No economic crisis and consequent recession hit when the lengthening of the stages in the productive structure, a process we studied in the last chapter, results from a prior increase in voluntary saving, rather than from credit expansion banks bring about without the backing of any growth in real saving. Indeed if a sustained rise in voluntary saving triggers the process, this saving prevents all of the six microeconomic phenomena which spontaneously arise in reaction to credit expansion and which reverse the artificial boom that credit expansion initially creates.

In fact, in such a case there is no increase in the price of the original means of production. On the contrary, if the loans originate from an upsurge in real saving, the relative decrease in immediate consumption which this saving invariably entails frees a large volume of productive resources in the market of original means of production. These resources become available for use in the stages furthest from consumption and there is no need to pay higher prices for them. In the case of credit expansion we saw that prices rose precisely because such expansion did not arise from a prior increase in saving, and therefore original productive resources were not freed in the stages close to consumption, and the only way entrepreneurs from the stages furthest from consumption could obtain such resources was by offering relatively higher prices for them.

In addition if the lengthening of the productive structure derives from growth in voluntary saving, there is no increase in the price of consumer goods which is more than proportional to a corresponding increase in the price of the factors of production. Quite the opposite is true; at first there tends to be a sustained drop in the price of these goods. Indeed a rise in saving always involves a certain short-term drop in consumption. Hence there will be no relative increase in the accounting profits of the industries closest to consumption, nor a decrease in the profits, or even an accounting loss, in the stages furthest from consumption. Therefore the process will not reverse and there will be nothing to provoke a crisis. Moreover as we saw in chapter 5, the “Ricardo Effect” plays a role, as it becomes advantageous for entrepreneurs to substitute capital equipment for labor, due to the growth in real wages following the relative decrease in the price of consumer goods, which in turn tends to arise from an upsurge in saving. Market rates of interest do not mount; on the contrary, they tend to decline permanently, reflecting society’s new rate of time preference, now even lower, given the increased desire to save. Furthermore if a component is to be included in the market interest rate to compensate for a change in the purchasing power of money, when voluntary saving climbs, the component will be negative. This is because, as we have seen, the tendency is toward a fall in the price of consumer goods (in the short- and long-term), which tends to drive up the purchasing power of money, an event which will exert even further downward pressure on nominal interest rates. In addition economic growth based on voluntary saving is healthy and sustained, and therefore entrepreneurial and risk components implicit in the interest rate will also tend to drop.

The above considerations confirm that the recession always originates from an absence of the voluntary saving necessary to sustain a productive structure which thus proves too capital-intensive. The recession is caused by the credit expansion the banking system undertakes without the corresponding support of economic agents, who in general do not wish to augment their voluntary saving. Perhaps Moss and Vaughn have most concisely expressed the conclusion of the entire theoretical analysis of this process:

Any real growth in the capital stock takes time and requires voluntary net savings. There is no way for the expansion of the money supply in the form of bank credit to short-circuit the process of economic growth.¹

 ^1.Moss and Vaughn, “Hayek’s Ricardo Effect: A Second Look,” p. 535.