https://wiki.freecapitalists.org/wiki/Special:RecentChanges Track the most recent changes to the wiki in this feed. en MediaWiki 1.43.9 Mon, 10 Aug 2026 17:03:19 GMT https://wiki.freecapitalists.org/index.php?title=Austrian_Business_Cycle_Theory&diff=24635&oldid=640 https://wiki.freecapitalists.org/index.php?title=Austrian_Business_Cycle_Theory&diff=24635&oldid=640 <p><span class="autocomment">History: </span> Edit for grammar.</p> <table style="background-color: #fff; color: #202122;" data-mw="interface"> <col class="diff-marker" /> <col class="diff-content" /> <col class="diff-marker" /> <col class="diff-content" /> <tr class="diff-title" lang="en"> <td colspan="2" style="background-color: #fff; color: #202122; text-align: center;">← Older revision</td> <td colspan="2" style="background-color: #fff; color: #202122; text-align: center;">Revision as of 17:59, 7 August 2026</td> </tr><tr><td colspan="4" class="diff-multi" lang="en">(One intermediate revision by the same user not shown)</td></tr><tr><td colspan="2" class="diff-lineno" id="mw-diff-left-l5">Line 5:</td> <td colspan="2" class="diff-lineno">Line 5:</td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>Banks expand credit well beyond their own assets and by the funds of their clients, often supported or encouraged by the setting of low interest rates by a central bank. This additional credit flow into the economy from increased borrowing for capital projects stimulates economic activity. Projects which would not have been started before, seem now profitable, creating [[malinvestment]]. They increase demand for production materials and for labor and their prices rise, which, in turn, leads to an increase in prices of consumption goods. If the banks would stop the extension of credit, the boom would be rapidly over. To prevent the sudden halt of this boom (and the resulting collapse of prices), the banks must create more and more credit, and the prices will rise even more.  </div></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>Banks expand credit well beyond their own assets and by the funds of their clients, often supported or encouraged by the setting of low interest rates by a central bank. This additional credit flow into the economy from increased borrowing for capital projects stimulates economic activity. Projects which would not have been started before, seem now profitable, creating [[malinvestment]]. They increase demand for production materials and for labor and their prices rise, which, in turn, leads to an increase in prices of consumption goods. If the banks would stop the extension of credit, the boom would be rapidly over. To prevent the sudden halt of this boom (and the resulting collapse of prices), the banks must create more and more credit, and the prices will rise even more.  </div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker" data-marker="−"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #ffe49c; vertical-align: top; white-space: pre-wrap;"><div>But this expansion of credit cannot continue forever. There is no additional capital or labor; there is only more money (and debt). The means of production and labor which have been diverted to the new enterprises have to be taken away from others. Society is not sufficiently rich to permit the creation of new enterprises without taking away from others. As long as the expansion of credit is continued this will not be noticed, but it can't be pushed indefinitely. The inflation and the boom can last only as long as the public thinks that the prices will stop rising in the near future. When the public becomes aware, that <del style="font-weight: bold; text-decoration: none;">there </del>the inflation will not end, and that prices will continue to rise, panic sets in. Eventually, people may give up the currency and rush to exchange money for goods, buying things they have no use for, just in order to get rid of the money (the so-called "[[flight into real values]].")&lt;ref name="Mises_business_cycle"&gt;[[Ludwig von Mises]]. [http://mises.org/pdf/austtrad.pdf "The Austrian Theory of the Trade Cycle and other essays"] (pdf), "The Austrian Theory of the Trade Cycle", p.23-32, referenced 2009-10-27.&lt;/ref&gt;</div></td><td class="diff-marker" data-marker="+"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #a3d3ff; vertical-align: top; white-space: pre-wrap;"><div>But this expansion of credit cannot continue forever. There is no additional capital or labor; there is only more money (and debt). The means of production and labor which have been diverted to the new enterprises have to be taken away from others. Society is not sufficiently rich to permit the creation of new enterprises without taking away from others. As long as the expansion of credit is continued this will not be noticed, but it can't be pushed indefinitely. The inflation and the boom can last only as long as the public thinks that the prices will stop rising in the near future. When the public becomes aware, that the inflation will not end, and that prices will continue to rise, panic sets in. Eventually, people may give up the currency and rush to exchange money for goods, buying things they have no use for, just in order to get rid of the money (the so-called "[[flight into real values]].")