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

Bank Credit Expansion and Its Effects on the Economic System 319FIRST: THE EFFECT PRODUCED BY THE NEW DISPARITY IN PROFITSBETWEEN THE DIFFERENT PRODUCTIVE STAGESIf there is an increase in social saving of one-fourth of netincome, clearly the total monetary demand for consumergoods will decrease by the same proportion. Chart V-2 illustratesthe effect this has on the final stage, that of consumption,and on the accounting profits of companies devoted to thatstage.great a quantity of consumption goods as in the precedingcase will become the subject of demand and of sale. If theentrepreneurs were nevertheless to continue for a time to followthe previous disposition of production and go on bringingconsumption goods to the market at a rate of a full 10 millionlabor-years annually, the oversupply would soon depressthe prices of those goods, render them unprofitable and henceinduce the entrepreneurs to adjust their production to thechanged demand. They will see to it that in one year only theproduct of 7.5 million labor-years is converted into consumptiongoods, be it through maturation of the first annual ringor be it through additional present production. The remaining2.5 million labor-years left over from the current annual allotmentcan be used for increasing capital. And it will be so used.. . . In this way it is added to the nation’s productive credit,increases the producer’s purchasing power for productivepurposes, and so becomes the cause of an increase in thedemand for production goods, which is to say intermediateproducts. And that demand is, in the last analysis, whatinduces the managers of business enterprises to invest availableproductive forces in desired intermediate product. . . . [I]findividuals do save, then the change in demand, once morethrough the agency of price, forces the entrepreneurs into achanged disposition of productive forces. In that case fewerproductive powers are enlisted during the course of the yearfor the service of the present as consumption goods, and thereis a correspondingly greater quantity of productive forces tied up inthe transitional stage of intermediate products. In other words,there is an increase in capital, which redounds to the benefitof an enhanced enjoyment of consumption goods in thefuture. (Böhm-Bawerk, Capital and Interest, vol. 2: Positive Theoryof Capital, pp. 112–13; italics added)