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

376 Money, Bank Credit, and Economic Cyclesinappropriate amount in an inadequate manner in the wrongplaces in the productive structure because they were underthe impression, deceived as they were by bank credit expansion,that social saving would be much greater. Economic agentshave devoted themselves to lengthening the most capitalintensivestages in the hope that once the new investmentprocesses have, with time, reached completion, the final flowof consumer goods and services will increase significantly.However the process by which the productive structure islengthened requires a very prolonged period of time. Untilthis time has passed, society cannot profit from the correspondingrise in the production of consumer goods and services.Yet economic agents are not willing to wait until the end ofthat more prolonged period of time. Instead they express theirpreferences through their actions and demand the consumergoods and services now, i.e., much sooner than would bepossible were the lengthening of the productive structure tobe completed. 85Society’s savings can be either wisely or foolishlyinvested. Credit expansion brought about by the banking systemex nihilo encourages entrepreneurs to act as if social savinghad increased substantially, precisely by the amount the bankhas created in the form of new loans or fiduciary media. The85 In the words of F.A. Hayek:The crux of the whole capital problem is that while it isalmost always possible to postpone the use of things nowready or almost ready for consumption, it is in many casesimpossible to anticipate returns which were intended tobecome available at a later date. The consequence is that,while a relative deficiency in the demand for consumers’goods compared with supply will cause only comparativelyminor losses, a relative excess of this demand is apt to havemuch more serious effects. It will make it altogether impossibleto use some resources which are destined to give a consumablereturn only in the more distant future but will do soonly in collaboration with other resources which are nowmore profitably used to provide consumables for the moreimmediate future. (Hayek, The Pure Theory of Capital, pp.345–46)