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

366 Money, Bank Credit, and Economic Cyclesbeen produced, which further increases the pressureof the monetary demand for final consumer goods. 75It is important to underline the effect of the more-than-proportionalrise in the price of consumer goods (or in the turnoveror gross income of consumer goods industries if their productivityincreases) with respect to the rise in the price of originalfactors of production. Theoretically this is the phenomenonwhich has most escaped the notice of many scholars. As theyhave not fully comprehended capital theory, the analyses ofthese theorists have not accounted for the fact that when moreproductive resources are devoted to processes further from consumption,processes which begin to yield results only after aprolonged period of time, there is a reduction in the speed atwhich new consumer goods arrive at the last stage in the productionprocess. Moreover this is one of the most significant distinguishingfeatures of the case we are now considering (inwhich the lengthening of production processes is financed withloans the banks create ex nihilo) with respect to the process initiatedby an upsurge in voluntary saving (which by definitionproduced an increase in the stock of consumer goods that75 The additional demand on the part of the expanding entrepreneurstends to raise the prices of producers’ goods andwage rates. With the rise in wage rates, the prices of consumers’goods rise too. Besides, the entrepreneurs are contributinga share to the rise in the prices of consumers’ goodsas they too, deluded by the illusory gains which their businessaccounts show, are ready to consume more. The generalupswing in prices spreads optimism. If only the prices of producers’goods had risen and those of consumers’ goods hadnot been affected, the entrepreneurs would have becomeembarrassed. They would have had doubts concerning thesoundness of their plans, as the rise in costs of productionwould have upset their calculations. But they are reassuredby the fact that the demand for consumers’ goods is intensifiedand makes it possible to expand sales in spite of risingprices. Thus they are confident that production will pay,notwithstanding the higher costs it involves. They areresolved to go on. (Mises, Human Action, p. 553)Furthermore, assuming the existence of a (constant) supply curve ofsavings, the decrease in interest rates will reduce savings and increaseconsumption. See Garrison, Time and Money, p. 70.