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

422 Money, Bank Credit, and Economic Cyclesand irresponsible behaviors. From this point of view our theoryof the cycle could be considered an application of the moregeneral theory of entrepreneurship to the specific case of theintertemporal discoordination (i.e., between different time periods)which follows from banking activity not subject to general legalprinciples and therefore based on the privilege of grantingloans unbacked by a prior rise in voluntary saving (the monetarybank-deposit contract with a fractional reserve). Hence ourtheory explains how the violation of legal principles, whichinvariably causes serious social discoordination, exerts thesame effect in a field as complex and abstract as that of moneyand bank credit. Thus economic theory has made it possible toconnect legal and economic phenomena (the granting of privilegesin violation of legal principles; and crises and recessions)which until now were thought to be completely unrelated.One might wonder how entrepreneurs can possibly fail torecognize that the theory of the cycle developed by economistsand presented here pertains to them, and to modify theirbehavior by ceasing to accept the loans they receive from thebanking sector and avoiding investment projects which, inmany cases, will bankrupt them. However, entrepreneurs cannotrefrain from participating in the widespread process ofdiscoordination bank credit expansion sets in motion, even ifthey have a perfect theoretical understanding of how the cyclewill develop. This is due to the fact that individual entrepreneursdo not know whether or not a loan offered them originatesfrom growth in society’s voluntary saving. In additionthough hypothetically they might suspect the loan to be createdex nihilo by the bank, they have no reason to refrain fromrequesting the loan and using it to expand their investmentprojects, if they believe they will be able to withdraw from thembefore the onset of the inevitable crisis. In other words the possibilityof earning considerable entrepreneurial profit exists forthose entrepreneurs who, though aware the entire process isbased on an artificial boom, are shrewd enough to withdrawfrom it in time and to liquidate their projects and companiesbefore the crisis hits. (This is, for instance, what Richard Cantillondid, as we saw in chapter 2.) Therefore the entrepreneurialspirit itself, and the profit motive on which it rests,destines entrepreneurs to participate in the cycle even when