Prosperity and Depression.pdf

Chap. 10The Contrt#tion Pro&ISSmeasures of credit policy. Within the limits set by existingmonetary organisation and banking practice, the monetaryauthorities can regulate the supply of money. But, in orderto arrest a fall in MV during a contraction, it will frequentlybe necessary to regulate and stimulate demand as well as supply;and this may require very dmstic interventions, which are hardlypossible without' far-reaching changes in the present institutionalframework.We sha1l now analyse the contraction processCIllllIIIatm broadly in terms of our demand-and-supply schedfa/Iill ules of investible funds. It may be that not much;lIIIuf11JI1If. is gained thereby; but,. as the analysis recapitulates'the essence of the theories which explain the slumpby an excess of the market. rate ofinterest over the equilibrium orprofit rate, it may serve as an introduction to a n1.ore realistictreatment ,of the matter.'When the demand for goods in general falls and productionshrinks, the demand for investible funds falls too-i.I., thedemand curve shifts to the left. Assuming that the supplycurve is unchanged, and is fairly elastic over the givenran~ the new point of intersection will be to the left of theold one-i.I., the amount of investment is reduced. But wecannot assume that the supply of savings is as elastic as thesupply of investible funds. This means that part of the supplyof investible funds which is not taken up by the demand willbe diverted, not into expenditure on ·consumption goods, butinto hoards-i.I.) it will be withdrawn from circulation. .Hencethe total dema.t1d· for goods in terms of money faIls further,prices fall still lower and production and employment arereduced. This provides a further discouragement to the demandfor investible funds, and .the demand curve is shifted further tothe left.On the other hand, the contraction process isDtyilll;-tp bound to give rise to unfavourable -reactions on theof mpP!y supply side. Losses are made everywhere : defaultsof flllldr. and bankruptcies threaten or ~ctually occur. Theeffect is to '.make the banks an4 the investing publiccautious and pessimistic The risk of lending' rises and the