Prosperity and Depression.pdf

AnalYsi.r of Theorie.rPart IThe two pairs of curves, relating to saving and investment onthe one hand and to credit or claims on the other, are interrelated,but they are not identical. How are they interrelated? Thesupply of credit (= demand for claims-e.g., for bonds) is notequal to planned savings (the supply of saving), because" it ispossible to plan to save and to increase the quantity ofcash insteadof lending. Also, one can plan to extend new credits in excessof planned savings if one is willing to reduce one's own quantityof cash."1Similarly, the demand schedule for credit is not identical withthe curve for planned investment, because there may be a " desireto vary the cash held, to cover expected losses or to financeconsumption ". 2Obviously, a similar proviso as for " increases " or " decreasesof cash " held (in other words, for hoarding and dishoarding)must be made for changes in the quantity of money made by thebanking system or the Govemment. An increase in the quantityof money has the same effect as a reduction in cash holdings ofsome individuals : it increases the supply of credit beyond ex ant,saving. The case ofa decrease in the quantity ofmoney is similar.- Taking everything into account, it would seemDiagrammatic that Professor OHLIN'S theory can be preciselyexposition. stated in the words of Mr. A. P. LERNER:"The rate of interest is the price that equatesthe supply of C credit '~ or saving plus the net increase in theamount of money in· a period, to the demand for ' credit " orinvestment plus net Choarding' in the period. . This isillustrated by [the follOWing] Figure 7.1 Lac. cit., page 425. There are some other possible differences betweensupply of credit and ex ante saving. "Besides, one can plan to extendcredit instead of reinvesting , capital made free '-i.e., ' depreciationmoney' " (page 425). A failure of reinvesting depreciation quotas canevidently be treated as negative investment, and could accordingly bededucted from the investment curve (demand curve for credit, of whichthe investment curve constitutes an element), instead of being added tothe supply of credit.I Ibid. The latter two it~ms could be considered as negative savingand thus be deducted from the· supply curve (curve of ex ante saving),instead of being added to the demand curve (curve of ex ante investment).