Prosperity and Depression.pdf

Chap. 10 The Contraction Process 333factor. On the contrary, the contraction of credit may persisteven after the banks have stopped pressing for the repaymentof loans, the reason being that there are other, more subtle,forms of deflation than those so far discussed. To these wenow turn.Industrial and commercial enterprises tend, likeHoarding by the banks, during a. general contraction to increaseindustrial and their liquidity : that is, they endeavour to strengthencommercial their cash reserves and to reduCe their debts withfirms. the banks. (The liquidation of other than bankdebts, which is not so closely·connected with theextinction of purchasing power as the liquidation of bank debts,will be discussed below in connection with certain aspects of theliquidation of debts in general.)There is atwofoldmotive behindthis attempttoincreaseliquidity.There is,first, the uncertainty as to the possibility of raising fundswhen they are·needed to meet liabilities falUng due.· During aperiod of contraction, especially in its initial phase, it is difficult toget credit from the banks or from the suppliers of raw materialand other means of··production. There is the danger that suchcredits may be difficult to renew. In addition, one is not sure ofbeing paid punctually by one's own debtors. All this makesincreased liquidity seeIll- advisable. SecondlY, there is the fact that, .when prices fall.and losses are made and further losses are expected,the replacement of fixed and working capital (reinvestment), aswell as new investment whi~h may have been contemplated beforethe situation became too bad, is postponed or suspertded forthe time being. It does not pay to invest or reinvest; and,instead, idle balances are accumulated, or· bank loans repaid evenwhen the banks are no longer pressing for repayment. (Inextreme cases, of course, the .hoarding may be e~ected in theform ofbank notes or gold rather than through the accumulationof idle bank balances and the repayment of bank loans.)The immediate effect is in all cases the same, whatever may bethe motives for, and the form o~ the pursuit ofliquidity. Demandfor goods shrinks, prices fall, production is curtailed and thegeneral situation is aggravated. So the initial achievement ofgreater liquidity creates a need for further steps to maintain