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

Bank Credit Expansion and Its Effects on the Economic System 351the productive structure; that is, they act as if society’s savinghad increased, when in fact such an event has not occurred. Inthe case of an upsurge in voluntary saving, which we examinedin the last section, the individual behavior of the differenteconomic agents tended to become compatible, and thusthe real resources that were saved and not consumed madethe preservation and lengthening of the productive structurepossible. Now the fact that entrepreneurs respond to creditexpansion by behaving as if saving had increased triggers aprocess of maladjustment or discoordination in the behavior of thedifferent economic agents. Indeed entrepreneurs rush to investand to widen and lengthen the real productive structure eventhough economic agents have not decided to augment theirsaving by the volume necessary to finance the new investments.In a nutshell, this is a typical example of an inducementto mass entrepreneurial error in economic calculation or estimationregarding the outcome of the different courses of actionentrepreneurs adopt. This error in economic calculation stemsfrom the fact that one of the basic indicators entrepreneurs referto before acting, the interest rate (along with the attractivenessof terms offered in the credit market), is temporarily manipulatedand artificially lowered by banks through a process ofcredit expansion. 67 In the words of Ludwig von Mises,But now the drop in interest falsifies the businessman’s calculation.Although the amount of capital goods availabledid not increase, the calculation employs figures whichwould be utilizable only if such an increase had takenplace. The result of such calculations is therefore misleading.They make some projects appear profitable and realizablewhich a correct calculation, based on an interest ratenot manipulated by credit expansion, would have shown as67 Elsewhere we have explained why systematic coercion and manipulationof market indicators, the result of government intervention or thegranting of privileges by the government to pressure groups (unions,banks, etc.), prevent people from producing and discovering the informationnecessary to coordinate society, and serious maladjustments andsocial discoordination systematically follow. See Huerta de Soto, Socialismo,cálculo económico y función empresarial, chaps. 2 and 3.