Ludwig von Mises on Money and Inflation.pdf - The Ludwig von ...

CHAPTER
SIXTEEN
Credit Expansion and the Trade Cycle
Now what is credit expansion Credit expansion is inflation also. e reason
for making a distinction between credit expansion and simple inflation
is because of the different effects that an additional quantity of money has
upon entering the economic system by the two different routes. In simple
inflation, the new money enters by spending on the part of government.
e government spends additional sums created, for instance, for
the purpose of carrying on a war. e effect of this spending is that prices
of the things the government buys go up and consumers start to hoard.
With credit expansion the additional quantities of money enter the economic
system, not through government spending, but through loans of
newly created credit to businessmen by the banks. So the prices of the
things businesses buy go up. is brings about a “boom” in business. If
this boom is not stopped in time, it develops into a great economic crisis.
is is the trade cycle, the most interesting phenomenon of the capitalistic
system.
e trade cycle is due to the fact that banks expand credit and this
credit expansion brings about an expansion of business. But as the quantities
of producers’ goods, capital goods, are not increased, there is an overexpansion
of some businesses, but not a general over-investment, as it is
called by some finance brokers, throughout the whole economy. e significant
characteristic of the boom is this over-expansion by the artificial
lowering of the interest rate in order to create the credit expansion. is
misleads businessmen into thinking that there is a greater amount of capital
goods available than actually exists, and that certain projects are now
possible which would have been impossible with a higher rate of inter-
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