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

348 Money, Bank Credit, and Economic Cyclesfrom nothing new m.u. in the form of deposits or fiduciarymedia which are granted to the public as loans or credit evenwhen the public has not first decided to increase saving. 63 Wewill now consider the effects this important event has onsocial processes of coordination and economic interaction.THE EFFECTS OF CREDIT EXPANSION ON THEPRODUCTIVE STRUCTUREThe creation of money by the banking system in the formof loans has some real effects on the economy’s productivestructure, and it is necessary to clearly distinguish betweenthese effects and those we studied in the last section withrespect to loans backed by saving. More specifically, the generationof loans ex nihilo (i.e., in the absence of an increase insaving) raises the supply of credit to the economy, especiallyto the different capital goods stages in the productive structure.From this standpoint, the increased supply of loanswhich results from bank credit expansion will initially exertan effect very similar to that produced by the flow of newloans from saving which we analyzed in detail in the last section:it will tend to cause a widening and lengthening of thestages in the productive structure.The “widening” of the different stages is easy to understand,since basically the loans are granted for the productionprocesses which constitute each of the stages. Credit extendedto finance durable consumer goods also leads to a wideningand lengthening of the productive structure, because (as wehave seen) durable consumer goods are economically comparableto capital goods throughout the period during whichthey are fit to render their services. Therefore even in the caseof consumer loans (to finance durable consumer goods), thegreater influx of loans will tend to increase both the quantityand quality of such goods.63 “So far as deposits are created by the banks, money means are created,and the command of capital is supplied, without cost or sacrifice on thepart of the saver.” F.W. Taussig, Principles of Economics, 3rd ed. (NewYork: Macmillan, 1939), vol. 1, p. 357. Remember also note 23 in chapter4, p. 205.