What Is a Crack-Up Boom Definition History Causes and Examples
What Is a Crack-Up Boom?
A crack-up boom is an economic crisis involving a recession in the real economy and a collapse of the monetary system due to continual credit expansion, resulting in unsustainable rapid price increases. Austrian economist Ludwig von Mises developed this concept as part of the Austrian business cycle theory (ABCT).
The crack-up boom is characterized by two key features: excessively expansionary monetary policy that leads to out-of-control inflation expectations, and resulting hyperinflation that causes the abandonment of the currency and a simultaneous recession or depression.
Key Takeaways:
– A crack-up boom is the crash of the credit and monetary system due to continual credit expansion and unsustainable price increases.
– Excessive credit expansion leads to inflation expectations that make money worthless and result in an economic collapse.
– The term was coined by Ludwig von Mises, a member of the Austrian School of Economics and witness to hyperinflation’s damages.
Understanding a Crack-Up Boom:
The crack-up boom is the result of credit expansion and resulting economic distortion that occurs during the boom phase of Austrian business cycle theory. In this scenario, the central bank tries to sustain the boom indefinitely by injecting more and more money into the economy. However, this eventually triggers an economic breakdown.
In the normal course of an economic boom driven by the expansion of money and credit, the economy becomes distorted, leading to shortages, inflation, and failures of investment projects. This real resource crunch marks the turning point from boom to bust.
When facing this crisis, the central bank has a choice: to accelerate money supply expansion to delay the recession or to refrain from doing so, allowing some businesses to fail. The crack-up boom occurs when the central bank chooses and sticks with the first option.
Economist Friedrich Hayek compared this situation to grabbing a "tiger by the tail." Continually expanding credit and inflation create positive feedback that leads to hyperinflation.
With each round of credit expansion, prices rise at an accelerating rate, making the currency lose its function. People abandon the currency, and the economic system breaks down.
Further expansion of money and credit has no effect at this point, and the economy enters a recession while the monetary system collapses.
History of the Crack-Up Boom:
The crack-up boom was developed by Ludwig von Mises, an Austrian economist and advocate of laissez-faire economics. Von Mises witnessed and decried hyperinflation during the 1920s in Austria and Germany. He warned that not controlling credit expansion could lead to a deadlier dose of hyperinflation.
Examples of a Crack-Up Boom:
Several economies, including Germany, Argentina, Russia, Yugoslavia, and Zimbabwe, have experienced a crack-up boom after credit expansion and hyperinflation. A recent example is Venezuela, where corruption and misfiring government policies led to a collapse, causing poverty and inflation rates as high as 10 million percent.
Special Considerations:
A crack-up boom can only happen in an economy relying on fiat money and fiduciary media. The gold standard and physical commodity money prevent overissuance of credit. However, electronic cryptocurrencies with inflexible limits on the quantity and rate of new units may prevent hyperinflation and a crack-up boom.
