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

Bank Credit Expansion and Its Effects on the Economic System 345decrease in society’s voluntary saving. Let us begin by supposingthat the productive structure closely resembles thatreflected in Chart V-3. If society as a whole decides to saveless, the result will be an increase, of for instance 25 m.u., inthe monetary demand for consumer goods and services.Therefore the monetary demand will rise from 75 m.u. to 100m.u., and the industries and companies of the stages closest toconsumption will tend to grow dramatically, which will driveup their accounting profits. Though these events may appearto provoke the effects of a consumer boom, in the long runthey will lead to a “flattening” of the productive structure,since productive resources will be withdrawn from the stagesfurthest from consumption and transferred to those closest toit. In fact the increased accounting profits of the stages close tofinal consumption will, relatively speaking, discourage productionin the most distant stages, which will tend to bringabout a reduction in investment in these stages. Moreover thedrop in saving will push up the market rate of interest anddiminish the corresponding present value of durable capitalgoods, deterring investment in them. Finally a reverse“Ricardo Effect” will exert its influence: growth in the pricesof consumer goods and services will be accompanied by animmediate decline in real wages and in the rents of the otheroriginal factors, which will encourage capitalists to replacecapital equipment with labor, now relatively cheaper.The combined result of all these influences is a flatteningof the productive structure, which comes to resemble thatdescribed in Chart V-1, which, although it reflects a greaterdemand for consumer goods and services in monetary terms,shows there has been a generalized impoverishment of society inreal terms. In fact the less capital-intensive productive structurewill result in the arrival of fewer consumer goods andservices to the final stage, which nevertheless undergoes aconsiderable rise in monetary demand. Hence there is adecrease in the production of consumer goods and services,along with a substantial increase in their price, a consequenceof the two previous effects combined. The result is the generalizedimpoverishment of society, especially of workers,whose wages shrink in real terms, since, while in monetaryterms they may remain constant or even increase, such a rise