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

550 Money, Bank Credit, and Economic Cyclesvoluntary saving (more voluntary saving without investment),but also on that of investment (more investment withoutprior saving). In the first case there is an increase in thedemand for money. As we saw in the last chapter, such anincrease provokes several overlapping effects: both thosecharacteristic of all voluntary saving (changes in the relativepricestructure which lead to a lengthening of investmentprocesses) and those due to a rise in the purchasing power ofmoney. 63 In the second case (more investment without priorsaving) an artificially long structure of production is created.It is one which cannot be maintained indefinitely, since economicagents are not willing to save enough. It also accountsfor the onset of crises and recessions following periods ofcredit expansion.In his attempt to counteract the Austrian hypothesis on theharmful effects of credit expansion, Keynes puts forward athird and final argument. He alleges that credit expansion mayultimately be used to finance an increase in investment63 Jacques Rueff has pointed out that in an economy on a pure gold standard,an increase in the demand for money (or “hoarding”) does notpush up unemployment at all. In fact, in accordance with the price system,it channels a greater proportion of society’s productive resources(labor, capital equipment, and original means of production) into themining, production, and distribution of more monetary units (gold).This is the market’s natural, spontaneous reaction to economic agents’new desire for higher cash balances. Therefore it is not necessary to initiatea program of public works (even if, as Keynes ironically remarked,it consisted merely of digging ditches and then filling them in again),since society will spontaneously use its productive resources to digdeeper mines and extract gold, thus more effectively satisfying thedesires of consumers and economic agents for higher cash balances.Hence an increased “liquidity preference” cannot possibly produce asituation of permanent, combined equilibrium and unemployment. Acombination of equilibrium and unemployment can only stem from arigid labor market in which the coercive power of the state, the unionsor both, prevents flexibility in wages and other employment contractand labor market conditions. See Jacques Rueff’s article, “The Fallaciesof Lord Keynes’ General Theory,” printed in The Critics of Keynesian Economics,Henry Hazlitt, ed. (New York: Arlington House, 1977), pp.239–63, esp. p. 244.