&lt;ref name="Mises_business_cycle"&gt;[[Ludwig von Mises]]. [http://mises.org/pdf/austtrad.pdf "The Austrian Theory of the Trade Cycle and other essays"] (pdf), "The Austrian Theory of the Trade Cycle", p.23-32, referenced 2009-10-27.&lt;/ref&gt;</div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>==History==</div></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>==History==</div></td></tr> <tr><td class="diff-marker" data-marker="−"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #ffe49c; vertical-align: top; white-space: pre-wrap;"><div>The regularly occurring booms and and busts were observed from approximately late eighteenth century, along with the start of the [[Industrial Revolution]]. Sudden economic <del style="font-weight: bold; text-decoration: none;">crisis</del>, when some king made war or confiscated the property of his <del style="font-weight: bold; text-decoration: none;">subject </del>were known; but there was no sign of the modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.&lt;ref name="Rothbard_business_cycle" /&gt;</div></td><td class="diff-marker" data-marker="+"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #a3d3ff; vertical-align: top; white-space: pre-wrap;"><div>The regularly occurring booms and and busts were observed from approximately <ins style="font-weight: bold; text-decoration: none;">the </ins>late eighteenth century, along with the start of the [[Industrial Revolution]]. Sudden economic <ins style="font-weight: bold; text-decoration: none;">crises</ins>, when some king made war or confiscated the property of his <ins style="font-weight: bold; text-decoration: none;">subjects, </ins>were known; but there was no sign of the modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.&lt;ref name="Rothbard_business_cycle" /&gt;</div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker" data-marker="−"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #ffe49c; vertical-align: top; white-space: pre-wrap;"><div>The Austrian cycle theory began with the eighteenth century Scottish philosopher and economist [[David Hume]], and with the eminent early nineteenth century English classical economist [[David Ricardo]]. These theorists observed another crucial institution developing in the mid-eighteenth century, alongside the industrial system. It was the institution of banking, with its capacity to expand credit and the money supply <del style="font-weight: bold; text-decoration: none;">(</del>first, in the form of paper money, or bank notes, and later in the form of demand deposits, or checking accounts, that are instantly redeemable in cash at the banks<del style="font-weight: bold; text-decoration: none;">)</del>. It was the operations of these commercial banks which held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.</div></td><td class="diff-marker" data-marker="+"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #a3d3ff; vertical-align: top; white-space: pre-wrap;"><div>The Austrian cycle theory began with the eighteenth century Scottish philosopher and economist [[David Hume]], and with the eminent early nineteenth century English classical economist [[David Ricardo]]. These theorists observed another crucial institution developing in the mid-eighteenth century, alongside the industrial system. It was the institution of banking, with its capacity to expand credit and the money supply<ins style="font-weight: bold; text-decoration: none;">, </ins>first, in the form of paper money, or bank notes, and later in the form of demand deposits, or checking accounts, that are instantly redeemable in cash at the banks. It was the operations of these commercial banks which held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.</div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker" data-marker="−"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #ffe49c; vertical-align: top; white-space: pre-wrap;"><div>The English "[[British Currency School|Currency School]]" has tried to explain the boom by the extension of credit resulting from the issue of banknotes without metallic backing. But the school did not see that current accounts which could be drawn upon at any time via checks, play exactly the same role in the extension of credit as bank notes. Because of the legislation inspired by the Currency School (like the [[Robert Peel|Peel]]'s [[Bank Act of 1844]] and similar laws in other countries), to prevent other economic crises, the issue of banknotes without metallic backing was restricted, but the expansion of credit through current accounts was unregulated. From this it was wrongly concluded that the English School's attempt to explain the trade cycle in monetary terms had been refuted by the facts.