank credit.

The economic truths which Hayek set out in the 1930s are much neglected. It is high time that they were widely read by economists and businessmen and that the impoverishing ideas of Keynes which are now doing so much damage are laid to rest.

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