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

Bank Credit Expansion and Its Effects on the Economic System 3473THE EFFECTS OF BANK CREDIT EXPANSIONUNBACKED BY AN INCREASE IN SAVING:THE AUSTRIAN THEORY OR CIRCULATIONCREDIT THEORY OF THE BUSINESS CYCLEIn this section we will examine the effects banks exert onthe productive structure when they create loans unbacked bya prior increase in voluntary saving. These circumstances differradically from those we studied in the last section, whereloans were fully backed by a corresponding rise in voluntarysaving. In accordance with the credit expansion process triggeredby fractional-reserve banking (a process we examinedin detail in chapter 4), a bank’s creation of credit would resultin an accounting entry which, in its simplest form, wouldresemble this one:(73) Debit Credit1,000,000 Cash Demand deposits 1,000,000(74)900,000 Loans granted Demand deposits 900,000These book entries, which are identical to numbers (17)and (18) in chapter 4, record in a simplified and concise fashionthe unquestionable fact that the bank is able to generatepossible was done to foster consumption, however the country becameextremely impoverished. Machlup ironically states:Austria had most impressive records in five lines: sheincreased public expenditures, she increased wages, sheincreased social benefits, she increased bank credits, sheincreased consumption. After all these achievements she wason the verge of ruin. (Fritz Machlup, “The Consumption ofCapital in Austria,” Review of Economic Statistics 17, no. 1[1935]: 13–19)Other examples of this kind of generalized impoverishments were theArgentina of General Perón and Portugal after the 1973 Revolution.