Prosperity and Depression.pdf

Chap. 10The Contraction ProcessB.' The Contraction Process§ 7. GENERAL DESCR.IPTION OF THE MECHANISMThe process of contraction, like the process ofROle of expansion, is cumulative and self-reinforcing. Oncedeflation. started, no matter how, there is a tendency for it to;w go on, even if the force by which it-was-provokedhas -in the meantime ceased to operate.'The -contraction may start from a state of full employment orpartial 'e~ployment; and the mechaoismis, in principle, the samein both cases.Deflation-in the sense of a gradual decrease in the total demandfor goods in terms ofmoney plays an essential role in the contractionprocess. ' Deflation must not) however, be interpreted in thenarrow sense of a deliberate act or policy on the part of themonetary authorities or commercial banks. A deflation in thisnarrow sense mayt of course) act as a starter to the process, and itusually comes in sooner or later as an intensifying element ; but,when the process has once got under .way, a sort of automati~deflation or self-defiation ofthe economic system (in contradistinctionto a deflation imposed on it by the monetary authorities) -isjust as much an effect as a cause.!1 Writers on the subject have frequently used the term "secondary"dellation. Their attention bas been concentrated mainly on the maladjustmentwhich,they maintain, is the cause of the crisis. They conceiveof the depression, not -as a cumulative self-reinforcing proceSs, but·as aperiod of adaptation during which the'economic system reverts to equilibriumand eliminates the maladjustments which have developed dur'ingthe preceding upswing and have been brought to light in the crisis.The defiation is regarded as an' unfortunate accident~ ,More recent writers have, however, come to realise increasingly thatthe above view is a misconception, that what it treats as an accidentalphenomenon is in fact the most important element in the depres~ion,thatthe deflation may continue long after the mala~justment by which itwas started has been removed, that it may be started by purely monetaryforces without anything being wrong with the structure of production.and that it does not revert directly to equilibrium, but, on the contrary,carries the economic system a.long way away from equilibrium.