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

412 Money, Bank Credit, and Economic Cyclesstages in the productive structure, changes which stem fromcredit expansion the banking system launches without thesupport of voluntary saving. As we know, this process initiallygenerates an increase in the monetary income of the originalmeans of production, and later, a more-than-proportional risein the price of consumer goods (or in the gross income of consumergoods industries, if productivity increases). In fact, thecirculation credit theory of the business cycle explains the theoreticalmicroeconomic factors which determine that theattempt to force a more capital-intensive productive structure,without the corresponding backing of voluntary saving, iscondemned to failure and will invariably reverse, provokingeconomic crises and recessions. This process is almost certainto entail an eventual redistribution of resources which in someway modifies the overall voluntary saving ratio that existedprior to the beginning of credit expansion. However unless theentire process is accompanied by a simultaneous, independent, andspontaneous increase in voluntary saving of an amount at leastequal to the newly-created credit banks extend ex nihilo, it will beimpossible to sustain and complete the new, more capital-intensivestages undertaken, and the typical reversion effects we have examinedin detail will appear, along with a crisis and economic recession.Moreover the process involves the squandering of numerouscapital goods and society’s scarce resources, making societypoorer. As a result, by and large, society’s voluntary savingultimately tends to shrink rather than grow. At any rate, barringdramatic, spontaneous, unforeseen increases in voluntarysaving, which for argument’s sake we exclude at this pointfrom the theoretical analysis (which furthermore alwaysinvolves the assumption that other things remain equal),credit expansion will provoke a self-destructive boom, whichsooner or later will revert in the form of an economic crisisand recession. This demonstrates the impossibility of forcingthe economic development of society by artificially encouraginginvestment and initially financing it with credit expansion,if economic agents are unwilling to voluntarily back such apolicy by saving more. Therefore society’s investment cannotpossibly exceed its voluntary saving for long periods (thiswould constitute an alternative definition of “forced saving,”one more in line with the Keynesian analysis, as F.A. Hayek