Friday, June 19, 2009

Quote of the Day – F.A. Hayek, advice to central bankers

Writing from the very depths of the 1930s depression, Friedrich Hayek offers advice for the central bankers responsible for this one.

    "Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. …
    To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection—a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. … It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.”

- Hayek, ‘Monetary theory and trade cycle.’ Quoted in Tom Woods’ article, ‘Unnatural Disaster: How the Fed Creates Booms and Busts.’

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