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

Bank Credit Expansion and Its Effects on the Economic System 321Chart V-2 shows that before the increase in saving, 100m.u. of net income were spent on final consumer goods producedby companies which first incurred expenses totaling 90m.u. Of this amount, 80 m.u. corresponded to the purchase ofcapital goods from the stage immediately preceding, and 10m.u. were paid for original means of production hired or purchasedin the last stage (labor and natural resources). Thisdetermined an accounting profit of 10 m.u., roughly equal to aninterest rate of 11 percent, which as we saw in the last section,was the market rate of interest which accounting profits of all productivestages, both those closest to and those furthest from finalconsumption, tended to match.If we suppose there is an increase in saving equal to 25percent of net income, the situation in the final stage (consumption)is reflected in Chart V-2 at period of time t+1.Immediately following the rise in saving, we see that the monetarydemand for final consumer goods decreases from 100 to75 m.u. in each time period. Nevertheless a reduction inexpenditures does not immediately accompany this fall incash income which businesses devoted to the final stage ofproduction experience. On the contrary, in their account booksthese companies record unchanged expenditures of 90 m.u. Justas in the previous case, 80 m.u. of this amount is spent on capitalgoods from the preceding stage (machinery, suppliers,intermediate products, etc.) and 10 m.u. are paid to the ownersof the original means of production (workers and the ownersof natural resources). As a result of this increase in saving,companies devoted to the final stage (consumption) suffer anaccounting loss of 15 m.u. This sum becomes 25 m.u. when weconsider the opportunity cost derived from the fact that theentrepreneurs not only experience the above accounting loss,but also fail to earn the 10 m.u. which capital invested in otherproductive stages generates as interest. Therefore we couldconclude that all increases in saving cause considerable relativelosses to or decreases in the accounting profits of the companieswhich operate closest to final consumption.However let us now remember that the sector of consumptionconstitutes only a relatively small part of society’s total productivestructure and that the sum of the m.u. spent on finalconsumption makes up only a fraction of the value of the gross