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

552 Money, Bank Credit, and Economic Cyclesinvestment is to be upheld by a subsequent rise in voluntarysaving, economic agents will ultimately have to save absolutely allmonetary income derived from the new investment. In other wordswhen the portion of gross income shaded in Chart V-6 reachesthe pockets of consumers, they will have to save all of it. (Theshaded portion reflects the artificial lengthening and wideningof the productive structure, modifications made possibleby new loans the bank creates from nothing.) Obviously consumerswill almost never save all such income, since they willspend at least part (and usually the largest part) of the newmonetary income created by banks on consumer goods andservices. In accordance with the theory presented in detail inthe last two chapters, such spending will necessarily reversethe new investment processes of monetary origin, and the crisisand recession will hit. In Hayek’s own words:[S]o long as any part of the additional income thus createdis spent on consumers’ goods (i.e. unless all of it is saved),the prices of consumers’ goods must rise permanently inrelation to those of various kinds of input. And this, as willby now be evident, cannot be lastingly without effect on therelative prices of the various kinds of input and on the methodsof production that will appear profitable.Elsewhere in the same work Hayek concludes:All that is required to make our analysis applicable is that,when incomes are increased by investment, the share of theadditional income spent on consumers’ goods during anyperiod of time should be larger than the proportion bywhich the new investment adds to the output of consumers’goods during the same period of time. And there is of courseno reason to expect that more than a fraction of the newincome [created by credit expansion], and certainly not asmuch as has been newly invested, will be saved, becausethis would mean that practically all the income earned fromthe new investment would have to be saved. 6565 Hayek, The Pure Theory of Capital, pp. 378 and 394. In the footnote onpage 395 of the original English edition of The Pure Theory of Capital,Hayek emphasizes his thesis even more when he states: