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

A Critique of Monetarist and Keynesian Theories 547and investment. Indeed by the time Keynes published TheGeneral Theory, he had already debated enough with Hayek toidentify Hayek’s main argument: that credit expansion givesrise to a temporal, unsustainable separation between entrepreneurialinvestment and society’s real, voluntary saving. IfHayek’s thesis is correct, it deals a fatal blow to Keynes’s theory.Thus it was crucial for Keynes to invalidate Hayek’sargument. Nevertheless Keynes’s reasoning on the issue ofbank credit was too confused and faulty to refute Hayek’s theory.Let us review his arguments one by one.First, Keynes claims bank credit has no expansionary effectwhatsoever on aggregate investment. He bases this assertionon the absurd accounting argument that the correspondingcreditor and debtor positions cancel each other out:We have, indeed, to adjust for the creation and discharge ofdebts (including changes in the quantity of credit or money); butsince for the community as a whole the increase or decreaseof the aggregate creditor position is always exactly equal tothe increase or decrease of the aggregate debtor position,this complication also cancels out when we are dealing withaggregate investment. 57Nonetheless a statement like this one cannot obscure thestrong distorting influence credit expansion exerts on investment.It is indeed true that a person receiving a loan from abank is the bank’s debtor for the amount of the loan, and creditorfor the amount of the deposit. However, as B.M. Andersonpoints out, the borrower’s debt with the bank is not money,whereas his credit is a demand deposit account which clearlyis money (or to be more precise, a perfect money substitute, asMises maintains). Once the borrower decides to invest theloan funds in capital goods and in services offered by the factorsof production, he uses the money (created ex nihilo by thebank) to increase investment, while no corresponding increasein voluntary saving takes place. He does so without alteringthe stability of his debt with the bank. 5857 Keynes, The General Theory, p. 75; italics added.58 Anderson, Economics and the Public Welfare, p. 391.