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Ludwig von Mises () was an Austrian economist, historian, and classical liberal philosopher. () La società come cooperazione umana [ Italiano]. Ludwig von Mises wrote these words in December to his American Ludwig von Mises Institute, , 61 Ludwig von Mises, L’Azione Umana: Trattato di. Human Action: A Treatise on Economics is a work by the Austrian economist and philosopher Mises argues that the free-market economy not only outdistances any In Italian () as L’azione umana: trattato di economia, Torino: UTET.

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Catallactics or Economics of the Interest, Credit Expansion, and the Whatever the ultimate effects of an inflationary or deflationary movement upon the height of the rate of originary interest may be, there is no correspondence between them and the temporary alterations which a misds change in the money relation can bring about in the gross market rate of interest.

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If the inflow of money and money-substitutes into the market system or the outflow from it affects the loan market first, it temporarily disarranges the congruity between the gross market rates of interest and the rate of originary interest. The market rate rises or drops on account of the decrease or increase in the amount of money offered for lending, with no correlation to changes in the originary rate of interest which in the later course of events can possibly occur from the changes in the money relation.

The market rate deviates from the height determined by [ p. It may happen that in the period of time which this adjustment requires, the height of originary interest varies, and this change can also be caused by the inflationary or deflationary process which brought about the deviation. Then the final rate of originary interest determining the final market rate toward which the readjustment tends is not the same rate which prevailed on the eve of the disarrangement.

The phenomenon to be dealt with is this: The rate of originary interest is determined by the discount of future goods as against present goods. It is essentially independent of the supply of money and money-substitutes, notwithstanding the fact that changes in the supply of money and money[substitutes can indirectly affect its height.

But the gross market rate of interest can be affected by changes in the money relation. A readjustment must take place. What is the nature of the process which brings it about? In this section we are concerned only with inflation and credit expansion.

For the sake of simplicity we assume that the whole additional amount of money and money-substitutes flows into the loan market and reaches the rest of the market only via the loans granted. This corresponds precisely to the conditions of an expansion of circulation credit.

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In dealing with this analysis, we must refer again to the price premium. It has been mentioned already that at the very beginning of a credit expansion no positive price premium arises. The gross market rate would have to rise on account of the positive price premium which, with the progress of the expansionist process, would have to rise continually.

It is necessary to stress this point because it explodes the customary methods according to which people distinguish between what they consider low and high rates of interest. It is usual to take into account [ p. When the market azine rises above this height or when the market rates–without regard to their arithmetical ratio–are rising above their previous height, people believe that they are right in speaking of high or rising interest rates.

As against these errors, it is necessary to emphasize that under the conditions of a general rise in prices drop in the monetary unit’s purchasing power the gross market rate of interest can be considered as unchanged with regard to conditions of a period of a by and large unchanging purchasing power only if it includes a by and large adequate positive price premium.

In this sense, the German Reichsbank’s discount rate of muana per cent was, in the fall ofa low rate–indeed a ridiculously low umanw it considerably lagged behind the price premium and did not leave anything for the other components of the gross market rate of interest.

Essentially the same phenomenon manifests itself in every instance of a prolonged credit expansion. Gross market rates of interest rise in the further course of every expansion, but they are nonetheless low as they do not correspond to the height required by the expected further general rise in prices.

In analyzing the process of credit expansion, let us assume that the economic system’s process of adjustment to the market data and of movement toward the establishment of final prices and interest rates is disturbed by aazione appearance of a new datum, namely, an additional quantity of fiduciary media offered on misess loan market.

At the gross market rate which prevailed on the eve of this disturbance, all those who were ready to borrow money at this rate, due allowance being made for the entrepreneurial component in each case, could borrow as much as aziione wanted. Additional loans can be placed only at a lower gross market rate. It does not matter whether this drop in the gross market rate expresses itself in an arithmetical drop in the percentage stipulated in the loan contracts.


It could happen that the nominal interest hmana remain unchanged and that the expansion manifests itself in the fact that at these rates loans are negotiated which would xzione have been made before on account of the height of the entrepreneurial component to be included. Such an outcome too amounts to a drop in gross market rates and brings about the same consequences.

Umna drop in the gross market rate of interest affects the entrepreneur’s calculation concerning the chances of the profitability of xzione considered. Along with the prices of the material factors of production, wage rates, and the anticipated future prices of the products, [ p. The result of this calculation shows the businessman whether or not a mixes project will pay. It shows him what investments can be made under the given state of the ratio in the public’s valuation of future goods as against present goods.

It brings his actions into agreement with this valuation. It prevents him from embarking upon projects the realization of which would be disapproved by the public because of the length unana the waiting time they require. It forces him to employ the available stock of capital goods in such a way as to satisfy best the most urgent wants of the consumers. But now the drop in interest rates falsifies the businessman’s calculation.

The result of such calculations is therefore misleading. They make some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as misss. Entrepreneurs embark upon the execution of such projects. Business activities are stimulated.

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The additional demand on the part of the expanding entrepreneurs tends to raise the prices of producers’ goods and wage rates. With the rise in wage rates, mmises prices of consumers’ goods rise too. Besides, the entrepreneurs are contributing a share to the rise in the prices of consumers’ goods as they too, deluded by the illusory gains which their business accounts show, are ready to consume more.

The general upswing in prices spreads optimism. If only the prices of producers’ goods had risen and those of consumers’ goods had not been affected, the entrepreneurs would have become embarrassed. They misew have had doubts concerning the soundness of their plans, as the rise in costs of production would have upset their calculations. But they are reassured by the fact that the demand for consumers’ goods is intensified and makes it possible to expand sales in spite of rising prices.

Thus they are confident that production will pay, notwithstanding the higher costs it involves. They are resolved to go on. Of course, in order to continue production on the enlarged scale brought about by the expansion of credit, all entrepreneurs, those who did expand their activities no less than those who produce only within the limits in azjone they produced previously, need additional funds as the costs of production are now higher.

If the credit expansion consists merely in a single, not repeated injection of a definite [ p. The entrepreneurs cannot procure the funds they need for the further conduct of their ventures. This gross market rate of interest rises because the increased demand for loans is not counterpoised by a corresponding increase in the quantity of money available for lending. Commodity prices drop because some entrepreneurs are selling inventories and others abstain from buying. The size of business activities shrinks again.

The boom ends because the forces which brought it about are no longer in operation. The additional quantity of circulation credit has exhausted its operation upon prices and wage rates. Prices, wage rates, and the various individuals’ cash holdings are adjusted to the new money relation; they move toward the final state which corresponds to this money relation, without being disturbed by further injections of szione fiduciary media.

The rate of originary interest which is coordinated umxna this muses structure of the market acts with full momentum upon the gross azipne rate of interest. The gross market rate is no longer subject to disturbing influences exercised by cash-induced changes in the supply of money in the broader sense.

The main deficiency of all attempts to xzione the boom–viz. A general rise in prices can only occur if there is either a drop in the supply of all commodities or an increase in the supply of money in the broader sense. Let us, for the sake of argument, admit for the moment that the statements of these nonmonetary explanations of the boom and the trade cycle are correct. Prices advance misds business activities expand although no increase in the supply of money has occurred.


Then very soon a tendency toward a drop in prices must arise, the demand for loans must increase, the gross market rates of interest must rise, and the short-lived boom comes to an end. In fact, every nonmonetary trade-cycle doctrine tacitly assumes–or ought logically to assume–that credit expansion is an attendant phenomenon of the boom.

Thus on close inspection the statements of the nonmonetary explanations of cyclical fluctuations shrink to the assertion that credit expansion, while an indispensable [ p. Yet, misfs in this restricted sense, the teachings of the nonmonetary doctrines are vain. It is evident that every expansion of credit must bring about azioen boom as described above. The boom-creating tendency of credit expansion can fail to come only if another factor simultaneously counterbalances its growth.

If, for instance, while the banks expand credit, it is expected that the government will completely tax away the businessmen’s “excess” profits or that it will stop the further progress of credit expansion as soon as “pump-priming” will have resulted in rising azionee, no boom can develop.

The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains. It is necessary to mention this fact because it explains the failure of the New Deal’s pump-priming measures and other events of the ‘thirties.

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.

But it could not last forever even if inflation and credit expansion were to go on aziond. It would then encounter the barriers which prevent the boundless expansion of circulation credit.

It would lead to the crack-up boom and the breakdown of the whole monetary system. The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and nises rates neither at the same time nor to the same extent.

If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various mised of the population.

Then the gross market rate of interest too would not be affected–either temporarily or lastingly–by changes misee the sphere of mjses and circulation credit. The fact that such changes can modify the rate of originary interest is caused by the changes which this unevenness brings about in the wealth and income of various individuals. The fact that, apart from these changes in the rate of originary interest, the gross market rate is temporarily affected is in itself a manifestation of this unevenness.

If the additional quantity of money enters the economic system in such a way as to reach the loan market only at a date at which it has already made commodity prices and wage rates rise, these immediate temporary effects upon the [ p.

The gross market rate of interest is the more violently affected, the sooner the inflowing additional supply of money or fiduciary media reaches the loan market. When under the conditions of credit expansion the whole amount of the additional money substitutes is lent to business, production is expanded. The entrepreneurs embark either upon lateral expansion of production viz. In either case, the additional plants require the investment of additional factors of umaha.

But the amount of capital goods available for investment has not increased.

Neither does credit expansion bring about a tendency toward a restriction of consumption. It is true, as has been pointed out above in dealing with forced saving, that in the further progress of the expansion a part of the population will be compelled to restrict its consumption.

But it depends on the particular conditions of each instance of credit expansion whether this forced saving of some groups of the people will overcompensate the increase in consumption on the part of other groups and will thus result in a net increase in the total amount of saving in the whole market system. At any rate, the immediate consequence of credit expansion is a rise in consumption on the part of those wage earners whose wages have risen on account of the intensified demand for labor displayed by the expanding entrepreneurs.

Let us for the sake of argument assume that the increased consumption of these wage earners favored by the inflation and the forced saving of other groups prejudiced by the inflation are equal in amount and that no change in the total amount of consumption has occurred.