Prosperity and Depression.pdf

Chap. 10The Contraction Processthis may be due to a shrinkage in the quantity of money and lorto a decrease in its velocity of circulation. It must be possible todemonstrate that (1) a part ofthe monetary circulation is destroyedor leaves the country, and lor (2) money does not change hands sofrequently against goods, because it is hoarded or used for otherpurposes. (3) In addition to the factors mentioned here aseffecting a reduction in MV, or the flow of money against goods,it is conceivable that a deflationary influence may be exerted byanother development which does not affect the flow of money,but adds to the work which money has to do-and that is anincrease in the turnover of goods. Goods in general will in thiscase change hands for money more frequently in the course oftheir journey from the primary producer to the consumer. Thereis, however, no reason to believe that this disintegration of thestructure of production is a characteristic or necessary feature of;the downswing. l (4) Financial transactions may immobilise alarger part of the circulating medium, and>demand for goods falls.Forms ofWe have now to answer the questions: At whatpoint does the money leak out of the circulation?deflationary Where is it held up? Who hoards it? In whatpressure. shape is the money hoarded? How is it destroyed?It is possible to enumerate a number of formsin .which the monetary contraction may appear, beginning withthe more extreme and conspicuous cases and proceeding to theless conspicuous and more subtle ones. Not all of these forms ofmonetary contraction are regular Of unavoidable features ofevery cyclical depression. The attempt is here made to arrangethem approximately in decreasing order of regularity andconspicuousness.Deflation by the central bank is a straightforwardOutright case which does not require much comment. A restrictiondeftation ~'Ythe centraJbank.by the central·monetary authorities of thecirculation of gold coins, notes and short-term liabilities(central-bank money) means a decrease in theflow of purchasing power~un1ess counteracted byother ·forces : e.g., the substitution of bank credit for centralbank1 See Ha}ek : Prices ana Production. 2nd ed., pages! 18 et seq.