Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIIn many respects, the contraction is the exact counterpart ofthe expansion, so that large parts of the analysis of the latter canbe adapted to explain the former.Suppose contraction has peen started for .anySpread of reason whatsoever (e.g., because a large constructiondeflation. schemewhichwas underway has had tobeinterruptedowing to inability to raise the necessary funds forfinancing it). Demand for construction materials and implementsfalls off, and production in the industries which· provide thosethings is curtailed. We might equally well take the case wherean act of deliberate deflation by the monetary authorities (whichagain may be due. to a great variety of reasons or motiyes) startsthe ball rollirig. In the section on the down-turn (crisis), thequestion of the possible or usual starters will be taken up. Herewe simply assume that a net contraction has been produced, andthat the total demand for goods in terms of money has shrunkby a considerable amount.When demand flags at various points, merchants will give lowerorders to producers, production will be curtailed and workerswill be dismissed. This reduces income. When incomes fall,the demand for all kinds ofgoods is further reduced and depressionspreads to other parts of the system.Like the expansion process, the contraction process will probablyproceed slowly at the beginning and then gather .momentum. 1At first, when demand has fallen offin the case of only a few commodities,the contraction may easily be stopped or reversedby favourable influences elsewhere. Later. on, when the demandfor a greater number of goods has fallen for some time andcontraction has spread to many parts of the system, expansionaryinfluences, which in the early stage of the process would have beenstrong enough to outweigh the forces of contraction, will no1 The spectacular events in the financial spherewhjch usually markthe tum from prosperity to depression should not be allowed to obscurethe fact that the downward movement of production and trade usuallytakes time to get under way. This was, e.g., the case after the crisis of1929. Ct. Slichter in Review of Economic Statistics, February 1937, on the1929 down-turn. In the autumn of 1937, the fall in production andemployment was much more rapid than in 1929, although there were nospectacular breakdowns in the financial sphere.