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

Bank Credit Expansion and Its Effects on the Economic System 355expansion without the backing of any saving. Thus credit expansionhas the effect of artificially raising the supply of presentgoods, which are demanded at lower interest rates by ownersof the original means of production and by capitalists of theearlier stages further from consumption. Furthermore Table V-5 reveals that the gross income for the year is over 483 m.u.,113 units more than the gross income for the year prior tocredit expansion. (See Table V-2.)Chart V-6 offers a simplified representation of the effect ofcredit expansion (i.e., unbacked by a prior rise in voluntarysaving) on the productive structure. In our example, this effectexpresses itself in the lengthening of the productive structurevia the appearance of two new stages, six and seven. Prior tothe expansion of credit these stages did not exist, and they arethe furthest from final consumption. In addition the preexistingproductive stages (two through five) are widened. Thesum of the m.u. which represent the monetary demandembodied in each new widening or lengthening of productivestages, and which on the chart is reflected by the shaded areas,amounts to 113.75 m.u., the exact rise in gross monetaryincome for the year, an increase which stems exclusively fromthe creation of new money through credit expansion broughtabout by banks.Let us not be deceived by Chart V-5: the new structure ofproductive stages it illustrates rests on generalized intertemporaldiscoordination, in turn the result of the mass entrepreneurialerror provoked by the introduction of a large volumeof new loans which are granted at artificially reduced interestrates, without the backing of real prior saving. This anomalousstate of discoordination cannot be maintained, and thenext section will include a detailed explanation of the reactioncredit expansion inevitably sets off in the market. In otherwords, from the standpoint of pure microeconomic theory, we willexamine the factors that will cause the reversal of the “macroeconomic”discoordination we have revealed.Hence we will study the reasons the intertemporal discoordinationprocess, initially set in motion by credit expansion,will completely reverse. Any attack on the social process, be itintervention, systematic coercion, manipulation of essential