This file is a short single-author economic essay, reprinted from The Freeman in 1951. Its scope is polemical and theoretical: Mises defends the monetary, or circulation-credit, theory of the business cycle against Marxian, Keynesian, and interventionist accounts that locate crises in capitalism itself. The essay’s main thesis is that booms and depressions are not natural products of an unhampered market but consequences of credit expansion that falsifies the rate of interest.
Mises begins from the classical Austrian claim that interest is not an arbitrary capitalist exaction but an expression of time preference and scarcity. Public opinion, he argues, treats low interest as an easy social good, ignoring the fact that bank credit cannot create real capital goods.
People believe that artificially lowering the rate of interest by expansion of bank credit is a blessing for everybody except idle capitalists.
The crucial conceptual move is the distinction between money-credit and real capital. Expanded bank credit may make investment appear profitable, but it cannot supply the capital structure needed to complete the projects it initiates. Hence the boom is not genuine prosperity but a distortion that must reveal itself as crisis.
They fail to realize that it is impossible to substitute additional bank credit for nonexistent capital goods and that therefore an artificially created boom must collapse and turn into a slump.
Mises presents this as a settled achievement of economic theory, associated with the British Currency School and refined by later economics. He insists that serious objections have not defeated it; rival theories survive because they are politically useful. The essay therefore moves quickly from theory to ideology: explanations of crises as inherent in capitalism serve to justify further state intervention.
Against this theory, which is commonly called the monetary or circulation credit theory of the business cycle, there have never been raised any tenable objections.
The next section attacks the idea that commercial crises arise from the “anarchy” of production. Mises traces that doctrine to Marx and argues that even anti-communist economists have adopted its premise when they call for “positive countercyclical policy.” In his reading, such policies do not correct capitalism but deepen the very monetary disorder created by government and banking authorities.
As they see it, the recurrence of economic crises is inherent in the very nature of the unhampered market economy.
His criticism of Alvin H. Hansen’s Business Cycles and National Income belongs to this wider polemic. Hansen is treated less as an original theorist than as a symptom of academic and official opinion: a literature reviving “general overproduction,” “general overinvestment,” and related explanations while neglecting the monetary cause. Mises’s target is therefore not only one book but a policy consensus that mistakes the cure for the disease.
In effect all these programs aim at the substitution for private initiative of all-round planning by the government.
The essay’s relevance lies in its warning about interpretation after a crisis. Mises fears that inflationary and credit-expansionist policies will first produce a boom, then a collapse, and that the collapse will be blamed on capitalism rather than on intervention. His argument is as much about political narrative as economic mechanism: whoever explains the depression controls the remedies thought available.
The methods of reckless inflation and credit expansion engineered by the present Administration will inevitably, sooner or later, result in an economic debacle.
The conclusion states the Austrian prescription with unusual sharpness. If the trade cycle is produced by manipulation of the money market, prevention requires refusing the manipulation, especially artificial credit expansion and deficit financing through commercial banks.
People must learn that the only means to avoid the recurrence of economic catastrophes is to let the market—and not the government—determine interest rates.
Mises’s final conceptual reversal is to redefine “countercyclical policy.” For interventionists it means active stabilization; for Mises it means monetary restraint. The state should not offset the cycle, because its credit policy is what sets the cycle in motion.
Deficit spending by borrowing from the commercial banks is the surest way toward economic disaster.
This work was divided into 1 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 1 sections and cites the passage.
Ask the Librarian