From my five myths about Austrian Economics: Myth: Austrians teach that the creation of new money causes the business cycle.This is a common one, but it technically misunderstands the Misesian view of the business cycle. In my amateur estimation, people misunderstand this point because they have not accurately grasped the Misesian taxonomy of money. In a lecture titled “Money, Credit, and the Business Cycle,” published in a Mises collection called The Free Market and Its Enemies: Pseudo-Science, Socialism, and Inflation, Mises writes:
If the fiduciary media [money substitutes that are not backed by the commodity money– see the above linked taxonomy] appear on the loan market, as an additional supply of loan money, there is another effect also [besides price inflation]; the increased supply causes, immediately and temporarily, a reduction in the rate of interest. […T]he rate of interest is affected by an increase in the amount of money appearing on the loan market. An increase in the amount of money appearing on the loan market brings about a drop in the monetary rate of interest. How does this readjustment take place? This is the problem of the trade cycle.
The “trade cycle,” also known as the Business Cycle is a product, not merely of money creation, but money creation which appears first on the loan market. Only a falsified increase in loanable funds can affect the interest rate and it is precisely this tampering with the interest rate that encourages entrepreneurs to presume, against the reality of things, that there is enough savings in the economy to fund their production efforts.
The creation of new “dollars” (or whatever) that goes directly to consumer spending will not, other things being equal, lead to the business cycle. Thus, schemes like UBI may cause rises in consumer prices, but to the extent that the money is given directly by the Treasury (or even some central bank scheme) to the consumer without first entering the loan market, it does not cause the boom-bust cycle. The boom-bust cycle, the peculiar historical set of circumstances in which the entire economy experienced a period economy-wide growth, followed by economy-wide failure, is something distinct-- and is a more modern phenomenon that occurred more frequently with the practice of fractional reserve banking, especially as this was supported by the establishment of central banks.