Prosperity and Depression.pdf

Chap. 4 The Debt-Deflation Theory lIS%. A much mote precarious proposition is thatOver-indebted- which regards the state of "over-indebtedness "ness may as the normal cause of.the collapse of the boon/.cause the What is meant by over-indebtedness? "Ove) .downturn. indebtedness means simply that debts are out-of-line,are too big relatively' to .other economic factors." JHow is over-indebtedness brought about? "It may be startedby many causes, of which the most common appears to befle1lJopportunities /0 ;1fPe./t at a big prospectilll profit, .••• such as throughnew inventions, new industries, development of new resources,opening of new .lands or new markets. Easy money is the greatcause of over-borrowing.":aIt seems clear that in these cases over-indebtedness is closelyconnected with over-investment. To say that the cause· of thebreakdown is dver-investment is the same thing as saying thatinvestments have been made which later turn out to be unprofitable: that is, in other words, sales proceeds do not cover cost, andone i~portant costitemis interest on £Xed and working capital. Theover-investment theory tries to showwhy this is the necessary consequenceofany inflationary boom, and how entrepreneurs are luredinto too heavy investments. Professor Irving FISHER) on the otherhand, stresses the fact that these over-investments have been madewith borrowed money. But clearly over-investment, rather thanover-indebtedness, is the primary cause of the breakdown. If theinvestments are excessive (in the sense that the structure of productionis not in equilibrium), then these enterprises will sufferlosses, whether they are financed with shares or with bonds, withborrowed capital or with the entrepreneur's own capital. Furtherinvestment will be stopped and deflation is likely to ensue. If, onthe other hand, the structure ofproduction is in equilibrium, thereis no reason why the indebtedness of the new enterprises shouldcause ~rouble. It may, however, readily be admitted that therepercussions of the breakdown of the investment boom are likelyto be much more severe where the investments have been financedwith borrowed money.1 Boontsand Dep'lessions, page II.I " The Debt-defiationTheory," loco cit., page 348. Italics in theoriginal.