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

690 Money, Bank Credit, and Economic Cyclesrelative prices of the various kinds of input and on the methodsof production that will appear profitable. 132Hayek clarifies his position even further:All that is required to make our analysis applicable is that,when incomes are increased by investment, the share of theadditional income spent on consumer’s goods during anyperiod of time should be larger than the proportion bywhich the new investment adds to the output of consumer’sgoods 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. 133As a graphic illustration of our argument, let us supposethat the demand for fiduciary media increases, while the proportionin which economic agents wish to consume and investremains unchanged. 134 Under these conditions, economicagents must reduce their monetary demand for consumergoods, sell bonds and other financial assets and, especially,reinvest less money in the different stages of the productiveprocess until they can accumulate the greater volume of bankdeposits they wish to hold. Therefore if we suppose that thesocial rate of time preference has not altered, and we use asimplified version of the triangular diagrams from chapter 5to represent society’s real productive structure, we see that in132 Hayek, The Pure Theory of Capital, p. 378.133 Ibid., p. 394. This appears to be the extreme case of an increase in savingwhich manifests itself entirely as a rise in balances of fiduciary media,the case Selgin and White use to illustrate their theory. See Selgin andWhite, “In Defense of Fiduciary Media—or, We are Not Devo(lutionists),We are Misesians!” pp. 104–05.134 Such a situation is definitely possible, as Selgin and White themselvesrecognize when they affirm: “An increase in savings is neithernecessary nor sufficient to warrant an increase in fiduciary media.” Selginand White, “In Defense of Fiduciary Media—or, We are NotDevo(lutionists), We are Misesians!” p. 104.