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

364 Money, Bank Credit, and Economic Cycleslaunched investment projects above the amount originallybudgeted. Nevertheless this effect alone is still not sufficient toend the wave of optimism, and entrepreneurs, who continueto feel safe and supported by the banks, usually go ahead withtheir investment projects without a second thought. 742. The subsequent rise in the price of consumer goods.Sooner or later the price of consumer goods begins togradually climb, while the price of services offered by theoriginal factors of production starts to mount at a slower pace(in other words, it begins to fall in relative terms). The combinationof the following three factors accounts for this phenomenon:(a) First, growth in the monetary income of the owners of theoriginal factors of production. Indeed if, as we are supposing,economic agents’ rate of time preferenceremains stable, and therefore they continue to savethe same proportion of their income, the monetarydemand for consumer goods increases as a result ofthe increase in monetary income received by the ownersof the original factors of production. Nonethelessthis effect would only explain a similar rise in theprice of consumer goods if it were not for the fact thatit combines with effects (b) and (c).(b) Second, a slowdown in the production of new consumergoods and services in the short- and medium-term, aconsequence of the lengthening of productionprocesses and the greater demand for original means ofproduction in the stages furthest from final consumption.This temporary decline in the speed at which newconsumer goods arrive at the final stage in the productionprocess derives from the fact that original factorsof production are withdrawn from the stagesclosest to consumption, causing a relative shortage ofthese factors in those stages. This shortage affects theimmediate production and delivery of final consumer74 In section 11 of chapter 6 (p. 440) we will see that our analysis does notchange substantially even when a large volume of unused factors ofproduction exists prior to credit expansion.