Prosperity and Depression.pdf

334 Nature and' Causes of the Cycle Part IIliquidity, and makes things worse than they were. Gradually,however, with the fall in prices and wages and the curtailment ofproduction, funds are liberated and-it may be, not till aftera succession of setbacks and relapses-liquidity. increases allround.Needless to say, the policy of the central and commercial banksis a decisive factor. By supplying or withholding additionalfunds, they can intensify or mitigate the consequences of privatehoarding. Both factors-viz., banking and monetary policy onthe one hand and the liquidity policy ofindustrial and commercialfirms on the other hand-interact in a complicated way. But itis nevertheless important to realise that the policy of the latteri.e.,the hoarding by private business firms-is an independentfactor which may make itself felt and provoke a generalcontraction, even in a pure cash economy with no bank moneyat all.Quite apart from bank debts, a strong deflationaryLiquidation effect is probably exercised, at least in the firstof non-bank stages of the cyclical contraction, by the liquidadebts.tion of inter-personal and inter-business debts.But the connection between the liquidation ofdebt in general and the decrease in the flow of money againstgoods is more complicated and indirect than in the case of bankdebts.The debts of a bank to its customers (that is, its deposits) arenormally used as money. The owner treats them as cash: theyconstitute· purchasing power and have a velocity of circulation.Hence the extinction of such debts through bank failures Otthrough a contraction of bank credit diminishes purchasing powerand demand for goods. Other debts may, of course, perform thesame function. A bill may circulate as money; and its settlementhas then the same effect as the liquidation ofa deposit. These cases,however, we may safely regard as quantitatively unimportantunder our present monetary and banking arrangements (althougheconomic history can show instances where they have been important).Usually it is in a less direct way that the liquidation ofdebts-or, if we prefer to take it from the opposite angle, credits-exerts its deflationary influence.