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

Bank Credit Expansion and Its Effects on the Economic System 327market value of projects for lengthening the productive structurethrough new, more modern stages further from consumptionbegins to rise and may even come to exceed the costof production, rendering these projects worthwhile. Hence thesecond effect of a decrease in the interest rate caused by anincrease in voluntary saving is the deepening of the investmentgoods structure, in the form of a vertical lengtheninginvolving new stages of capital goods increasingly distantfrom consumption. 47Both the widening and deepening of the capital goodsstructure follow from the role of entrepreneurs and their collectivecapacity for creativity and coordination. They are ableto recognize an opportunity and a potential profit marginwhen a difference arises between the market price of capitalgoods (determined by the present value of their expectedfuture rent, which increases appreciably when the interest ratefalls) and the cost necessary to produce them (a cost whichremains constant or may even decrease, given the greater marketsupply of original means of production coming from thestage of final consumption, which initially shrank when savingincreased).Thus this second effect also entails a lengthening of the capitalgoods structure, just as we saw with the first effect.Fluctuations in the value of capital goods, which arisefrom variations in saving and the interest rate, also tend tospread to the securities which represent these goods, and thusto the stock markets where they are traded. Hence an increasein voluntary saving, which leads to a drop in the interest rate,will further boost the price of stocks of companies which operatein the capital goods stages furthest from consumption, andin general, the price of all securities representing capital47 It should be noted that technological innovations which boost productivity(in the form of a greater quantity and/or quality of goods andservices) by reducing the length of production processes will be introducedin any case, whether or not society’s net saving increases. Howeversuch an increase makes possible the application of new technologieswhich, due to a marginal lack of resources, cannot be adopted priorto the rise in saving.