We are now able to identify the modifications, if any, to be made to our analysis when, as in modern economies, a significant portion of the credit expansion banks bring about without the support of voluntary saving takes the form of consumer credit. This analysis is of great theoretical and practical importance, since it has at times been 
argued that, to the extent credit expansion initially falls on consumption and not on investment, the economic effects which trigger a recession would not necessarily appear. Nevertheless this opinion is erroneous for reasons this section will explain.
It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of so called “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption.
Hence we have only to consider how to revise our theory of the business cycle if a significant portion of credit expansion is devoted (contrary to the usual practice) to financing not durable consumer goods, but the current consumption of each financial year (in the form of goods and services which directly satisfy human needs and are exhausted in the course of the period in question). Substantial modifications to our analysis are unnecessary in this case as well, since one of the following is true: either credit expansion satisfies a more or less constant demand for credit to finance existing direct consumption in the economic system, and given that credit markets are like “communicating vessels,” such expansion frees the capacity to grant loans in favor of the stages furthest from consumption, thus instigating the typical processes of expansion and recession we are familiar with; or the loans exert their impact on current consumption while no additional capacity is freed for granting loans to industries from the stages furthest from consumption.
Only in this second case, insignificant in practice, is there a direct effect on the monetary demand for consumer goods and services. Indeed the new money immediately pushes up the prices of consumer goods and diminishes, in relative terms, the prices of the factors of production. The “Ricardo Effect” is set in motion, and entrepreneurs begin to hire more workers, in relative terms, and substitute them for machinery. Thus a trend toward the flattening of the productive structure is established without a prior expansionary boom in the stages furthest from consumption. Therefore the only modification to be made to our analysis is the following: if consumption is directly encouraged through credit expansion, the existing productive structure furthest from consumption clearly ceases to be profitable in relative terms, creating a trend toward the liquidation of these stages and the general flattening of the productive structure. This constitutes an economic process of impoverishment which initially manifests itself in a bubble, not only due to the increased consumer demand, but also because many entrepreneurs try to complete the investment projects they have already committed to. This process is just the opposite of the one we examined at the beginning of chapter 5, where we studied the beneficial effects an increase in voluntary saving (or a decrease in the immediate consumption of goods and services) exerts on economic development.
At any rate credit expansion always gives rise to the same widespread malinvestment in the productive structure, whether by artificially lengthening the existing structure (when expansion directly affects the most capital-intensive stages, financing durable consumer goods) or shortening it (when credit expansion directly finances non-durable consumer goods).
