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

406 Money, Bank Credit, and Economic Cycles3CONSUMER CREDIT AND THE THEORY OF THE CYCLEWe are now able to identify the modifications, if any, to bemade to our analysis when, as in modern economies, a significantportion of the credit expansion banks bring about withoutthe support of voluntary saving takes the form of consumercredit. This analysis is of great theoretical and practicalimportance, since it has at times been argued that, to theextent credit expansion initially falls on consumption and noton investment, the economic effects which trigger a recessionwould not necessarily appear. Nevertheless this opinion iserroneous for reasons this section will explain.It is first necessary to point out that most consumer creditis extended by banks to households for the purchase of durableconsumer goods. We have already established that durableconsumer goods are actually true capital goods which permitthe rendering of direct consumer services over a very prolongedperiod of time. Therefore from an economic standpoint,the granting of loans to finance durable consumer goods is indistinguishablefrom the direct granting of loans to the capital-intensivestages furthest from consumption. In fact an easing of creditterms and a decline in interest rates will provoke, among othereffects, an increase in the quantity, quality and duration of socalled“durable consumer goods,” which will simultaneouslyrequire a widening and lengthening of the productive stagesinvolved, especially those furthest from consumption.Hence we have only to consider how to revise our theoryof the business cycle if a significant portion of credit expansionis devoted (contrary to the usual practice) to financing notdurable consumer goods, but the current consumption of eachfinancial year (in the form of goods and services which directlysatisfy human needs and are exhausted in the course of theperiod in question). Substantial modifications to our analysisare unnecessary in this case as well, since one of the followingis true: either credit expansion satisfies a more or less constantdemand for credit to finance existing direct consumption in theeconomic system, and given that credit markets are like “communicatingvessels,” such expansion frees the capacity to grant