Money, Interest, And The Business Cycle

When I started to study the theory of money and credit I found in the whole world of literature only one living author, a Swedish economist, Knut Wicksell [1851–1926], who really saw the problems in credit expansion.3 The idea prevails even today that we cannot do without credit expansion. It will be impossible, without a very serious struggle which really has to be fought, to defeat all those ideological forces that are operating in favor of credit expansion. Most people, of course, don’t give any thought to credit expansion. But the governments have a very clear idea about it—they say, “We can’t do without it.”

Credit expansion is fundamentally really a problem of civil rights. Representative government is based on the principle that the citizens need to pay to the government only those taxes that have been legally promulgated in a constitutional way: “No taxation without representation.” However, governments believe they cannot ask their citizens to pay as much in taxes as is needed to cover the whole of government expenditures. When governments cannot cover their expenses out of legally enacted taxes, they borrow from the commercial banks and so expand credit. Therefore, a representative government can actually be the instigator of credit expansion and inflation.

If the institution of credit expansion and other types of government inflation had been invented in the seventeenth century the history of the struggle of the Stuarts with the British Parliament would have been very different. Charles I [1600–49] wouldn’t have had any problems in getting the money he needed if he could simply have ordered the Bank of England, which didn’t exist in his time, to grant him credit. He would then have been in a position to organize an army of the King and to defeat Parliament. This is only one aspect.

The second aspect—I don’t believe that this country could stand psychologically a recurrence of a crisis like that of 1929. And the only way to avoid such a crisis is by preventing the boom. We are already very far along in this boom, but we could still stop it in time. However, there is a great danger. While capital goods are limited in amount and are scarce and would, therefore, limit those projects which can be executed and make many projects appear impossible for the time being, credit expansion can hide by the illusion of an increase in the capital reported in dollars on the books. Credit expansion creates the illusion of available capital, while in fact there is not.

The fundamental problem of the nineteenth century was that people didn’t realize these things. As a result, capitalism was very much discredited, for people believed that the almost periodic occurrence of depressions was a phenomenon of capitalism. Marx and his followers expected the depressions to get progressively worse, and Stalin still says openly every day: “We have only to wait. There will be a very bad crisis in the capitalist countries.” If we want to thwart these plans we must realize that sound credit policies acknowledge the fact that there is a scarcity of capital goods, that capital cannot simply be increased by credit expansion. This must come to be recognized by our businessmen and politicians.


  • 1.[See Ludwig von Mises, “Business Under German Inflation,” The Freeman, November 2003.—Ed.]
  • 2.[See Ludwig von Mises, “The Causes of the Economic Crisis” (1931) in Percy L. Greaves, Jr., ed., On the Manipulation of Money and Credit: Essays of Ludwig von Mises (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 173–203, esp. pp. 186–92.—Ed.]
  • 3.[Knut Wicksell, Interest and Prices (New York: Macmillan, [1898] 1936).—Ed.]
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This essay is a selection from lecture 7 in Marxism Unmasked: From Delusion to Destruction.

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