Prosperity and Depression.pdf

NaJr, and Casls of the ey,,,Part IIin connection with the production of producers' goods than inconnection with the production of consumers' goods.The first of these facts is -soJndubitable that it hardly calls forspecial statistical verification at this point. It is only necessaryto recall that production rises inthe upswing, falls inthedownswing,while prices in general (including factor prices, especially moneywages and prices of real estate-and" property rights) rise or remainconstant l in the upswing and faIl in the downswing. It followsthat the money value of production and of transactions rises and"falls. In other words, the volume ofwork which the medium ofexchange has to perform expands and contracts with the-rise and fallof the business cycle. MV, the quantity of money X velocity ofcirculation-i.I., the flow of money against goods or the aggregatedemand for -goods in terms of money per unit of time-growsduring prosperity--and- shrinks during ,depression. This propositionis certainlJ true of the -money value of production and themoney value of transactions relating to goods-of the cc industrialcirculation n, to -use-an expression of Mr. KEYNEs. _It may notalways be true-or at any"- rate irregular fluctuations may occurifstock-exchange-transactions (that is, the " financial circulation"in Mr. KEYNES' -terminology) are included.It should be noted that these· propositions do not follow fromthe definition of prosperity and depression, and are by no meansself-evident.- It -is_ not a logical necessity that fluctuations in thymaterial volume of production should -always be accompanied beparallel changes -in -its money· value. Fluctuation in real incomeneed not show itself by fluctuation in money income. Pricesmight conceivably fall during the upswing and rise during thedownswing.I That the contrary is true, that a higher national1 -The be.c;t-known case of constant or even falling prices is that of the1926-1929 boom in America. Even in this .case it was only true ofcommodity prices : factor prices and stock-exchange prices rose.S This has, e.g., clearly been overlooked by Mr. R. F. Kahn, in hisRejoinder to my Comments on his review of the first edition of this book.(Economic Journal, Vol. 48, June 1938, page 335, last sentence of secondparagraph.)• Where the -fall in the volume of production is due to a physicalobstruction of the process of production, unaccompanied by changes onthe money side, that_is what one would expect.