I’m still pretty new to Austrian Theory, but I’ve already got a question that is nagging me.
The Austrian Theory of the Business-Cycle sounds the most convincing out of all other theories I’m familiar with (Keynesian, Monetarist, etc.). However, one of the main claims that Austrian Theory makes is that “we wouldn’t have the ‘business-cycle’ if we didn’t have a central bank / fiat money.” Thus, it gets me to wondering whether there has been a study of business-cycles (if there were any) prior to the establishment of central banks and fiat money? If there are none known of, then fine, but if business-cycles did exist before these institutions, how are they explained?
Please correct me if I’ve simplified Austrian Theory too much above, and also if this sort of post has been answered somewhere else. I did a few searches, but didn’t come up with anything.
Yes, business cycles are possible when bankers refuse to stick the traditional legal practises (e.g. they engage in fractional reserve banking). For an elaboration on this and examples of it happening I advise you to look at Jesus Huerta de Soto’s Money, Bank Credit and Economic Cycles.
By the way, if you’d like something shorter then I suggest looking at one of Professor Salerno’s lectures on the subject in the media section of this website, also, if you want shorter than that Mr Rockwell has an interview with Hulsmann, I forget what it’s called though so you’ll have to check the podcasts on Lewrockwell.com.
There were recessions previous to the FED and inbetween the periods in which the First and Second Banks of the US operated, most of these were, though, generated by interference with the gold prices (ie making the price of gold 15:1 silver instead of a natural 16:1, just as an example). Relating lets say to the recession, or depression (idk), of 1837 Mises.org has a journal explaining the cause, which maybe of interest (though there was currently no central bank so to say): http://mises.org/journals/scholar/trask1.pdf
we certainly did have business cycles in the 19th century, way before the fed, but they certainly were not nearly as bad as everything we’ve experienced since 1913. as others have pointed out, fractional reserve banking enables the inflation and artificially low interest rates that precipitate the business cycle. in fact, the federal reserve was simply established simply to prop up the fractional reserve system, which at the time was about to, and should have, fall flat on its face.
Although the U.S. did not have a central bank for all of the 19th century, it engaged in trade with coutries that did and therefore was affected by changes in their financial cycles.
Look at China today. Although its banking system may be supported by a 40% savings rate, its export businesses that supplied credit-fueled American industries are no longer needed. That way it is facing a recession just as the American economy is.
That’s a really interesting point! Even if we were not to have a central bank, and have currency based on gold, would the fact that other countries which still practice central banking / fiat currency / fractional-reserve lending affect us? How bad?