‘Misguided monetary messages’: The Austrian case, 1931 – 34*

This paper deals with the apparent contradiction between the monetarist explanation of the Great Depression (as the result of a great monetary contraction) and the Austrian economists' diagnosis, which puts the blame on the inflationist policies pursued by the monetary authorities. Although tempting, the solution to this puzzle does not lie in the Austrians' misperception of the monetary facts but in their specific theory of deflation. Thereby they distinguished between ‘automatic deflation’ (as an endogenous response of the market system) and ‘deflationary policies’ (as exogenous disturbances). Thus, they were able to identify inflationist policies amidst an automatically shrinking money supply.