</div></td><td class="diff-marker" data-marker="+"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #a3d3ff; vertical-align: top; white-space: pre-wrap;"><div>The English "[[British Currency School|Currency School]]" has tried to explain the boom by the extension of credit resulting from the issue of banknotes without metallic backing. But the school did not see that current accounts which could be drawn upon at any time<ins style="font-weight: bold; text-decoration: none;">, </ins>via checks, play exactly the same role in the extension of credit as bank notes. Because of the legislation inspired by the Currency School (like the [[Robert Peel|Peel]]'s [[Bank Act of 1844]] and similar laws in other countries), to prevent other economic crises, the issue of banknotes without metallic backing was restricted, but the expansion of credit through current accounts was unregulated. From this it was wrongly concluded that the English School's attempt to explain the trade cycle in monetary terms had been refuted by the facts.</div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker" data-marker="−"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #ffe49c; vertical-align: top; white-space: pre-wrap;"><div>The Currency School has also restricted its analysis to the case where credit is expanded in only one country while the banking policy of all the others remains conservative. The internal rise in prices would encourage imports and paralyse exports. Metallic money would drain away to foreign countries. As a result the banks would face increased demands for repayment of the instruments they have put into circulation (such as unbacked notes and current accounts), until they have to restrict credit. Ultimately the outflow of specie checks the rise in prices. The Currency School analyzed only this particular case; it did not consider credit expansion on an international scale by all the capitalist countries simultaneously. In the second half of the 19th century, this theory of the trade cycle fell into discredit, and the notion that the trade cycle had nothing to do with money and credit gained acceptance. The attempt of [[Knut Wicksell|Wicksell]] (1898) to rehabilitate the Currency School was short-lived.&lt;ref name="Mises_business_cycle" /&gt;</div></td><td class="diff-marker" data-marker="+"></td><td style="color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #a3d3ff; vertical-align: top; white-space: pre-wrap;"><div>The Currency School has also restricted its analysis to the case where credit is expanded in only one country while the banking policy of all the others remains conservative. The internal rise in prices would encourage imports and paralyse exports. Metallic money would drain away to foreign countries. As a result<ins style="font-weight: bold; text-decoration: none;">, </ins>the banks would face increased demands for repayment of the instruments they have put into circulation (such as unbacked notes and current accounts), until they have to restrict credit. Ultimately<ins style="font-weight: bold; text-decoration: none;">, </ins>the outflow of specie checks the rise in prices. The Currency School analyzed only this particular case; it did not consider credit expansion on an international scale by all the capitalist countries simultaneously. In the second half of the 19th century, this theory of the trade cycle fell into discredit, and the notion that the trade cycle had nothing to do with money and credit gained acceptance. The attempt of [[Knut Wicksell|Wicksell]] (1898) to rehabilitate the Currency School was short-lived.&lt;ref name="Mises_business_cycle" /&gt;</div></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><br></td></tr> <tr><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>== Questions Addressed ==</div></td><td class="diff-marker"></td><td style="background-color: #f8f9fa; color: #202122; font-size: 88%; border-style: solid; border-width: 1px 1px 1px 4px; border-radius: 0.33em; border-color: #eaecf0; vertical-align: top; white-space: pre-wrap;"><div>== Questions Addressed ==</div></td></tr> <!-- diff cache key wiki_freecapitalists_org_nCF8x6NO:diff:1.41:old-640:rev-24635:php=table --> </table> Fri, 07 Aug 2026 17:59:07 GMT Ikester8 https://wiki.freecapitalists.org/wiki/Talk:Austrian_Business_Cycle_Theory https://wiki.freecapitalists.org/wiki/User:Ikester8 https://wiki.freecapitalists.org/wiki/User:Ikester8 <p>User account <a href="/index.php?title=User:Ikester8&amp;action=edit&amp;redlink=1" class="new mw-userlink" title="User:Ikester8 (page does not exist)"><bdi>Ikester8</bdi></a> was created</p> Fri, 07 Aug 2026 17:51:40 GMT Ikester8 https://wiki.freecapitalists.org/wiki/User_talk:Ikester8