'The British government made a very serious mistake in the 1920s .. a Swedish economist, Knut Wicksell [1851–1926], who really saw the problems in credit expansion.4 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 .. Credit expansion is fundamentally really a problem of civil rights .. Therefore, representative government can actually be the instigator of credit expansion and inflation.'<blockquote>'These income-tax laws also deal with “profits” as if they were salaries. The income-tax authors are very astonished if a firm doesn’t have a profit every year. They don’t realize that there are good years and bad years for an enterprise. One consequence was that during the depression in the early 1930s people used to say,“How unjust that a man who owns a big factory doesn’t have to pay any income tax this year, while a man who makes only $300 a month has to pay.” It was not unjust from the point of view of the law; that year the big factory owner had no “income.”
The authors in promulgating these income-tax laws had not the slightest idea of what “capital” and “income” in the economic system really meant. What they didn’t see was that the greater part of the great profits and great incomes wasn’t spent by the businessmen, but reinvested in capital goods and plowed back into the enterprise to increase production. This was precisely the way in which economic progress, improvement in material conditions, took place. Fortunately I do not have to deal with the income-tax laws, nor with the mentality that led to these laws. It is enough to say that, from the point of view of the individual worker, it would be much more reasonable to tax only income spent, not income saved and reinvested.
...
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.3
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 afterwards and had a greater purchasing power than the pound, of 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 a 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.
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.4 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, representative government can actually be the instigator of credit expansion and inflation.'
- Ludwig von Mises,
Marxism Unmasked, page(s) 69, 86, 87, 88.
3 [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.]
4 [Knut Wicksell,
Interest and Prices (New York: Macmillan, [1898] 1936).—Ed.]</blockquote>