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

A Critique of Monetarist and Keynesian Theories 599workers and owners of the original means of production, aswell as to their customers, whom they grant a period of severaldays or months to pay their debts. Logically, this creditcustomers receive always requires a prior sacrifice on the partof certain economic agents, who must reduce their consumptionand save the corresponding resources to make these easypayment terms possible. Hence customer credit cannot begenerated from nothing, but always obliges someone (theowners of the company offering the credit) to save first. In theabsence of distortions caused by bank credit expansion, creditinsurance fulfills a particularly important economic function.The large databases of credit insurance companies enablethem to classify customers according to their default risk.These credit insurance companies also provide legal collectionservices, taking advantage of significant economies of scalebeyond the scope of their individual clients.The problem emerges when bank credit expansion distortsall credit markets and provokes recurrent cycles of boom andrecession. In fact in the boom stage fed by credit expansion,multiple unrealistic investment projects are artificiallylaunched, and many market operations are financed in installmentsand covered by credit insurance. As a result, companiesspecializing in credit insurance take on systematic risks which,by their very nature, are not technically insurable. Indeed theprocess of expansion must reverse sooner or later, and widespreadbankruptcies, suspensions of payments, and liquidationsof unsuccessful investment projects will reveal the errorscommitted. Consequently, in modern economies subject to thedistorting effects of credit expansion, credit insurance is of acyclical nature, which prevents it from surviving recessionstages in the absence of a series of safeguard clauses to protectit from the same fate suffered on a large scale by overoptimisticentrepreneurs who unduly lengthen their investment projectsin the expansionary boom stage. Of these clauses the followingstand out: those which establish credit limits to buyers as wellas deductibles and waiting periods on the payment of claims,depending upon the amount, and that which requires an adjudicationof bankruptcy, which, due to the sheer length of bankruptcyproceedings, tends to involve a long delay, which