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

448 Money, Bank Credit, and Economic Cycles(b) The second type of deflation, which should be clearlydistinguished from the first, occurs when economicagents decide to save, that is, to refrain from consuminga significant portion of their income and to devoteall or part of the total saved to increasing their cashbalances (i.e., to hoarding). 47 In this case, the rise in thedemand for money tends to push up the purchasingpower of the monetary unit (in other words, it tendsto push down the “general price level”). However thistype of deflation differs radically from the former inthe sense that it does make a contribution, since itoriginates from an increase in the saving of economicagents, who thus free resources in the form of unsoldconsumer goods and services. This provokes theeffects we studied in chapter 5, where we considered arise in voluntary saving. More specifically the“Ricardo Effect” appears, due to the drop in the relativeprices of consumer goods, which in turn leads toan increase, other things being equal, in the realwages of workers and in the income of the other originalmeans of production. Hence the processes whichtrigger a lengthening of the productive structure areset in motion. The productive structure becomes morecapital-intensive, due to the new investment projectsundertaken, projects entrepreneurs will be able tocomplete because productive resources have beenthe world crisis of 1931—but, I am still inclined to believe, justat the time when the aim of that painful struggle had beennearly achieved. (F.A. Hayek, 1980s Unemployment and theUnions: The Distortion of Relative Prices by Monopoly in theLabour Markets, 2nd ed. [London: Institute of EconomicAffairs, 1984], p. 15. See also footnote 43 in chapter 8)47 It is also possible, in theory and in practice, for economic agents toraise their cash balances (demand for money) without at all modifyingtheir volume of monetary consumption. They can do this by disinvestingin productive resources and selling capital goods. This leads to aflattening of the productive structure and brings about the widespreadimpoverishment of society through a process which is the exact oppositeof the one we analyzed in chapter 5 with respect to a lengthening(financed by growth in voluntary saving) of the productive structure.