The great economist Ludwig von Mises was 40 years old when he lived through the great inflation of the Weimar Republic in 1921. This economic tragedy wiped out the savings of the German people. This inflation gave impetus to the Nazis, a fringe movement of extremists at the time. Mises observed Hitler’s rise to power and his virulent anti-Semitism. Consequently, Mises who was Jewish closed up shop in Austria and moved to Switzerland just before the Nazis annexed Austria. His books and papers were eventually recovered in Russia many years later. Eventually, he escaped into the south of France, evaded the Nazis and got on a boat to the U.S. He then became a professor at NYU and elsewhere.
Mises was uncompromising in his warnings to nations that inflate. Since all nations in the world play it fast and loose with money and credit, the outcome that Mises insists to be inevitable is most worrisome.
As central banks have begun to cancel a portion of their bond issues. Mises pointed out the outcome of this policy: “The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”
He went on, “The longer the boom of inflationary bank credit continues, the greater the scope of malinvestments in capital goods, and the greater the need for liquidation of these unsound malinvestments. When the credit expansion stops, reverses, or even significantly slows down, the malinvestments are revealed.” Mises further wrote, “The collapse of the house of cards is manifestation of the democratic process of the market. It is vain to object that the public favors the policy of cheap money. The masses are misled by the assertions of the pseudo-experts that cheap money can make them prosperous at no expense whatever.”
Mises further warned, “The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.” He stated, “If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real value begins, and the whole monetary system founders. Continuous inflation must finally end in the crack-up boom and the complete breakdown of the currency system.”
Mises concluded, “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness. The final outcome of the credit expansion is general impoverishment. Some people may have increased their wealth; they did not let their reasoning be obfuscated by the mass hysteria, and took advantage in time of opportunities offered by the mobility of the individual investor…but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.”