Prosperity and Depression.pdf

Chap. 10 The E~pansion Processbe greater or less according as incomes are rising more or less fast,and, since the greater the proportion of income saved the slowerwill be the expansion of incomes, it follows that the higher theproportion of income saved the less will be the rate ofinvestment. at any given income level. But the expansion will cease whensaving catches up with investment, and the higher the proportionof income saved the lower will be the income level at which.theexpansion will cease. 1The general conclusion ofthe foregoing argument is that savingwhich is in progress during an expansion process tends to slow downthe expansion. Ce/eriJ paribtu, the more peoplC? save the slowerthe expansion, and the less they save the more rapid the expansion.It must, however, be kept in' mind, if seriousQuali- misunderstanding is to be avoided, that our analysisfica/ions. is limited at this point to the peculiar economiccircumstances which are supposed to prevail duringa typical upswing. We assume that a credit expansion is underway and, that the supply of investible funds from inflationarysources is to some degree elastic. Ifthat is so, then an increase inthe rate of saving leads to a slowing-down of the inflow of newmoney (inflation), and a decrease in the rate of saving to an accelerationof the inflow of new money. If the money supply iscompletely inelastic, the situation is different; for· in that casewe cannot assume that a deficiency in the supply of investiblefunds caused by a decrease in the rate ofsaving will be automaticallymade up, wholly or partly, by inflation. This is, however, notthe typical situation during the upswing, which is, Oft the contrary,characterised by an elastic money supply from inflationary sources.But, since (as will be shown in detail at a later point) this elasticityin the money supply is likely to diminis!l with the progress ofthe boom, the deflationary effect of saving is likely to become lessand less pronounced.1 Compare Mr. Harrod's treatment of the interactions of the accelerationprinciple (which he calls tI the relation ") and the propensity to save(or II the multiplier") in The Trade Cycle, London, 1936, Chapter 2.