In Austrian theory, does constant, predicted deflation distort credit markets? Many leading Austrian thinkers propose a 100% reserve gold standard banking.  They agree that such a system leads inevitably to monetary deflation if productivity continually improves.

Austrians also believe that markets free of distortions are optimal.

Thus, some Austrians must either believe that (a) the monetary deflation resulting from the proposed monetary system doesn't distort credit markets, or (b) it does, but there is no practical alternative that does provide for free credit markets, or (c) something I've not thought of.

Which do they believe?

I am having trouble seeing how deflation could NOT distort credit markets, since if the free-market real interest rate for a given loan, as determined by time preference for consumption, is less than the expected deflation rate, no transaction will take place even though both parties would benefit by making one. 

But then which rationale is given for 100% reserve banking with gold standard?
As with inflation, so long as deflation is expected, there is no distortion. The expected deflation is simply built into interest rates.

For example, if I expect deflation to be 1% per year and I am looking for a 5% real return on an investment, then I'll look for investments with a 4% nominal return.