What makes manufacturing an important part of the boom-bust phenomenon is the crucial role that time plays in production. Unfortunately, not only is this fact ignored by our economic commentariat they also adamantly refuse to even recognise its existence, just as they refuse to recognise that there exists a capital structure. (What makes this attitude peculiar is that some of these people claim to have studied von Hayek. The content of their articles strongly suggests otherwise.)

Once an understanding of the relationship of time to production has been grasped the importance of manufacturing as an economic bellwether becomes much clear. However, critical to this understanding is the influence of a monetary expansion on the structure of relative prices. Orthodox economists either deny this influence outright or try to downplay its existence.

Nevertheless, the fact remains that money is not neutral and therefore monetary expansion must by definition create distortions that will have to be liquidated at a later date. The refusal to recognise this fact led to the conclusion among mainstream economists that the boom-bust cycle is the price one pays for having a free market economy. Des Moore, a former deputy head of the Australian Treasury, echoed the orthodox view in a talk he gave on the global financial crisis:

First, while this is a very serious economic crisis, history suggests that human nature has a natural tendency to swing between optimistic and pessimistic attitudes almost regardless of the type of economic organisation prevailing in a country. But such swings have occurred quite frequently in countries that increasingly adopted free market type arrangements after about 1800. Since that time one historian has identified 13 banking crises in the US and a dozen in the UK.

This statement is wrong through and through. These crises can be easily traced back to medieval times and have their roots in the fractional reserve banking. It will probably amaze some of you to learn that economic historians have documented these financial booms and busts. Anyone acquainted with the work of Carlo Cipolla and Raymond de Roover, for example, would be fully aware of these facts. Unfortunately our economic pundits refuse to make even a cursory study of the subject.

What has -- in my opinion -- led many astray is that the economic consequences of a monetary expansion -- particularly in the form of bank credit -- takes on a very different shape in an industrialised or industrialising economy than in a purely agricultural society. Austrian economic analysis explains this difference by the role time plays in production. It therefore follows that the view that financial crises first appeared in the nineteenth century and are an unavoidable by-product of a free market is utterly false and also dangerously misleading.

If you accept the orthodox opinion then the only thing left is to call for more government regulations to compensate for lack of government oversight. And this is precisely what Moore does, arguing "that governments and regulators share a good part of the blame". That the fault lies with bad economics and not with any regulatory laxity on the part of government never occurred to him anymore than it occurred to the rest of our economic punditry.

However, he did come close to fingering the problem when criticised central banks for allowing excess credit at "low rates of interest". He then veered away from it by accusing Prime Minister Rudd of overlooking "the fact that even our central bank allowed credit to grow at rates well above the growth in nominal GDP". But this is to make the terrible error of assuming that monetary policy should be designed to maintain a stable price level in the belief that stable prices will prevent a boom followed by a bust. Advocates of this policy have yet to explain why the stable price level of the 1920s did not prevent the Great Depression.

Peter Jonson (aka Henry Thornton) baldly stated "that the main point that needs emphasis is that periodic crises are a feature of the capitalist system"* (Courage and adventure, The Australian, 17 December 2008) thus revealing an appalling ignorance of economic history and the history of economic thought. Clearly Johnson has never read Henry Thornton -- the man whose name he adopted as a nom de plume -- otherwise he would have known that Thornton explained how monetary expansion by the banking system not only caused the boom-bust phenomenon but the manner by which it distorted prices -- because money is not neutral -- promoted speculation and created forced savings. (Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, (1802), London: George Allen and Unwin, 1939, pp. 195, 230-40, 255, 271.)

Unfortunately Thornton was not what one might call an organised thinker. His fear of deflation led him to conclude that the solution to the boom-bust problem that he so admirably described was more of the same monetary poison that creates these crises in the first place!

Despite all the historical evidence to the contrary the economic punditry still insist on blaming the gold standard for economic instability in the nineteenth century and the post-WW1 world. For instance, Alan Wood, an economics writer for The Australian, stated that "the costs in economic and social dislocation are too high" to justify a gold standard.

David Uren, The Australian's economics correspondent, asserted that in the "1930s, governments were hamstrung by the gold standard, which obliged their central banks to redeem currency for gold at a fixed rate for anyone who wanted it". (Inflation bears now gold bugs, 16 February, 2009). Complete rubbish. He obviously does not know that the US was on a gold standard, the UK was on a gold bullion standard while the rest of Europe was either on a gold exchange standard or bullion standard. (It's truly appalling that we have economic writers that do not even know of the existence of these different standards and what this meant for monetary policy.)

Under a gold bullion standard people could not redeem the currency for gold. So the idea that this standard "hamstrung" governments is nonsense. Furthermore, under the gold exchange standard a country maintained its reserves in 'hard currency' like pounds. So the more pounds it acquired the greater would be its reserves and hence monetary expansion unless the pounds were sterilised. Rather than hamstringing governments these bastardised gold standards virtually gave them carte blanche to print money.

It is also a myth that the nineteenth and early twentieth gold standard restricted monetary growth. For instance, in June 1920 the US gold stock was $2.6 billion and the money supply was $34 billion. Come December 1929 the gold stock had risen to $4 billion and the money supply to $45 billion. This makes nonsense of any assertion that in the 1920s or 1930s the quantity of gold limited the quantity of money. The situation was a damn sight more complex than that.

Monetary conditions were not much different before WWI. According to Sir George Paish before 1913 the gold reserve of the Bank if England never exceeded $50,000,000 (about £10,000,000). Jacob Viner noted that the British banking system rested on an extremely low ratio of gold to liabilities. He estimated that the ratio "fell at times to as low as 2 per cent and never between 1850 and 1890 exceeded 4 per cent" (Jacob Viner, Studies in the Theory of International Trade, Harper & Brothers, 1937, p. 264).

*Jonson repeated the same nonsense in Boom-and-bust cycle can breed the best and weed out the worst in capitalism, The Australian, 16 March. I dare say Peter Jonson has many virtues. Unfortunately having an open mind is apparently not one of them. In this respect he is typical of our rightwing economic pundits who adamantly refuse to recognise any economic views that contradict their own deeply held convictions.