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

Additional Considerations on the Theory of the Business Cycle 4094THE SELF-DESTRUCTIVE NATURE OF THE ARTIFICIALBOOMS CAUSED BY CREDIT EXPANSION:THE THEORY OF “FORCED SAVING”In the broad sense of the term, “forced saving” arises wheneverthere is an increase in the quantity of money in circulationor an expansion of bank credit (unbacked by voluntarysaving) which is injected into the economic system at a specificpoint. If the money or credit were evenly distributedamong all economic agents, no “expansionary” effect wouldappear, except the decrease in the purchasing power of themonetary unit in proportion to the rise in the quantity ofmoney. However if the new money enters the market at certainspecific points, as always occurs, then in reality a relativelysmall number of economic agents initially receive thenew loans. Thus these economic agents temporarily enjoygreater purchasing power, given that they possess a largernumber of monetary units with which to buy goods and servicesat market prices that still have not felt the full impact ofthe inflation and therefore have not yet risen. Hence theprocess gives rise to a redistribution of income in favor of thosewho first receive the new injections or doses of monetaryunits, to the detriment of the rest of society, who find that with thesame monetary income, the prices of goods and services beginto go up. “Forced saving” affects this second group of economicagents (the majority), since their monetary incomegrows at a slower rate than prices, and they are thereforegeneral, all public spending which generates in the productive structure achange that cannot ultimately become permanent because the behavior ofconsumers does not support it. Hayek concludes:[S]o much of the credit expansion has gone to where governmentdirected it that the misdirection may no longer be of anoverinvestment in industrial capital but may take any number offorms. You must really study it separately for each particularphase and situation. . . . But you get very similar phenomenawith all kinds of modifications. (Hayek, Hayek on Hayek: AnAutobiographical Dialogue, p. 146)