The Coercive Machinery Is Represented by the GPU (Later KGB) in Russia, But by Credit Expansion of the Banking System in the West

For this it is necessary that some kind of coercion be exerted which releases the production of capital goods from the link with the community’s voluntary decisions to save, and forces the proportional shrinkage of the production of consumption goods above the level to which the community is prepared to submit voluntarily through its savings. This coercion may take place with the brutal overtness of Russia today under the rule of the Five-Year Plan which represents to the trade-cycle theorist a gigantic attempt with the aid of government authority to free the tempo and extent of investment from the limitations imposed by the rate of savings—consumption being ruthlessly held down by means of State force. This throws further light on the probability mentioned already that in Russia also the steepness of the investment curve will find its counterpart in the sharp descent of the curve of reaction, only with the difference that the reaction in Russia will assume other forms than in the capitalistic countries. It is in any case useful to realize that what is being carried out in Russia differs from the type of boom characterized by over-capitalization in the capitalist countries in method and extent only, and not in kind, and bears a likeness to it even so far that all warnings of inevitable reaction are thrown to the winds. In the capitalist economy the place of authoritarian force is taken by credit expansion.

As will be seen in the next section, the expansion of credit also involves “forced saving,” though of a totally different kind. The difference may perhaps be expressed by saying that in our economic system it is monetary “forced saving” which sets the wheels of over-investment in motion, while in Soviet Russia it is authoritarian “forced saving.” Whereas in Russia the coercive machinery is represented by the G.P.U. with its rifles and dungeons, in capitalism it is represented by the banking system with its cheques and overdrafts. This capitalistic machinery of credit expansion serves two purposes: in the first place, it provides the entrepreneur waiting to invest with the necessary additional credit and, in the second place, by raising profit expectations, it increases the desire to invest, of which the driving force is here, in contrast to the socialist State, governed by individual decisions based on profit expectations. This is, in fact, the way in which the process of cyclical movement regularly takes place in the capitalist world.

—Wilhelm Röpke, Crises and Cycles, ad. and rev. Vera C. Smith (London: William Hodge and Company, 1936), 107.

A Depression May Grow to Dimensions Out of Proportion to the Preceding Boom, Losing Its Readjustment Function, Degenerating into a “Secondary Depression”

The upshot of all that we have so far said is that the causation of the crisis and of the depression must be traced back to the mechanism of the boom. We understand now not only why the boom simply comes to a halt but also why it is usually followed by a painful process of contraction and liquidation. A satisfactory explanation of the boom implies, therefore, the explanation of the crisis as well. For this reason the theory of crises and cycles is essentially a theory of the boom. In the crisis, what has been sown during the boom has to be reaped; a readjustment of the disjointed economic system cannot be avoided. This is a point which must be emphasized strongly. But it is also a point which must not be driven too far. As the dramatic development of the present crisis abundantly proves, there is no denying the fact that the depression may, under certain circumstances, grow to dimensions quite out of proportion to the preceding boom, so that it loses more and more its function of readjustment and degenerates into a secondary depression void of any function whatsoever except to test the strength of the patience of the people in enduring a cumulative process of senseless and murderous economic destruction. Instead of restoring the economic equilibrium disrupted by the boom, the depression may lead, after a while, to a new disequilibrium which, caused by the process of the chronic depression itself, has nothing to do with the old set of disturbing factors. To explain this, a special theory of the depression becomes necessary. Its task is to describe how the original process of liquidation and adaptation in the primary depression comes to set in motion a cumulative process of recession, the conditions of disequilibrium being continuously reproduced on an ever-declining level of economic activity.

—Wilhelm Röpke, Crises and Cycles, ad. and rev. Vera C. Smith (London: William Hodge and Company, 1936), 119-120.