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

Bank Credit Expansion and Its Effects on the Economic System 3756. The appearance of accounting losses in companies operatingin the stages relatively more distant from consumption: theinevitable advent of the crisis.The above five factors provoke the following combinedeffect: sooner or later companies which operate in the stagesrelatively more distant from consumption begin to incurheavy accounting losses. These accounting losses, when comparedwith the relative profits generated in the stages closestto consumption, finally reveal beyond all doubt the seriousentrepreneurial errors committed and the urgent need to correctthem by paralyzing and then liquidating the investmentprojects mistakenly launched, withdrawing productiveresources from the stages furthest from consumption andtransferring them back to those closest to it.In a nutshell, entrepreneurs begin to realize a massivereadjustment in the productive structure is necessary. Throughthis “restructuring” in which they withdraw from the projectsthey began in the stages of capital goods industries and whichthey were unable to successfully complete, they transfer whatis left of their resources to the industries closest to consumption.It has now become obvious that certain investment projectsare unprofitable, and entrepreneurs must liquidate theseand make a massive transfer of the corresponding productiveresources, particularly labor, to the stages closest to consumption.Crisis and economic recession have hit, essentially due to a lackof real saved resources with which to complete investment projectswhich, as has become apparent, were too ambitious. The crisis isbrought to a head by excessive investment (“overinvestment”)in the stages furthest from consumption, i.e., in capital goodsindustries (computer software and hardware, high-tech communicationsdevices, blast furnaces, shipyards, construction,etc.), and in all other stages with a widened capital goodsstructure. It also erupts due to a parallel relative shortage ininvestment in the industries closest to consumption. The combinedeffect of the two errors is generalized malinvestment ofproductive resources; that is, investment of a style, quality,quantity, and geographic and entrepreneurial distributiontypical of a situation in which much more voluntary savinghas taken place. In short, entrepreneurs have invested an