Prosperity and Depression.pdf

Chap. 10The Contraction Processlonger be sufficient to reverse the downward movement, but willmerely slow it down. This is what is meant when we say that" the process has gathered momentum".After the process has .continued for a while,Intensifying intensifying factors are likely to come into play.ftKlors. Prices will soon begin to fall, and losses will bemade everywhere, because wages and other costitem..; cannot readily be reduced. There will be a strong tendencyto reduce stocks and to curtail orders and purchases by more thanthe apJount by which sales have gone down. A sustained ·fallin demand and prices is bound to create in·the business world amore pessimistic outlook in general and an expectation, whetherjustified or not, of a further fall in prices. The profit rate willbe reduced all along the line, and new investment or reinvestmentof amortisation quotas will be curtailed. Nobody dares toembark on ambitious schemes of investment; and this willintensify the tendency to reduce commodity stocks and to increasemoney stocks;, that is to hoard-the counterpart of the tendencyto dishoard during expansion.It is important to note that such a contraction process canhappen even in a ·pure cash economy with constant quantity ofmoney (M). In a modern banking and credit economy, powerfulintensifying factors come in. If a large part of the circulatingmedium consists of bank· money (demand deposits subject tocheque) and ifthe banking system as a whole or a number ofindividualbanks get into difficulties, the banks will restrict credit. Theywill call in outstanding loans and be reluctant to grant new ones,and as a consequence M will shrink. Ifa run on the banks occurs-if, that is to say, depositors want to change their deposits intonotes-the d~flation becomes still more serio1;ls. The same mayhappen in the international sphere. There may be ~ run on thecentral bank in order· to exchange notes for coins and foreignmoney-that is to say, gold hoarding may develop or a flight'ofCapital may intensify the deflation.Owing to the rigidity ofa number ofcost items, each decrease inthe t,otal demand for goods in tenDS of money is followed by acertain shrinkage in production, and any reduction in the productionof finished goods tends to be translnitted with· increasing