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

Bank Credit Expansion and Its Effects on the Economic System 3132THE EFFECT ON THE PRODUCTIVE STRUCTUREOF AN INCREASE IN CREDIT FINANCED UNDERA PRIOR INCREASE IN VOLUNTARY SAVINGTHE THREE DIFFERENT MANIFESTATIONS OF THEPROCESS OF VOLUNTARY SAVINGIn this section we will examine what happens within thestructure of production when, for whatever reason, economicagents reduce their rate of time preference; that is, when theydecide to increase their saving or supply of present goods toothers. This can take place in any of the following ways:First, capitalists of the different stages in the productivestructure may decide, beginning at a certain point, to modifythe proportion in which they had been reinvesting the grossincome derived from their productive activity. In other words,nothing guarantees the continuity, from one period to thenext, of the ratio in which the capitalists of one productivestage spend the income they receive from that stage on thepurchase of capital goods from earlier stages and on labor andnatural resources. Capitalists may very possibly decide toincrease their supply of present goods to others. That is, theymay decide to reinvest a greater percentage of the income theyreceive per period, acquiring capital goods and services aswell as original means of production (labor and naturalresources). In that case, in the short run, their accountingprofit margin will decrease, which is equivalent to a downwardtrend in the market interest rate. The profit margin fallsas a result of an increase in monetary costs in relation toincome. The capitalists are willing to temporarily accept thisdrop in accounting profits, since they expect to generate inthis way, in a more or less distant future, total profits largerthan those they would have earned had they not modifiedtheir behavior. 41 Given that the market in which present goods41 The expected increase in profit is considered in absolute, not relative,terms. Indeed profits representing, for example, 10 percent of 100 m.u.