The business cycle constantly reappears at attempts to reduce the natural interest rates through policy.  This expands credit beyond 100 percent of gold reserves.  The interest rates develop by the material wealth of society.  Projects that wouldn’t have been profitable under a natural interest rate appear profitable.  Resources are misdirected and the cycle is set into motion.

If the natural interest rates were adhered to, business could continue without interruption—with a few exceptions.  The fact that the cycle exists, it must be admitted this is caused by a policy of intervention.  It is the opinion of politicians and the public that reducing the interest rates is good economic policy—this could be attributed to ignorance, propaganda, or libido dominandi—maybe all three.

The effect on business cannot last forever, that’s why its cyclical.  Eventually, these good economic times must collapse.  Just think of the internet and housing bubble.  Once the interest rate is artificially reduced, a business that wasn’t profitable now appears profitable.  This is fictitious.  The business should have been liquidated.  It wasn’t, resources were misdirected to prop up a failing business.  These are resources that should have gone to a business that was actually profitable.

This misdirection of resources is malinvestment not a general overinvestment. The resources that the failing businesses needs to succeed do not exist.  These resources are transferred from profitable businesses to unprofitable ones.  This means, had the credit not been expanded, the resources would have flowed to the correct businesses.  Resources flowing an unprofitable business is not possible under a 100 percent reserve system.

Credit expansion does not create more goods.  It redirects resources to places that they shouldn’t go based on the existing wealth of society.  It is not real prosperity.  It is fictitious or illusory.  It did not appear from a genuinely profitable business.  The fictitious wealth is built on a house of cards.  The business cycle comes from credit expansion, not: animal spirits, greed, speculators, etc., or any other excuse they can come up with except the real cause.  The pump doesn’t need to be primed, 100 percent reserves needs to be adhered to.

Reference

Ludwig von Mises; On the Manipulation of Money and Credit