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

Bank Credit Expansion and Its Effects on the Economic System 363phenomena (financial crises, economic recessions, and unemployment)back to their fundamental microeconomic roots. Wewill now study, one by one, the six microeconomic causes of thereversal of the boom that credit expansion invariably triggers:1. The rise in the price of the original means of production.The first temporary effect of credit expansion is an increasein the relative price of the original means of production (laborand natural resources). This rise in price stems from two separatecauses which reinforce each other. On the one hand, capitalistsfrom the different stages in the production processshow a greater monetary demand for original resources, andthis growth in demand is made possible by the new loans thebanking system grants. On the other hand, with respect tosupply, we must keep in mind that when credit expansiontakes place without the backing of a prior increase in saving,no original means of production are freed from the stages closestto consumption, as occurred in the process we studied earlier,which was initiated by a real upsurge in voluntary saving.Therefore the rise in the demand for original means of productionin the stages furthest from consumption and theabsence of an accompanying boost in supply inevitably resultin a gradual increase in the market price of the factors of production.Ultimately this increase tends to accelerate due tocompetition among the entrepreneurs of the different stages inthe production process. The desire of these entrepreneurs toattract original resources to their projects makes them willingto pay higher and higher prices for these resources, prices theyare able to offer because they have just received new liquidityfrom the banks in the form of loans the banks have createdfrom nothing. This rise in the relative price of the original factorsof production begins to push the cost of the newlybooks, the only other work in Spanish on the topic is our article, “Lateoría austriaca del ciclo económico,” which was published overtwenty years ago in Moneda y Crédito 152 (March 1980), and whichincludes a comprehensive bibliography on the subject; and the series ofessays by F.A. Hayek published as ¿Inflación o Pleno Empleo? (Madrid:Unión Editorial, 1976). Last, in 1996 Carlos Rodríguez Braun’s translationof Hayek’s Prices and Production (Precios y producción) appeared,published by Ediciones Aosta and Unión Editorial in Madrid.