Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Bank Credit Expansion and Its Effects on the Economic System 285scale of value, means that in a market comprising many economicagents, each of which has his own distinct and variabletime preference, multiple opportunities arise for mutuallybeneficial exchanges.Hence people with a low time preference will be willing togive up present goods in exchange for future goods valuedonly a bit higher, and they will perform exchanges in whichthey will hand over their present goods to people with ahigher time preference, i.e., people who value the presentmore intensely than they do. The creativity and alertnessinherent in entrepreneurship give rise to a market process thattends to establish a market price for present goods with respectto future goods. We will use the term “interest rate” to denote themarket price of present goods in relation to future goods. Given thatin the market many actions are carried out using money as agenerally-accepted medium of exchange, the interest rate isthe price one must pay to obtain a certain number of m.u.immediately; this price reflects the number of units one mustreturn in exchange at the end of the set term or time period.Generally, for reasons of custom, the price is expressed as acertain yearly percentage. For instance, an interest rate of 9percent indicates that market transactions are conducted insuch a way that it is possible to obtain 100 m.u. immediately(present good) in exchange for a promise to turn over 109 m.u.at the end of one year (future good). 21Therefore the interest rate is the price established in amarket in which the suppliers or sellers of present goods are21 The interest rate can actually be interpreted in two different ways. Itcan be seen as a ratio of today’s prices (of which one corresponds to thegood available today and the other corresponds to the same goodavailable tomorrow); or it can be considered the price of present goodsin terms of future goods. Both ideas yield the same result. The former isthe one advocated by Ludwig von Mises, for whom the interest rate “isa ratio of commodity prices, not a price in itself” (Human Action, p. 526).We prefer to favor the latter here, following Murray N. Rothbard. Adetailed analysis of how the interest rate is determined as the marketprice of present goods in terms of future goods, along with other studies,can be found in Murray N. Rothbard’s book, Man, Economy, and