The supply of loanable funds rises, interest rates fall, and entrepreneurs receive an accurate signal that real resources have been freed up for longer-term investment. The production structure lengthens—more capital-intensive projects become viable—and the economy's capacity expands sustainably.

This coordination mechanism is elegant precisely because no one controls it. Millions of individual decisions about saving and spending aggregate into a price—the interest rate—that guides investment across the entire economy. Hayek called this spontaneous order: no central planner needed, because the price signal carries all the necessary information.

On August 15, 1971, President Nixon closed the gold window, severing the last link between the dollar and any commodity anchor. The Federal Reserve—freed from the constraint of gold redemption—could now create money and inject it into credit markets at its discretion. The thermostat was not broken. It was switched off and replaced with a dial controlled by a committee.

Credit Expansion: Money Masquerading as Saving

Austrian business cycle theory predicts precisely what happens next. When a central bank expands credit, it floods the loanable funds market with newly-manufactured money. For entrepreneurs scanning interest rates, this looks identical to genuine savings: rates are low, funds are available, and long-term projects appear viable. They act accordingly.