From Capital and Production (1934), Richard Strigl:
During the downturning segment of the cycle, the situation is such that credit for investment will be refused. With its supply of credit, the central bank will encounter a rejection of credit-taking by the economy. We have already given two reasons for this. On the one hand, the psychological conditions necessary for the investment of money into durable investments will not be present. There will be general unrest in the economy. On the other hand, the relationship of prices and the general tendency of price development will stand in the way of investment activity. The repudiation of credit will, however, not be general. Even in this stage of the cycle there is a very significant demand for credit, namely the demand by those who are forced to liquidate, to make emergency sales or to cease production due to a lack of capital—a demand for which any credit means at least the momentary avoidance of losses and perhaps even the potential for later improvements. However, satisfying this demand implies delaying the liquidation of the crisis, lengthening and strengthening it. For it is essential to this situation that a significant demand for credit by those who would like to work towards continuing the boom, that is, an “unhealthy” demand for credit, exists along with a significantly reduced demand for new sound investments….
The call for a crisis policy is usually a call for the stimulation of production during a downswing. However, here crisis policy can lead to more general questions regarding economic policy. Whether or not it might earn a justification from any other standpoint, from the point of view of ameliorating the results of the crisis and preparing for a new upswing, everything which hampers the adjustments of economic magnitudes or impairs economic success can only be judged negatively. pp. 155-157
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Aren’t these thoughts on the same base of the keynesian argument? Doesn’t follows from them that during a bust, nobody invests on productive activities because the animal spirits are sleeping and the prices are falling, so government must prevent prices from falling and increase aggregate demand ?
Animal spirits implies irrational, baseless fear. Psychological conditions, on the other hand, can be well grounded. It is a non sequitur to then say the government “needs” to do anything, and certainly doesn’t follow from what Strigl is saying.
Yes. You’re right.
But what I’m trying to say is that it sounds like keynesian stuff, because if we accept this explanation (of psychological states and falling prices) it’s not hard to accept that government could do something to help — which doesn’t happen with the traditional austrian explanation of the causes of the recession.
I don’t know if this quotation is about the ultimate “causes” of the recession, but, if it is, it is wrong (worse than wrong, it’s keynesian).
By psychological, he means just that investors don’t want to risk it. That was the language of the time.
Literature for George Selgin.
Why?
Because Strigl says it is impossible for the central bank rationally to accommodate any changes in the demand for money.
I think I’ll read the book.
Strigl:
“Once the economy’s movement has been determined by the effect of a supply of capital surpassing the degree of real saved capital, once the initiation of “too lengthy” roundabout production methods has led the economy towards an economic crisis, then the only path
remaining is via an economic crisis. And the only thing that remains a certain possibility for crisis policy seems to be that the central bank—insofar as it is able to restrict credit and raise the
interest rate—can also force a turnaround from an upswing to an economic crisis at any time. This turning point can thus only be reached earlier than otherwise would be the case; earlier than
that point at which the circumstances we mentioned elsewhere cause the central bank to halt the expansion of credit. An earlier forced turnaround would occur at the expense of the length and success of the upswing; perhaps one could hope that the severity of the crisis would thereby be ameliorated.” (p. 158)
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