Money, Interest, And The Business Cycle

On account of the credit expansion, the whole economic system of the country or of the world is in the situation of a man who has a limited supply of building materials available and wants to construct a home. But being poor in technological calculations, he makes some mistakes. He thinks he can build a bigger house out of his limited supply of building materials than he really can. Therefore, he starts by constructing too large a foundation. Only later does he discover that he has made a mistake and that he cannot finish the house in the way he had intended. Then he must either abandon the whole project or use the materials still available to build a smaller house, leaving part of the foundation unused. This is the situation in which a country or in which the world finds itself at the end of a crisis caused by credit expansion. Because of the easy credit businessmen make mistakes in their economic calculations and find themselves with over-ambitious plans which cannot be completed because of insufficient factors of production.

In every boom period that precedes a crisis, in Great Britain and then later in other parts of the world, indeed, in every country in the world which has experienced credit expansion, you always find people who have said, “This is not a boom that will be followed by a crisis; only people who do not know what is going on can say such a thing. This is the final prosperity—and everlasting prosperity. We will never again have such a crisis.” The more people believe in this slogan of everlasting prosperity, the more desperate they become when they discover that the “everlasting” prosperity doesn’t last forever.

One thing that made matters worse following 1929, than in preceding periods of depression, was that the American unions were really very powerful and they would not tolerate that the crisis should bring about those results which were the consequence of earlier crises in this country and in other countries—i.e., they would not tolerate a considerable drop in money wage rates. In some branches of business, money wages went a little bit down. But by and large, the unions were successful in maintaining the wage rates which had been developed artificially during the boom. Therefore, the number of unemployed remained considerable, and unemployment continued for a very long time. On the other hand, those workers who did not lose their jobs enjoyed a situation in which their wages did not drop to the same extent as commodity prices. The living conditions of some groups of labor even improved.2

This was the same situation that led to the conditions in England in the latter part of the 1920s, which were important in bringing about the doctrines of Lord Keynes and the ideas of credit expansion that have been practiced in recent years. The British government made a very serious mistake in the 1920s. It was necessary for Great Britain to stabilize the currency. But they did not simply stabilize. In 1925, they returned to the pre-war gold value of the pound. That meant that the pound was a heavier pound afterward and had a greater purchasing power than the pound, or let us say 1920. A country like Great Britain that imports raw materials and foodstuffs and exports manufactures should not have made the pound more expensive. As Hitler expressed it, “They must either export or starve.” In such a country, in which the unions did not tolerate a drop in wage rates, it meant that the costs in pounds of manufacturing British products were increased in relation to production costs in countries which had not made a similar return to the gold standard. With higher costs, you must ask higher prices to stay in business. So you can sell fewer units and must cut production. Therefore, unemployment increased, and there was permanent mass unemployment.

Because it was impossible to deal with the unions concerning this problem, the government proceeded in 1931 to devalue the pound much more than it had been revalued in 1925, in order, they said, to encourage export trade. Other countries did the same. Czechoslovakia did it twice. The United States followed in 1933. The countries of the French standard (France, Switzerland) followed in 1936. I mention this because it is necessary to realize why the crisis of 1929—it was merely a crisis of credit expansion—had much longer and more serious consequences than those crises in preceding times. Of course, the Marxians say, every crisis must be worse and worse; the Russians, they say, have no trade cycle. Of course, the Russians don’t; they have depression all the time.

We must realize the tremendous “psychological” importance, the enormous importance of the fact that in the history of the nineteenth and twentieth centuries, credit expansion was limited. Nevertheless, it was the general opinion of businessmen, economists, statesmen, and the people, that bank credit expansion was necessary, that the rate of interest was an obstacle to prosperity, and that an “easy money” policy was a good policy to have. Everyone, businessmen as well as economists, considered credit expansion necessary and they became very angry if somebody tried to say that it might have some drawbacks. At the end of the nineteenth century, it was considered practically indecent to support the British Currency School, which was opposed to credit expansion.

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This essay is a selection from lecture 7 in Marxism Unmasked: From Delusion to Destruction.

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