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Economic Theory of Bank Credit$
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L. Albert Hahn

Print publication date: 2015

Print ISBN-13: 9780198723073

Published to Oxford Scholarship Online: November 2015

DOI: 10.1093/acprof:oso/9780198723073.001.0001

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The Influence of Credit on Capital

The Influence of Credit on Capital

Chapter:
(p.94) (p.95) [2.]B. The Influence of Credit on Capital
Source:
Economic Theory of Bank Credit
Author(s):

L. Albert Hahn

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198723073.003.0005

Lowering interest rates lowers production costs causing an increase in production. The expansion of production causes an increase in labour demand, wages, and prices for raw materials which cause all other prices to rise as well. Production costs are only partially determined by wages. The price of goods will therefore increase disproportionally less than wages and wages will rise in real terms. The short-run effect wears off over time and is not effective in the long run. Credit creation countervails the labour-saving effect of more capital-intensive production; rising prices decrease the real incomes of capitalists, pensioners, and fixed-wage earners. Credit-fuelled production increases can theoretically occur as long as the labour force can be expanded, but in practice workers increasingly save rather consumer more. This causes a fall in prices and a contraction in production. The boom has reached its peak and the economy experiences a downturn.

Keywords:   business cycle, boom, downturn

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