Prosperity and Depression.pdf

Nature andCause.r of the CyclePart IIand currency instability recedes. All this tends to make lenderswilling to lend at lower interest rates ft1nds which they had keptin cash or other liquid forms.. It is impossible to generalise as to the timeTime sequence of these various changes. The changesequence. on the supply side may precede the revival indemand and, once the process has started, one factortends to stimulate the others. If, with a rising deman~, people areinduced to disgorge the content of their hoards on the capitalmarkets, it may very well happen that for a considerable time therising demand for credit and rising prices and production goparallel with falling interest rates-a development which, superficiallyregarded, might seem to contradict all accepted principlesof economic theory. 1 The situation in the gold- and sterling-blDGcountries in 1933 to 1936 seems to offer a good illustration.In the sterling bloc, continued recovery, rising transactions anddemand have been coupled with comparatively low or evenfalling interest rates. In the gold countries, contraction andliquidation have been accompanied by comparatively high interestrates and a tight capital market. 8It is extremely important to realise from theVolatility beginning that both the demand curve and theof demand supply curve· for investible funds are subject tofor funds. frequent and rapid shifts. They are influenced,not only by technological factors--e.g., by a newinvention or the qestruction of instruments by wear and tearor fire· tending to move the demand curve to the right, whichis tantamount (loosely speaking) to increasing the demand forfunds-but also by "psychological" factors (optimism andpessimism),.changes in demand for particular goods~ etc. Much1 This can be expressed in Keynesian terms by saying thattheliquiditypreferenceschedule shifts, or that the liquidity preference of the communityas a whole becomes weaker. The transaction motive to hold moneyhas become stronger ; but this is over-compensated by anoppositechangein the speculative motive; M 1increases; M s decreases. For details seeChapter 4, § 3·t This explains also the fact that sometimes increased borrowing bythe State for unproductive purposes (e.g., armaments) makes the moneyand capital market more rather than less liquid.