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

Central and Free Banking Theory 689Therefore it is unsurprising that modern free-banking theoristsoverlook the Austrian theory of business cycles, since thistheory does not fit in with their analysis of the issuance of fiduciarymedia in a fractional-reserve free-banking system. Thesetheorists thus take refuge in an exclusively macroeconomic analysis(monetarist or Keynesian, depending on the case) and, atmost, use instruments which, like the equation of exchange orthe “general price level,” actually tend to conceal the truly relevantmicroeconomic phenomena (variations in relative pricesand intertemporal discoordination in the behavior of economicagents) which occur in an economy upon the expansion ofcredit and growth in the quantity of fiduciary media.In normal market processes, the supply of consumergoods and services tends to vary along with the demand forthem, and new goods generally reach precisely those consumerswhose subjective valuation of them has improved.However where newly-created fiduciary media are concerned,the situation is radically different: an increased supplyof fiduciary media never immediately and directly reaches thepockets of those economic agents whose demand for themmay have risen. Instead, the money goes through a lengthy,cumbersome temporal process, or transition phase, duringwhich it first passes through the hands of many other economicagents and distorts the entire productive structure.When bankers create new fiduciary media, they do notdeliver them directly to those economic agents who may desiremore. On the contrary, bankers grant loans to entrepreneurswho receive the new money and invest the entire amount withouta thought to the proportion in which the final holders offiduciary media will wish to consume and save or invest. Henceit is certainly possible that a portion of the new fiduciary media(supposedly issued in response to increased demand) may ultimatelybe spent on consumer goods, and thereby push up theirrelative price. We know (chap. 7, p. 552) that according to Hayek:[S]o long as any part of the additional income thus createdis spent on consumer’s goods (i.e., unless all of it is saved),the prices of consumer’s 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 the