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

Bank Credit Expansion and Its Effects on the Economic System 365goods and services. Furthermore as the capital theoryoutlined at the beginning of the chapter explains, thegeneralized lengthening of production processes andthe incorporation into them of a greater number ofstages further from consumption invariably leads to ashort-term decrease in the rate at which new consumergoods are produced. This slowdown lasts thelength of time necessary for newly initiated investmentprocesses to reach completion. It is clear that thelonger production processes are, i.e., the more stagesthey contain, the more productive they tend to be.However it is also clear that until new investmentprocesses conclude, they will not allow a largerquantity of consumer goods to reach the final stage.Hence the growth in income experienced by the ownersof the original factors of production, and thus theincrease in monetary demand for consumer goods,combined with the short-term slowdown in thearrival of new consumer goods to the market,accounts for the fact that the price of consumer goodsand services eventually climbs more than proportionally;that is, faster than the increase in monetaryincome experienced by the owners of the originalmeans of production.(c) Third, the rise in monetary demand for consumergoods which is triggered by artificial entrepreneurialprofits that result from the credit expansion process.Banks’ creation of loans ultimately entails an increasein the money supply and a rise in the price of the factorsof production and of consumer goods. Theseincreases eventually distort entrepreneurs’ estimatesof their profits and losses. In fact entrepreneurs tendto calculate their costs in terms of the historical costand purchasing power of m.u. prior to the inflationaryprocess. However they compute their earnings basedon income comprised of m.u. with less purchasingpower. All of this leads to considerable and purely fictitiousprofits, the appearance of which creates an illusionof entrepreneurial prosperity and explains why businessmenbegin to spend profits that have not actually