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

Bank Credit Expansion and Its Effects on the Economic System 379Chart V-7 reflects the state of the productive structureonce the crisis and economic recession provoked by creditexpansion (i.e., unbacked by a prior increase in voluntary saving)have become evident and the necessary readjustmentshave been made. As the chart makes clear, the new productivestructure is flatter and contains only five stages, since the twostages furthest from consumption have disappeared. AsCharts V-5 and V-6 show, initially credit expansion, in error,permitted entrepreneurs to embark on these stages. FurthermoreTable V-6 demonstrates that although the gross incomefor the year is identical to that reflected in Table V-5 (483.7m.u.), the distribution of the portion allocated to the directdemand for final consumer goods and services and to thedemand for intermediate goods has varied in favor of the former.In fact now there are 132 m.u. of monetary demand forconsumer goods, an amount one-third larger than the 100units of monetary demand which appeared in the exampleshown in Chart V-5 and Table V-5. Meanwhile the overallmonetary demand for intermediate goods has diminishedfrom 383 to 351 units. In short there is a “flatter” structurewhich is less capital-intensive and therefore leads to the productionof fewer consumer goods and services, yet thesegoods and services are the object of greater monetary demand,all of which gives rise to a strong jump in the price of consumergoods and services and the generalized impoverishmentof society. This is revealed in the fall, in real terms, in theprice of the different original factors of production. Thoughthe nominal value of the monetary income received by theirowners has mounted substantially, the even more rapidMark Skousen indicates that in the recession phase the price of goodsfrom the different stages undergoes the following changes: first, themost serious decreases in price and employment normally affect thecompanies operating furthest from consumption; second, the prices ofproducts from the intermediate stages fall as well, though not as dramatically;third, wholesale prices drop, yet less sharply in comparison;and fourth and last, the prices of consumer goods also tend to decline,though much less noticeably than the rest of the above goods. Moreoverif stagflation occurs the price of consumer goods may even rise insteadof declining. See Skousen, The Structure of Production, p. 304.