In support of their new view, the UNCTAD writers selectively quote Hayek, who seems – somewhat uncharacteristically – to be endorsing their inflationary theories in the ‘Monetary Theory of the Trade Cycle’ (1933) where he writes:
“By creating additional credits in response to an increased demand, and thus opening up new possibilities of improving and extending production, the banks ensure that impulses towards expansion of the productive apparatus shall not be so immediately and insuperably balked by a rise of interest rates as they would be if progress were limited by the slow increase in the flow of savings”
What they fail to do, however, is to reproduce Hayek’s very next comments which, as Dr Shenoy kindly pointed out, read:
“But this same policy stultifies the…mechanism of adjustment which keeps the various parts of the system in equilibriumâ€¦ [This policy] makes possible disproportionate developments which must, sooner or later, bring about a reaction.”
Which puts a rather different spin on things, don’t you think?