Chapter 10

Beyond the Cycle: Paper Money's Endgame

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

—Ludwig von Mises1

When the latest financial crisis commenced in 2007 and comparisons with the Great Depression of the 1930s began to appear, one could frequently hear comments to the effect that such an outcome was unlikely. The reason given was that modern-day governments would simply not allow a repeat of these catastrophic events. The state, this was the confident prediction, had learned from past mistakes. It would now use active fiscal policy to avoid a collapse of aggregate demand. But most importantly, and this was a view that was shared across the political spectrum, the monetary policy apparatus had been greatly enhanced. Central banks were no longer tied down by inflexible commodity money. The “golden shackles” had come off and through the printing of new money—in potentially unlimited quantities—bank runs, asset price collapses, and a return of deflation could be prevented. Active monetary policy would provide a powerful counterbalance to the recessionary forces unleashed by the crisis, and would soon initiate a recovery.

The preceding chapters show that this assessment is untenable. The view of the elastic money system ...

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