The Austrian Theory of the Trade Cycle and Other Essays (LvMI)

by Richard M. Ebeling

it can be shown that such an artificial decrease of the rate of interest will induce the business leaders to indulge in an excessive lengthening of the process of production, in other words, in over-investments. As the finishing of a productive process takes a considerable period of time, it turns out only too late that these newly initiated processes are too long. A reaction is inevitably produced—how, we shall see at once—which raises the rate of interest again to its natural level or even higher. Then these new investments are no longer profitable, and it becomes impossible to finish the new roundabout ways of production. They have to be abandoned, and productive resources are returned to the older, shorter methods of production. This process of adjustment of the vertical structure of production, which necessarily implies the loss of large amounts of fixed capital which is invested in those longer processes and cannot be shifted, takes place during, and constitutes the essence of, the period of depression.