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

A Critique of Monetarist and Keynesian Theories 549any increase in the money supply via credit expansionwould be tantamount to an “increase in saving,” which issheer nonsense. 61 Even if we concede for the sake of argumentthat all investment financed by new credit has been immediatelyand simultaneously “saved,” a problem still faces us.Once the new money reaches its final holders (workers andowners of capital goods and original means of production), ifthese people decide to spend all or part of it on consumergoods and services, the productive structure will be revealedas too capital-intensive and recession will hit. For all hissophistry, Keynes cannot deny the obvious fact that artificialcredit expansion does not guarantee economic agents will becompelled to save and invest more than they normallywould. 62 Furthermore it is paradoxical that Keynes shouldinsist that voluntary saving does not guarantee more investment,while at the same time claiming all investment impliesprior saving. If we admit that the agents who save and thosewho invest are different, and that a lack of coordination intheir decisions may prevent equilibrium, then we must admitthat such discoordination may exist not only on the side of61 George Selgin essentially bases his doctrine of monetary equilibriumon this second argument of Keynes’s (without specifically citing it). Wewill critically examine Selgin’s doctrine in the next chapter. It is paradoxicalthat Selgin, an economist from an Austrian background, shouldfall into the Keynesian trap in an attempt to prove that credit expansionin the context of a free-banking system would be harmless for the economicsystem. Perhaps this fact provides the clearest evidence that theOld Banking School has been reincarnated today in the figures of theoristslike Selgin, defenders of fractional-reserve free banking. See GeorgeA. Selgin, The Theory of Free Banking: Money Supply under CompetitiveNote Issue (Totowa, N.J.: Rowman and Littlefield, 1988), esp. pp. 54–55.62 In other words, although ex post facto all invested resources have beensaved (I=S), Keynes overlooks the fact that, microeconomically speaking,saved resources can be invested either wisely or foolishly. In factcredit expansion misleads entrepreneurs with respect to the true rate ofvoluntary saving. Thus society’s meager savings are unwisely investedin processes which are excessively capital-intensive and cannot be completedor sustained, and society grows poorer as a result (see pp. 375–84of chapter 5).