So what happened in the 1920s is, in the contrary to the usual approach, it wasn't all the laissez-faire capitalism, there was a heavy mass of the Federal Reserve that had been created in 1913, Justin Thomas with the fast World War I, almost by magic.
It was created in December 1913 and got started around August 1914, just about the time the World War started.
They were able to double the money supply during World War I and kept on during the 1920s and the theory was that there was now a new era, as they called it, before the New Deal there was a new era, a new era of the 1920s, which was promoted by the establishment of Irving Fisher, who was sort of the sort of the Keynes of the Walter Heller, Paul Samuelson of the 1920s, the most prominent economist, the greatest economist of the 20th century,
Fischer's approach was, well now we have this Fed, we have a great system now, the Fed's
job is to stabilize the price level, keep the price level constant, and by doing that,
by pumping in enough money to keep prices from falling, which he thought was the major
problem, by pumping in credit, looking at the price index and seeing that it's stable,
you can prevent from now on all future inflation, all future recession. So that was the theory,
and one of the economists in the 20s said this was what was being accomplished, except
We now have the Fed. We don't have to worry about recessions anymore. We don't have to worry about inflation. We've got the Fed. The Fed is going to have the control levers of the economic system, make sure everything is great.
And indeed, they looked at the price level in the 1920s, and if you look at the price index, or in those days wholesale prices was the gauge, it was level.
And from 1921 to 1929, it was more or less constant, and so they figured there was no inflation, what are they worrying about, there's no inflation, we're looking at the price index, don't worry folks, we're looking at the control panel, and it says no inflation.
Well, what happened was that there was a big increase in the money supply by the Fed during the 20s for various reasons, and pumping into the system, which created, by the way, of course a big inflation in stock prices and in real estate.
The reason why most of our prices weren't going up is because something else was happening at the same time.
There was a tremendous increase in productivity and goods and services going up.
The result was the consumer prices didn't go up.
But the point of the Austrian was it doesn't make any difference.
You don't have to have prices going up to create a business cycle.
All you need is for the money supply to go up and business loans to go up.
This will cause a recession anyway.
has nothing to do with the other counteracting force, it's not a statistical problem, it's a deep problem within the system caused by government intervention, caused by the inflationary bank credit.