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

Bank Credit Expansion and Its Effects on the Economic System 325backed by real voluntary saving and lead to an increase in themonetary demand for original means of production and capitalgoods used in such stages. As we saw at the beginning ofthis chapter, production processes tend to be more productivethe more stages distant from consumption they contain, andthe more complex these stages are. Therefore this more capitalintensivestructure will eventually bring about a considerableincrease in the final production of consumer goods, once thenewly-initiated processes come to an end. Hence growth insaving and the free exercise of entrepreneurship are the necessaryconditions for and the motor which drives all processesof economic growth and development.SECOND: THE EFFECT OF THE DECREASE IN THEINTEREST RATEONTHEMARKET PRICE OF CAPITAL GOODSThe increase in voluntary saving, i.e., in the supply ofpresent goods, gives rise, other things being equal, to adecrease in the market rate of interest. As we know, this interestrate tends to manifest itself as the accounting differencebetween income and expenses in the different productivestages and is also visible in the interest rate at which loans aregranted in the credit market. It is important to note that thefall in the interest rate caused by all rises in voluntary savinggreatly affects the value of capital goods, especially all ofthose used in the stages furthest from final consumption,goods which, relatively speaking, have a long life and make alarge contribution to the production process.Let us consider a capital good with a long life, such as abuilding owned by a company, an industrial plant, a ship orairplane used for transport, a blast furnace, a computer orhigh-tech communications device, etc., which has been producedand performs its services in different stages of the productivestructure, all of which are relatively distant from consumption.The market value of this capital good tends to equalthe value of its expected future flow of rents, discounted bythe interest rate. An inverse relationship exists between thepresent (discounted) value and the interest rate. By way ofillustration, a decrease in the interest rate from 11 to 5 percent,