Prosperity and Depression.pdf

Chap. 8 'Recent Discussions on· the Traae Cycle 2.2.1however, not go into this matter more thoroughly, becauseMr. KErnEs himself (quite rightly,. it would seem) believes thatthis contingency of an "absolute liquidity-preference" is atheoretical possibility which has actually not yet arisen. "Butwhilst this limiting case", in which "the monetary authoritywould have lost effective control over the rate ofinterest" (and inwhich, we may add, no fall in wages and prices could depress therate of interest by releasing money from the transaction sphere),ee might become practically important in future, I know of noexample of it hitherto. Indeed, owing to the unwillingness ofmost monetary authorities to deal boldly in debts of long term,there has not been much opportunity for a test." 1 Nor, we maya.dd, has the alternative to a policy of increasing the quantity ofmoney-viz., a sustained fall of all prices and wages-been putto a real test. 1An almost perfectly elastic demand for idleSummary. balances up to a very considerable amount mayoccasionally occur, and has occurred temporarily(Mr. HAWTREY'S temporary credit deadlock), but the hypothesisthat it may exist indefinitely has not yet been put to the test of fact.aI Gene"alTheoyy, page 207. It must, however, be admitted that thereare many passages in Mr. Keynes' writings which are difficult to reconcilewith this pronouncement and seem to assume the actual· existence ofcases of an·insatiable desire for liquidity.• It should be understood that, according to Mr. Keynes' theory, thetwo policies are alternative means only in one respect, which is, however(in the present context). the important one. Both policies serve toincrease the quantity of money in terms of real purchasing power, " interms of wage units ", as Mr. Keynes says. On page 234 of his General,Theory, Mr. Keynes says, for example: " The only relief [for an excessiveliquidity preference-that is, for an extreme desire to hoard]-apartfrom changes in the marginal efficiency of capital--can come . . .from an increase in the quantity of money, or-which is formally the sametbing--a rise in the value of money. tt (Note that this passage containsan explicit statement to the effect that a fall in wages and prices willeventually bring relief. We wish, however, by no means to deny, nordoes Mr. Keynes, that in many other respects the two policies are verydifferent ahd cannot be regarded, from a practical point of view, as goodsubstitutes. Ct. § 5 of this chapter below.)• Chronic unemployment with stable money wages is no proof of anabsolute liquidity preference.