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

474 Money, Bank Credit, and Economic Cyclesmalinvestment of productive resources, a phenomenon whichhas even been accompanied by cyclical adverse changes andwhich has been studied in certain detail by various theoristsfrom the former Eastern economies. 78The appalling economic difficulties presently confrontingthe economies of the former Eastern bloc stem from manydecades of systematic economic errors. These errors have beenmuch more serious (and have been committed at a much morerapid pace) than those which have regularly appeared in theWest due to credit expansion by the banking system and to themonetary policy of public authorities.17TWO ADDITIONAL CONSIDERATIONSOn various historical occasions credit expansion has beenused as an instrument to help finance the national budgetdeficit. This can occur in two ways: either banks may beinstructed to acquire treasury bonds with part of their creditexpansion, or the government may borrow money directlyfrom banks. Though technically these are examples of creditexpansion, here it does not directly influence the loan market,but rather acts as a perfect substitute for the creation of money.In fact in this case, credit expansion amounts to the simple creationof money to finance the public deficit and leads to thetraditional effects of any inflationary process: an initial redistributionof income similar to that which follows any inflationaryprocess; and a distortion of the productive structure,to the extent the government finances expenditures and publicworks which temporarily modify the productive structureand later cannot be permanently maintained via economicagents’ current spending on consumer goods and services. Atany rate it is necessary to distinguish true credit expansion,78 Among others, Tomask Stankiewicz in his article, “Investment underSocialism,” Communist Economies 1, no. 2 (1989): 123–30. See also JanWiniecki’s book, The Distorted World of Soviet-Type Economies (London:Routledge, 1988 and 1991).