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

354 Money, Bank Credit, and Economic CyclesChart V-5 provides a simplified illustration of the effectexerted on the structure of productive stages by creditexpansion brought about by the banking system without thenecessary increase in social saving. When we compare it withChart V-1 of this chapter, we see that final consumptionremains unchanged at 100 m.u., in keeping with our suppositionthat no growth in net saving has taken place. Howevernew money is created (deposits or fiduciary media) and entersthe system through credit expansion and the relative reductionin the interest rate (along with the typical easing of thecontractual conditions and the requirements for obtaining aloan) necessary to persuade economic agents to take out thenewly-created loans. Therefore the rate of profit in the differentproductive stages, which as we know tends to coincidewith the interest rate obtained at each stage by advancingpresent goods in exchange for future goods, now drops fromthe 11 percent shown in Chart V-1 to slightly over 4 percentyearly. Moreover the new loans allow the entrepreneurs ofeach productive stage to pay more for the corresponding originalmeans of production, as well as for the capital goods fromearlier stages which they obtain for their own productiveprocesses.Table V-5 reflects the supply of and demand for presentgoods following bank credit expansion unbacked by saving.We see that the supply of present goods increases from the 270m.u. shown in Table V-1 to slightly over 380 m.u., which are inturn composed of the 270 m.u. from the example in the lastsection (m.u. originating from real saved resources) plusslightly over 113 m.u. which banks have created through creditand the Concertina Effect,” Economica (November 1942): 359–82. Curiously,Kaldor had translated from German to English Hayek’s book,Monetary Theory and the Trade Cycle, first published in 1933 (London:Routledge). Rudy van Zijp has pointed out that the criticism Kaldor andothers have leveled against Hayek’s “Ricardo Effect” has derived fromthe assumption of a hypothetical state of general equilibrium whichdoes not permit a dynamic analysis of the intertemporal discoordinationcredit expansion inevitably provokes in the market. See Rudy vanZijp, Austrian and New Classical Business Cycle Theory (Aldershot, U.K.:Edward Elgar, 1994), pp. 51–53.