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

Additional Considerations on the Theory of the Business Cycle 401The success of this strategy of postponing the crisisthrough additional loans hinges on a continuously-growingrate of credit expansion. Hayek already revealed this principlein 1934 when he stated: “[I]n order to bring about constantadditions to capital, [credit] would have to . . . increase at aconstantly increasing rate.” 4 The need for this ever-escalatingincrease in the rate of credit expansion rests on the fact that ineach time period the rate must exceed the rise in the price ofconsumer goods, a rise which results from the greater monetarydemand for these goods following the jump in the nominalincome of the original factors of production. Thereforegiven that a large portion of the new income received by ownersof the original means of production originates directlyfrom credit expansion, this expansion must progressivelyintensify so that the price of the factors of production is alwaysahead of the price of consumer goods. The moment this ceases tobe true, the six microeconomic processes which reverse thechanges made to the productive structure, shortening and flatteningit, are spontaneously set in motion and the crisis andeconomic recession irrevocably hit.In any case credit expansion must accelerate at a ratewhich does not permit economic agents to adequately predictit, since if these agents begin to correctly anticipate rateincreases, the six phenomena we are familiar with will be triggered.Indeed if expectations of inflation spread, the prices ofconsumer goods will soon begin to rise even faster than theprices of the factors of production. Moreover market interestrates will soar, even while credit expansion continues to intensify(given that the expectations of inflation and of growth inthe interest rate will immediately be reflected in its marketvalue).Hence the strategy of increasing credit expansion inorder to postpone the crisis cannot be indefinitely pursued,and sooner or later the crisis will be provoked by any of thefollowing three factors, which will also give rise to the recession:4 Hayek, Prices and Production, p. 150.