According to Hayek and the Austrians a RELATIVE INFLATION Characterised the American Boom of the 1920s, Especially after 1927

The distinction between Hayek’s emphasis on relative prices and the preoccupation of the ‘stabilisation theorists’ with the price level is brought out most clearly when considering a steadily progressive economy. Here, unlike the stationary economy, the output (of consumers’ goods) is growing over time, in the simplest case due to technical progress that steadily increases the total productivity of the factors of production. Then a constant circulation of money makes the price level decline inversely to the rate of productivity growth. In fact, advocacy of such a ‘productivity norm’ for price-level behaviour was not novel. As pointed out by Robbins, such was “not the esoteric creed of a handful of ‘sadistic deflationists’”, but the opinion of many economists of repute like Marshall, Edgeworth, Taussig, Hawtrey, Robertson, and Pigou. Yet, it was Hayek’s major and novel contribution to argue for this norm as a requirement of neutrality and thus as a means to prevent the trade cycle, whereas the older economists often had rested their case on considerations of equity. 

Looking at the market for loanable funds, in order to keep prices stable in the face of growing output money must be injected into the circulation. In particular, when money is injected by credit creation this constitutes an additional supply of credit beyond that of voluntary saving, and for this additional supply to be absorbed by demand, the interest rate must fall below its equilibrium level. Yet, this is just the situation that will give rise to an unsustainable boom, and thus to the trade cycle. In the terminology of Haberler’s study this case is one of ‘relative inflation’. According to Hayek and the Austrians such a relative inflation characterised the American boom of the 1920s, especially after 1927, and consequently the stabilisation of the price level in the face of buoyant growth in productivity was to blame for causing the crisis of 1929 and eventually the Great Depression.

—Hansjoerg Klausinger, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 7, Business Cycles, Part I, by F. A. Hayek (Carmel, IN: Liberty Fund, 2017), 35-36.