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

352 Money, Bank Credit, and Economic Cyclesunrealizable. Entrepreneurs embark upon the execution ofsuch projects. Business activities are stimulated. A boombegins. 68At first the discoordination expresses itself in the emergenceof a period of exaggerated and disproportionate optimism,which stems from the fact that economic agents feelable to expand the productive structure without at the sametime having to make the sacrifice of reducing their consumptionto generate savings. In the last section the lengthening ofthe productive structure was shown to be made possibleprecisely by the prior sacrifice required by all increases in saving.Now we see that entrepreneurs hasten to widen andlengthen the stages in production processes when no suchprior saving has taken place. The discoordination could not bemore obvious nor the initial excess of optimism more justified,since it seems possible to introduce longer productionprocesses without any sacrifice or previous accumulation ofcapital. In short a mass error is committed by entrepreneurs,who adopt production processes they consider profitable, butwhich are not. This error feeds a generalized optimismfounded on the belief that it is possible to widen and lengthenthe stages in production processes without anyone’s having tosave. Intertemporal discoordination increasingly mounts: entrepreneursinvest as if social saving were constantly growing;68 Mises, Human Action, p. 553 (p. 550 of the Scholar’s Edition). As allsaving takes the form of capital goods, even when initially these goodsare merely the consumer goods which remain unsold when saving rises,Mises’s explanation is completely valid. See footnotes 13 and 54. LionelRobbins, in his book, The Great Depression (New York: Macmillan, 1934),lists the following ten characteristics typical of any boom: first, the interestrate falls in relative terms; second, short-term interest rates begin todecline; third, long-term interest rates also drop; fourth, the current marketvalue of bonds rises; fifth, the velocity of the circulation of moneyincreases; sixth, stock prices climb; seventh, real estate prices begin tosoar; eighth, an industrial boom takes place and a large number of securitiesare issued in the primary market; ninth, the price of naturalresources and intermediate goods rises; and last, tenth, the stockexchange undergoes explosive growth based on the expectation of anuninterrupted increase in entrepreneurial profits (pp. 39–42).