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

Bank Credit Expansion and Its Effects on the Economic System 289In the outside world, the only directly-observable figuresare what we could call the gross interest rate or marketrate of interest (which coincides with the interest rate in thecredit market) and the gross accounting profits generated byeach production activity (i.e., net income). The first consistsof the interest rate as we have defined it (also sometimescalled the originary or natural rate of interest), plus the riskpremium corresponding to the operation in question, plus orminus a premium for expected inflation or deflation; that is, forthe expected decrease or increase in the purchasing powerof the monetary unit used in exchanges of present goods forfuture goods and in calculations regarding such transactions.The second figure, which is also directly observable in themarket, represents gross accounting profits (i.e., net income)derived from the specific productive activity carried out ateach stage of the production process. These profits tend tomatch the gross interest rate (or market rate of interest) as wehave defined it in the preceding paragraph, plus or minuspure entrepreneurial profits or losses. 24 As in all marketsentrepreneurial profits and losses tend to disappear as a resultof competition between entrepreneurs, the accounting profitsof each productive activity by time period tend to match thegross market interest rate. Indeed the accounting profitsreported by each company for a financial year could be consideredto include an implicit interest-rate component, withrespect to the resources saved and invested by the capitalists24 In fact the interest rate at which loans are negotiated in the credit marketalso includes an entrepreneurial component we have not mentionedin the text:The granting of credit is necessarily always an entrepreneurialspeculation which can possibly result in failure andthe loss of a part of the total amount lent. Every intereststipulated and paid in loans includes not only originaryinterest but also entrepreneurial profit. (Mises, HumanAction, p. 536)