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

762 Money, Bank Credit, and Economic Cycles2. “The proposed system would largely decrease the amount ofavailable credit, thereby pushing up the interest rate and hinderingeconomic development.” This is the popular criticism most oftenexpressed, and it mainly comes from those economic agents(businessmen, politicians, journalists, etc.) who allow themselvesto be influenced chiefly by the external and most visiblecharacteristics of the economic system. According to thisobjection, if we prevent banks from creating loans ex nihilo,many companies will meet significantly greater difficulties inobtaining financing, and hence, ceteris paribus, the interestrate will rise and obstacles to economic development willappear. This objection stems from the fact that presently, dueto credit expansion, businessmen face little difficulty in securingfinancing for almost any investment project, no matterhow outlandish, assuming the economy is in a phase inwhich bankers are not afraid to expand their loans. Creditexpansion has altered the traditional habits associated withthe “entrepreneurial culture,” habits which rested on muchmore prudent, responsible, and careful consideration prior toa decision on whether or not to launch a particular investmentproject.At any rate, it is a grave error to suppose credit would disappearin a banking system governed by a 100-percent reserverequirement. Quite the opposite is true. Banks would still loanfunds, but only those funds previously and voluntarily savedby economic agents. In short, the proposed system wouldguarantee that only that which has been saved would be lent.The new arrangement would thus ensure coordinationbetween the supply and demand of present and future goodsin the market and, consequently, prevent the profound maladjustmentswhich the current banking system produces andwhich ultimately generate economic crises and recessions.Moreover the notion that the loan funds devoted to investmentin the current system can ultimately exceed society’svoluntary saving is a fallacy. As we know, ex post, saving isalways equal to investment, and if, ex ante, banks grant loans(through a process of credit expansion) at a faster pace thanthat of voluntary saving, entrepreneurs will simply tend to erren masse and allot the scarce, real resources saved by society