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

662 Money, Bank Credit, and Economic Cyclesand the distortion caused by credit expansion (i.e., unbackedby a prior increase in real, voluntary saving) would bechecked. Nevertheless we cannot conclude that all discoordinationgenerated by the central bank would disappear, sincethe mere existence of the central bank and its reliance on systematiccoercion (the imposition of legal-tender regulationsand a set monetary policy) would still have a damaging effecton the processes of social coordination.In this example the most critical discoordination would beintratemporal, rather than intertemporal, 89 because new moneycreated by the central bank and placed in the economic systemwould tend to affect the relative-price structure “horizontally.”In other words it would tend to engender a productive structurewhich, horizontally speaking, would not necessarily coincidewith the one consumers wish to sustain. A poor allocation ofresources would ensue, along with a need to reverse the effectsnew injections of money would exert on the economic system. 9089 Nonetheless we cannot completely rule out the possibility of intertemporaldistortions in this case. Even if banks are required to maintain a100 percent reserve, intertemporal distortions will inevitably occur if thecentral bank injects new money into the economic system via massiveopen-market purchases which directly affect securities markets, rates ofreturn, and hence, indirectly, the interest rate in the credit market.90 F.A. Hayek has explained that unemployment often stems from theexistence of intratemporal discrepancies between the distribution of thedemand for different consumer goods and services and the allocation oflabor and the other productive resources necessary to produce thesegoods. The creation and injection of new money by the central bank atdifferent points in the economic system tends to produce and aggravatesuch qualitative discoordination. This argument, which is illustratedand reinforced by fractional-reserve banking to the extent that it combinesintratemporal distortion with far more acute intertemporal discoordination,would still carry weight even if the central bank were todirect a banking system which operated with a 100-percent reserveratio. In this case any increase in the money supply brought about by thecentral bank to achieve its monetary-policy goals would always horizontallyor intratemporally distort the productive structure, unless (andthis is inconceivable in real life) the new money were equally distributedamong all economic agents. In this case the rise in the quantity of