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

Bank Credit Expansion and Its Effects on the Economic System 323from the fifth stage increase their investment in original factorsand productive resources from 18 m.u. to 31.71 m.u., a figurenearly double their initial outlay. (Of this amount 21.5 m.u. arespent on the productive services of capital goods and 10.21 m.u.are spent on labor services and natural resources). 45 This leadsto a rise in the production of goods in the fifth stage, which inmonetary terms, increases from 20 m.u. to 32.35 m.u., resultingin an accounting profit of 0.54 m.u. Although in terms of percentagethis amount is lower than former profits (1.70 percentas opposed to the 11 percent earned previously), it is comparativelya much higher profit than that which the industries producingfinal consumer goods obtain (industries which, as wesaw, are sustaining absolute losses of 15 m.u.).Consequently growth in saving gives rise to a disparitybetween the “rates of profit” in the different stages of the productivestructure. This leads entrepreneurs to reduce immediateproduction of consumer goods and to increase productionin the stages furthest from consumption. A lengthening of productionprocesses tends to ensue, lasting until the new socialrate of time preference or interest rate, in the form of differentialsbetween accounting income and expenditures in eachstage, now appreciably lower as a result of the substantialincrease in saving, spreads uniformly, throughout the entireproductive structure.The entrepreneurs of the fifth stage have been able toincrease their supply of present goods to others from 18 m.u.during period t to 31.71 m.u. in period t+1. This has been possibledue to greater social saving, or a greater supply of presentgoods in society. The entrepreneurs finance this larger investmentin part through the increase in their own saving, i.e., byinvesting a portion of the money which in the past they earnedas interest and spent on consumption, and in part through newsaving they receive from the credit market in the form of loansfully backed by a prior rise in voluntary saving. In other words, theincrease in investment in the fifth stage materializes by any ofthe three procedures described in the last section.45 These amounts correspond to the numerical example in Chart V–3.