Summary of Marxism Unmasked Lecture seven: Money, Interest, and the Business Cycle.

The seventh lecture in Mises's series on Marxism covers the general idea that is widely accepted today that capitalism is the cause of the booms and busts of economies. These busts, by and large, disproportionately affect those who cannot bear the burdens of inflation and unemployment, and for that reason, anti-capitalist explanations seem highly attractive.

Interest

Interests are not a new concept; Aristotle had an issue with it, saying, "Money cannot beget money.

" This erroneous idea was prominent for two millennia and used as the basis for the prohibition of interest-bearing loans. In many parts of Europe, the church was guilty of prohibiting interest-taking. They used the law of Moses to justify their position: "lend, hoping for nothing again."

According to Mises, we should not hold interest in a negative light. On the contrary, Mises explains, "interest stemmed from a general category of human action, that it arose out of the fact that all people by necessity, without any exemption, valued present goods higher than future goods."
In this sense, interest is not a predatory concept but merely the result of particular human choices.

The lack of understanding of interest's role in a market economy led many to attempt to reduce and vanish interest entirely by manipulating the money supply. The idea was if more money is made available for those willing to borrow it, then interests must fall. If the money supply increases enough, interests can disappear completely.

"There are actually socialist authors who believe this is the right way to bring about abundance, to create plenty for all, and make everybody rich."

Banking

In this lecture, Mises outlines two issues in banking practices: fiduciary media and credit expansion.

Fiduciary media is the receipts for gold issued by the holder of hold. It is a simple concept. Those who held gold in reserve for others realized they could issue more claim checks on that gold than gold held in reserve. These holders of the gold noticed that people would generally use their claim checks, rarely coming to claim the gold. The receipts were usually traded in the market at face value based on the reputation of the gold dealer.

Credit expansion is "...the most important economic problem of our age."

A similar concept, credit expansion, occurs when the banker lends more money to people than he receives from his depositors. Today this has become a standard practice known as fractional reserve lending. The reserve ratio denotes the amount of "vault cash" that bank must keep as a percent of all the bank credits (credit expansion) a bank issues out in new loans.

"What are the consequences of such operations?"

Mises regards this operation to be of little consequence when private banks can leverage their reputations to expand credit using fiduciary media. As long as the surplus could be returned to the bank of issue, there was a "check" or limit on this expansion. Predictably, the problems with this practice were augmented when governments invaded the practice. The government, being interested in lowering interest rates, issues more money than they receive from the public. In so doing, the idea that government could and should control the interest rate became mainstream.

"many even believed that the rate of interest was something produced by the greed of selfish money-lenders and that it was the duty of the government to fight against it."

If governments had not changed their ways and allowed the free development of prices and wages during the rise of capitalism, capitalism would not have developed. As a result, we would not enjoy today the developments of our age. Since the development of capitalism, governments and banks have worked together using the expansion of credit to manipulate the rate of interest in the market. They have not understood that there is no way to manage credit expansion and the needs of businesses. The expansion of credit creates demands for its use. Businesses have projects they are only willing to undertake if the credit is available at specific rates. When those rates become available, credit expansion creates the illusion of booming business! Lowering rates through credit expansion became a political tool for representative governments.

The Business Cycle

"Thus the decision to expand credit is very often influenced by the government that wants  to have "prosperity."

When businesses are misled by the extra capital they have acquired and choose to undertake new projects for which there was no actual market demand, the economy undergoes what is referred to as a market "boom."

How can we explain the economic crises that seem to result from these artificial booms?

Suppose a business has the capital to undertake a project that will cost him x amount. This amount of resources enters the market as the business acquires the capital goods required for that project. When credit expansion makes this new undertaking possible, the extra capital that enters that business creates a new unforeseen demand, raising the prices of the goods required to produce capital goods in that market. The higher cost gives everyone a sense of prosperity. But this state of affairs is not everlasting. Mises presents a dichotomy to explain how this situation is usually resolved: 1) the banks must continue to prop up the markets through further credit expansion. Or 2) the banks stop (for whatever reason they deem appropriate). Once the credit expansion ends, the business is left with higher prices but unable to pay for the continued production of its goods. As a result, the illusion of prosperity ends, and panic sets in as businesses fail. The depression begins because with high prices and no more extra demand, wages either fall or unemployment ensues. In this sense, the labor unions cause further damage because they protect the members' wages, but those wages cannot reflect the new market conditions.

Ultimately, credit expansion is a matter of civil rights! Representative governments can borrow against the labor of their citizens. In so doing, they behave according to that principle of human actions, which Mises opens the lecture. Of course, humans value present goods more than future goods. But the notion that governments and banks are in the rightful position to inflate the people's currency for their political and financial gain is the problem with the modern business cycle.

Omar Moreno wrote this summary. The text "Marxism Unmasked" may be acquired from Mises.org.