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

Bank Credit Expansion and Its Effects on the Economic System 305unshaded area corresponding to the final stage, that of consumergoods, versus the shaded areas pertaining to the otherstages (including the net monetary income of the factors ofproduction, shown at the top). Hence it is an unquestionablefact that the amount of money spent on intermediate goods duringany time period is much larger by far than the amount spent duringthe same period on consumer goods and services. It is interesting tonote that even minds as brilliant as Adam Smith committedunfortunate errors when it came to recognizing this fundamentaleconomic fact. Indeed, according to Adam Smith,the value of the goods circulated between the different dealers,never can exceed the value of those circulated betweenthe dealers and the consumers; whatever is bought by thedealers, being ultimately destined to be sold to the consumers.35CRITICISM OF THE MEASURES USED IN NATIONALINCOME ACCOUNTINGThe sum of gross income, as we have defined and calculatedit, along with its distribution over the different stages inthe production process, is crucial for a correct understandingof the economic process which takes place in society. In fact thestructure of the stages of capital goods and their value in m.u.are not measures which, once obtained, can be automaticallyand indefinitely maintained regardless of human decisionsmade by entrepreneurs who must deliberately and continuallychoose whether to increase, hold steady or reduce the productivestages undertaken in the past. In other words, whether a35 Adam Smith, The Wealth of Nations, book 2, chap. 2, p. 390 of vol. 1 ofthe original 1776 edition cited earlier, p. 306 of the E. Cannan edition(New York: Modern Library, 1937 and 1965); and p. 322 of vol. 1 of theGlasgow edition, (Oxford: Oxford University Press, 1976). As Hayekpoints out (Prices and Production, p. 47), it is important to note that AdamSmith’s authority on this subject has misled many authors. For example,Thomas Tooke, in his book, An Inquiry into the Currency Principle (London1844, p. 71), and others have used Smith’s argument to justify theerroneous doctrines of the Banking School.