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

372 Money, Bank Credit, and Economic Cyclesinterest rates in real terms, they will have to add (tothe interest rate which prevails prior to the beginningof the credit expansion process) a component for“inflation,” or in other words, for the expected drop inthe purchasing power of the monetary unit (as well asthe increased risk premium mentioned on page 380). 81(b) There is another powerful reason interest rates climbto and even exceed their prior level: entrepreneurswho have embarked upon the lengthening of productionprocesses despite the rise in interest rates will, tothe extent that they have already committed substantialresources to new investment projects, be willing topay very high interest rates, provided they are suppliedwith the funds necessary to complete the projects they havemistakenly launched. This is an important aspect whichwent completely unnoticed until Hayek studied it in81 As Ludwig von Mises wrote in 1928:The banks can no longer make additional loans at the sameinterest rates. As a result, they must raise the loan rate oncemore for two reasons. In the first place, the appearance of thepositive price premium forces them to pay higher interest foroutside funds which they borrow. Then also they must discriminateamong the many applicants for credit. Not all enterprisescan afford this increased interest rate. Those which cannotrun into difficulties. (See On the Manipulation of Money andCredit, p. 127)This is Bettina Bien Greaves’s translation into English of the book publishedin 1928 by Ludwig von Mises with the title, Geldwertstabilisierungund Konjunkturpolitik. The above passage is found on pp. 51–52 of thisGerman edition, which contains a detailed explanation of all of Mises’stheory on business cycles. It was published before Prices and Productionand the German edition of Monetary Theory and the Trade Cycle by Hayek(1929). It is odd that Hayek almost never cites this important work, inwhich Mises formulates and develops the theory of the cycle, which heonly had the opportunity to outline in his book, The Theory of Money andCredit, published sixteen years earlier. Perhaps this oversight was deliberateand arose from a desire to convey to the scientific community theimpression that the first attempt to develop Mises’s theory was made byHayek in his writings on Monetary Theory and the Trade Cycle and Pricesand Production, when Mises had already covered the topic very thoroughlyin 1928.