Prosperity and Depression.pdf

Chap. 3 The Over-illtJ6slmmt Theories 101Two alternatives are open. for (liscussion. TheMethod new investments can be financed (a) by means ofof ftllalking current savings or (b) by way of inBation throughthe III. the creation of new bank credit and/or more inten·i1lllesfmtnl. sive utilisation of existing means of payment. Inother words, the increased investment mayor maynot be. consistent with the maintenance of the stability of themonetary circulation-i.e., of MV.Ad (a). Suppose that, with the working of the accelerationprinciple, a shift or an increase in the aggregate demand for finishedgoods affords new investment opportunities, but that the supplyof capital in terms of money is not increased by way of inflation.There is no elastic credit supply, and no hoards of any sort whichproducers can draw on. The consequence will be a rise in therate of interest. This willproduce a retrenchment ofinvestmentofreinvestment or new investment, as the case may be-indifferent branches of industry, offsetting the increased investmentin industries inwhich the demand for the finished product has risen.The aggregate demand for producers' goods cannot therefore rise.Ad (b). It is of course recognised by the leading exponentof the acceleration principle, Professor J. M. CLARK, that theprinciple cannot serve as an explanation of the business cycle,nor even as an incomplete and partial explanation, except inconjunction with an elastic credit supply. Unless it entails acredit expansion, an in~rease in investment in particular branchesofindustry cannot produce a general up-tum in business activity.]fthere has been an increase in the circulating.medium, income anddemand for finished goodswillrise; this willfurther stimulateinvesttnent,and so a cumulative process of expansion will be started.The acceleration principle is thus assimilated by the over.investmenttheory, and adds an important feature to the· picture of thec:ycle as drawn in the preceding sections.Ooser analysis reveals further points of connec­FNrfher: tion between the acceleration principle and thefonsiderations. over-investment theory.The, fact that durable instruments are requiredin order to satisfy current demand for finished goods or servicesJnay be characterised, in the terminology of the monetary over-