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

A Critique of Monetarist and Keynesian Theories 551which would lead to a rise in income and therefore eventuallyalso boost saving. Thus Keynes believes entrepreneurscannot possibly invest loaned funds at a rate faster than that atwhich the public decides to increase savings. In Keynes’s ownwords:The notion that the creation of credit by the banking systemallows investment to take place to which “no genuine saving”corresponds can only be the result of isolating one ofthe consequences of the increased bank-credit to the exclusionof the others. If the grant of a bank credit to an entrepreneuradditional to the credits already existing allows himto make an addition to current investment which would nothave occurred otherwise, incomes will necessarily beincreased and at a rate which will normally exceed the rate ofincreased investment. Moreover, except in conditions of fullemployment, there will be an increase of real income as wellas of money-income. The public will exercise a “free choice”as to the proportion in which they divide their increase ofincome between saving and spending; and it is impossible thatthe intention of the entrepreneur who has borrowed in order toincrease investment can become effective . . . at a faster rate thanthe public decide to increase their savings. 64Keynes clearly states that it is impossible for the rate ofinvestment to exceed the rate of saving. His claim is conditionedby his tautological belief that investment and savingare always equal, a concept which keeps him from appreciatingthe disruptive effect investment financed by newly-createdloans exerts on the productive structure. Nonetheless if arise in investment leads hypothetically to an increase in realincome, we may still wonder whether or not such an increasein income could stimulate enough growth in saving to permanentlysustain new investments initially financed by creditexpansion.We must remember that Hayek showed it to be practicallyimpossible for the income growth which arises from investmentfinanced by new credit expansion to provoke enoughvoluntary saving to sustain initial investment. Indeed if such64 Keynes, The General Theory, pp. 82–83; italics added.