Ȁȃȃ Partʺ: Economicsfor money requires widespread cuts in prices and wages, sellers and wage
negotiators in many or most of the markets for individual goods and ser-
vices have reason to delay cuts of their own while waiting for a clearer
reading on market conditions and waiting to see what other sellers—com-
petitors, workers, suppliers—will do.
Rapid coping with monetary disequilibrium is difficult because knowl-
edge is scattered in millions of separate minds—knowledge about tastes,
resources, production possibilities, exchange opportunities, money and
credit conditions, and conditions on specific markets. Because the market
is, among other things, a mechanism for conveying signals and incentives,
it would be inconsistent both to recognize these functions yet to suppose
(as the rational-expectations theorists nearly do) that transactors some-
howalreadyhave the knowledge that the price system works to convey.
Ļe market process has no quick and easy substitute.
Mises repeatedly emphasized the delayed and nonuniform responses
to money-supply changes (ȀȈȀȁ/ȀȈȇȀ, pp.Ȁȅȁ–ȀȅȂ, where he cites observa-
tions of David Hume and John Stuart Mill; MisesȀȈȈǿ, chaps.ȃ–ȅ). “Ļe
essence of monetary theory is the cognition that cash-induced changes
in the money relation affect the various prices, wage rates, and interest
rates neither at the same time nor to the same extent” (ȀȈȃȈ/ȀȈȅȂ, p.ȄȄȄ).
Although Mises focuses his critical attention on money and credit expan-
sion and its consequences, he recognizes the damage done to business
when a credit expansion ceases (p.Ȅȅȇ). “Deflation and credit contraction
no less than inflation and credit expansion are elements disarranging the
smooth course of economic activities” (p.ȄȅȆ). Mises alludes (p.Ȅȅȇ) to
the damage done by deflation and credit restriction required by Britain’s
return to the prewar gold parity of its currency after both the Napoleonic
wars and World War I.
ŏŞőŐ੠ōŚŐ řśŚőť
Credit disruption accompanies or even seems to overshadow monetary
disruption in some episodes. Again the current recession provides an
example. When the housing boom fed by cheap credit went into reverse,
spreading fear made banks and other lenders, including those in the com-
mercial-paper market, hesitant to lend. Some businesses, deprived of
credit, had to curtail their operations, spreading distress to their suppliers
and laid-off employees. Others that might still have obtained credit did
not seek it for lack of attractive opportunities to employ the money.