Review of Austrian Economics, Volume 10 by Murray N. Rothbard

Author:Murray N. Rothbard
Language: eng
Format: mobi
ISBN: 9781610165365
Publisher: Ludwig von Mises Institute
Published: 1997-11-06T16:00:00+00:00

Figure 3. Long-Term Bank Loans by Higher-Stage Industries 1981–1991 All Manufacturing Bank Loans = 100

Source: Quarterly Financial Report, Census Bureau and Federal Reserve

Figure 3 depicts long-term bank loans to higher-stage industries (represented by iron and steel, primary metals, and machinery) relative to total-long-term bank loans to all manufacturing industries, superimposed on the annual growth of the M2 money supply. Notice how two of these industries increased their loans, in relation to all manufacturing loans, dramatically during 1982 and 1983. The increase was 250 percent in iron and steel and 150 percent for primary metals. Machinery industries—much lower in the structure of production than primary metals—increased their borrowing only slightly during the expansionary period and were generally below industry averages thereafter.11

The fact that the increases in higher stage borrowing from 1981 to 1985 were based on the increased availability of capital funding rather than directly anticipated demand for increased output is shown by the statistics on industrial production during this period. The level of production in the iron and steel industry at the time was far below capacity (estimated at about 63.5 percent from 1981 to 1985)12 due to the low level of orders. Lower-stage industries, closer to the consumer, showed no such increased borrowing levels during this period of massive money supply increases.

With the benefit of hindsight, we know today that net shipments of steel mill products would never regain their 1981 levels during the following decade. Why did they expand their production? All that industry participants knew at the time was that funding for expansion was available. Iron-ore production, much closer to its direct customers than the iron and steel industry, did not invest in expansion during the period, and, in fact, closed down several of its operating mines.13

When the massive money-supply increases came to an end in 1986, the iron and steel industry collapsed. Prices of their product dropped every year as the higher-capacity and more-efficient new facilities competed with the older plants for what was essentially a disappointing demand.

For the copper industry 1981–1985 were turbulent years. They were years of bankruptcies, shut down mines, laid off workers. But financing was available. Despite massive losses in the industry, Standard Oil of Ohio invested $400 million to modernize Kennecott’s Utah Copper Division early in the period. After serious losses, the plant was shut down entirely in 1985.14

In looking at these figures, it is important to recognize that these numbers are industry averages only. Inside each number are dozens, or hundreds or thousands, of individual firms—some of which were borrowing heavily, others of which may have been doing nothing in the way of external financing. When the figures for an entire industry are shown to be at 270 percent of their previous level, this must mean that some individual firms had really increased their bank borrowing by a major amount. For primary metals, for example, bank loans in the first quarter of 1981 were listed at $4,010 million. By the first quarter of 1982, their level was $7,597 million. Iron and steel had a similar increase: from $1,832 million to $5,453 million.

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