Prosperity and Depression.pdf

Chap. 10The Contraction Processsecurities, real estate and commodities ofall sorts aga..inst cash, andhoard the proceeds of the sales. This has a double effect. Onthe one. hand, money is withdrawn from circulation (except inso far as the buyer ofthe assets manages to pay without decreasinghis other expenditure-e.g., if securities are taken up by bankswhich create deposits ag~st them), and the demand for goodsfalls offat some point. On the other hand, the price of the assetsin question is depressed, which may have serious repercussions.To this extremely important aspect we shall return later.Clearly, hoarding of gold and· bank notes by the public is nota feature of every cyclical depression. It happens only in exceptionallysevere .depressions and under special circumstances--e.g.,when the banking system is in bad shape, as in the United States ofAmerica in 1933, or when a Bight into foreign currencies takesplace, a$ in many European .States during recent years. Ifmoney hoarding by the public develops, naturally it bringswith it a severe intensification of the deflation.This probably has been, until now, an invariableContraction feature of any contraction in an economy with aof credit by fairly developed banking system. It is one of thethl &ommercial best known and most fully analysed aspects of thebanks. depression and need not long detainus~Since bank deposits are, under modern bankingorganisation, ·a means of payment·(bank money), a liquidation ofbank loans and deposits is a clear case of deflation. This processmay proceed in a slow and orderly fashion without spectacularbank failures, or rapidly to the accompaniment of bankruptcies.It may be hastened by pressure from above and below, from thecentral bank. and from a public that demands cash for its deposits.Whether such complications arise or not and whether in consequencethe contraction of credit goes ,a long way or not depends,not merely on the. seriousness of the disturbance by which thecontraction process was first set afoot, but also-and presumablyin many cases to a larger extent-on institutional and psychologicalcircumstances, on the policy pursued by the monetary authorities,on the international complications, on the methods of financingproduction (short-term or long-term. credit, equities or fixedinterest-bearingbonds), etc. . By way of example, the habit of