Question about Mises' theory of money and credit, chapter 19.

Esuric posted on Sun, Jul 5 2009 3:13 AM

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As far as I understood it, or thought I understood it, an increase in the supply of fiduciary media must necessarily mean a fall in the market rate of interest relative to the natural rate. Since the demand for fiduciary media would be nonexistent at the natural or equilibrium rate, which is determined by the actual economic condition. But in chapter 19 of Mises' money and credit (chapter 19 is called Money, Credit, and interest) he says:

"An entrepreneur who is making big profits (here he means inflated profits) will be prepared if necessary to pay a higher rate of interest, and the competition of other would-be borrowers, who are attracted by the same prospect of increased profits, will make payment of a higher rate necessary. The entrepreneur with whom business is bad will only be able to pay a lower rate of interest and the pressure of competition will oblige lenders to be content with the lower rate. Thus a falling value of money goes hand in hand with a rising rate of interest, and a rising value of money with a falling rate of interest. This lasts as long as the movement of the objective exchange value of money continues. When this ceases, then the rate of interest is reestablished at the level dictated by the general economic situation." pg 387