Loan interest is just one category of the general phenomenon of present money trading at a premium for future money. The other category is the production structure of the economy. Entrepreneurs pay to buy factors of production in the present to earn a rate of return by selling their output at higher prices in the future. So, if this assertion about expanding money were true it would apply to all production in addition to contract loans.
There are two basic problems with this assertion. First, it fails to account for the demand for money or, as the neoclassical economists say, the velocity of money. The total expenditures in an economy over some time period depend both on the stock of money and how many times each unit of money is spent over the same time period, i.e., the demand for money. With a given money stock, total expenditures can be larger if the velocity of money increases, i.e., the demand for money declines.
Second, the interest rate, i.e., the price spread between input prices and output prices is independent of the stock of money. If the money stock in an economy were twice as large, then both buying prices of inputs and selling prices of outputs would be twice as high leaving the price spread the same. If the money stock were half as large, then both buying prices of inputs and selling prices of outputs would be half as high leaving the price spread the same. Put another way, prices adapt to any stock of money. So, even if the money stock shrinks, prices can fall sufficiently to allow every exchange to take place that took place before the money stock fell, including loans.
Take a look at Tom Woods on the issue:
Here’s Tom and Bob Murphy:
And Gary North: