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

Bank Credit Expansion and Its Effects on the Economic System 367remained unsold and which sustained the owners of the originalfactors of production while new processes of productioncould be completed). When there is no prior growth in saving,and therefore consumer goods and services are not freed to supportsociety during the lengthening of the productive stages andthe transfer of original factors from the stages closest to consumptionto those furthest from it, the relative price of consumergoods inevitably tends to rise. 763. The substantial relative increase in the accounting profits ofthe companies from the stages closest to final consumption.The price of consumer goods escalates faster than the priceof original factors of production, and this results in relativegrowth in the accounting profits of the companies from thestages closest to consumption with respect to the accountingprofits of companies who operate in the stages furthest fromconsumption. Indeed the relative price of the goods and servicessold in the stages closest to consumption increases veryrapidly, while costs, though they also rise, do not rise as fast.Consequently accounting profits, or the differential betweenincome and costs, mount in the final stages. In contrast, in thestages furthest from consumption the price of the intermediategoods produced at each stage does not show a majorchange, while the cost of the original factors of productionemployed at each stage climbs continuously, due to thegreater monetary demand for these factors, which in turnoriginates directly from credit expansion. Hence companiesoperating in the stages furthest from consumption tend to76 Hayek expresses the concept in this concise manner:[F]or a time, consumption may even go on at an unchangedrate after the more roundabout processes have actuallystarted, because the goods which have already advanced tothe lower stages of production, being of a highly specific character,will continue to come forward for some little time. Butthis cannot go on. When the reduced output from the stagesof production, from which producers’ goods have been withdrawnfor use in higher stages, has matured into consumers’goods, a scarcity of consumers’ goods will make itself felt,and the prices of those goods will rise. (Hayek, Prices and Production,p. 88)