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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 775expected future evolution of the purchasing power of money.However in this respect it is only important that in practiceeconomic agents be able to easily predict the evolution of thepurchasing power of money and to take it into account whenmaking decisions. This would be sufficient to avert the sudden,unjustified redistribution of income between creditorsand debtors which in the past has always accompanied theexpansionary credit or monetary shocks economic agentshave failed to foresee in time.It has been argued that if the supply of specie grows lessrapidly than economic productivity, the consequent rise in thepurchasing power of the monetary unit (or decrease in thegeneral price level) may, under certain circumstances, evenexceed the social rate of time preference incorporated in themarket rate of interest. 77 Although the social rate of timepreference depends on humans’ subjective valuations, andthus its evolution cannot be theoretically ascertained inadvance, we must recognize that if it drops to very low levels,due to a substantial rise in society’s tendency to save, theabove effect could actually appear on occasion. However marketrates of interest would under no circumstances reach zero,much less a negative number. To begin with, the well-knownPigou effect would become evident: the increase in the purchasingpower of the monetary unit would boost the value ofthe real cash balances held by economic agents, whose wealthwould grow in real terms and who would increase their consumption,thus pushing the social rate of time preference backup. 78 In addition, entrepreneurs would always find financing,via a positive interest rate, for all investment projects whichgenerated the expected accounting profits in excess of the rateprevailing in the market at any given moment, no matter howlow. We should keep in mind that gradual reductions in the77 This is the argument C. Maling presents in his article, “The AustrianBusiness Cycle Theory and its Implications for Economic Stability underLaissez-Faire,” chapter 48 of J.C. Wood and R.N. Woods, Friedrich A.Hayek: Critical Assessments (London: Routledge, 1991), vol. 2, p. 267.78 On the Pigou effect, see Don Patinkin’s article, “Real Balances,” TheNew Palgrave: A Dictionary of Economics, vol. 4, pp. 98–101.