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

442 Money, Bank Credit, and Economic CyclesThe theory of the business cycle teaches precisely thatcredit expansion unbacked by an increase in real saving willencourage the malinvestment of productive resources evenwhen there is a significant volume of idle resources, specifically,unemployed labor. In other words, contrary to opinionsexpressed by many critics of the theory, full employment isnot a prerequisite of the microeconomic distortions of creditexpansion. When credit expansion takes place, economic projectswhich are not actually profitable appear so, regardless ofwhether they are carried out with resources that were unemployedprior to their commencement. The only effect is thatthe nominal price of the original means of production may notrise as much as it would if full employment existed beforehand.Nevertheless the other factors which give rise to malinvestmentand a spontaneous reversal, in the form of a crisisand recession, of the errors committed eventually appear,regardless of whether the errors have been committed withoriginally-unemployed resources.An artificial boom based on bank credit expansion whichreallocates previously-unemployed original means of productionmerely interrupts the process of readjustment of thosefactors, a process not yet complete. Consequently a new layerof widespread malinvestment of resources overlaps a previouslayer which has yet to be completely liquidated and reabsorbedby the market.Another possible effect of the use of previously-idleresources is the following: apart from the fact that their pricedoes not increase as rapidly in absolute terms, they may makea short-term slowdown in the production of consumer goodsand services unnecessary. Nonetheless a poor allocation ofresources still takes place, since resources are invested inunprofitable projects, and the effects of the cycle eventuallyappear when the monetary income of the previously-unemployedoriginal means of production begins to be spent onfrom the existence of idle resources. There he expressly reminds us thatfrom the time Mises began developing the theory of the cycle in 1928, heassumed some labor and other resources would be unemployed (seealso the footnote 1 on p. 42).