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

380 Money, Bank Credit, and Economic Cyclesincrease in the price of consumer goods places the owners ofthese factors at a considerable disadvantage in real terms.Moreover the interest rate, or rate of accounting profitapproached at each stage, has risen above 13.5 percent, i.e., toa level which even exceeds that of the interest in the creditmarket prior to credit expansion (11 percent per year). Thishigher rate reflects a premium to compensate for the drop inthe purchasing power of money; the keener competitionamong the different entrepreneurs, who desperately wish toobtain new loans; and the increase in the components of riskand entrepreneurial uncertainty which influences the interestrate whenever pessimism and economic distrust are rampant.We must emphasize that the productive structure whichremains following the necessary readjustment, and whichChart V-7 illustrates, cannot continue to match the structurethat existed prior to credit expansion. This is due to the factthat circumstances have changed significantly. Heavy inevitablelosses of specific capital goods have been incurred to theextent that society’s scarce resources have been channeled intoinvestments that cannot be restructured and therefore aredevoid of economic value. This gives rise to general impoverishmentof society, a state which manifests itself as a decline incapital equipment per capita, resulting in a decrease in the productivityof labor, and consequently, a further reduction in realwages. Furthermore there has been a shift in the distribution ofincome among the different factors of production, as well as arealignment of all the investment processes which, though initiatedin error, are still of some use and economic value. All ofthese new circumstances make the productive structure qualitativelyvery different from and quantitatively much flatterand poorer than the one that existed before banks broughtabout credit expansion. 9090 Fritz Machlup has closely studied the factors which provoke the flatteningof the productive structure and has examined the reasons it is differentand poorer after the readjustment than before credit expansion:(1) Many capital goods are specific, i.e., not capable of beingused for other purposes than those they were originallyplanned for; major losses follow then from the change in