Prosperity and Depression.pdf

Chap. 10 The Contraction Process 33SBut, evenifdebts (credits) other than bank debts (credits) do notcirculate as money, they may be highly liquid assets-the degree ofliquidity depending on the standing ofthe debtor and the situationof the market. Therefore, such debts are used as liquidityreserves; and when during a process of general contractionthey diminish in quantity or lose their saleability, they canno longer adequately fulfil this function and must be ..replacedby money, bank 'deposits, or central bank money. The demandfor money increases, its velocity of circulation tends ·to fall,and total demand shrinks according to the process previouslydescribed.Forced salesof assets/0 repaydebts.The liquidation of debts in general has, however,yet another aspect, which is of great significance.When a debtor is pressed to repay a loan, he isnot always in a position to meet his obligationout of his current receipts. Ordinarily, he will beforced to sell assets in order to raise the fund, forthe discharge of his debt. He may sell securities, real estate, orcommodities of different descriptions. These forced sales musthave a depressing influence on the price ofthe assets,with deflationaryconsequences.It is important to realise clearly why it is that such forced salesand the consequent price-falls produce or intensify deflation. Itmight be argued that these transactions themselves (i.e., the salesand purchases of such .assets) absorb money, temporarily at least,and withdraw it from other uses. Purchasing power whichotherwise would have been spent for new investment or forconsumption is now spent for old securities and other assets whichare thrown on the market by harassed debtors. In the terminologyof Mr. KEYNEs' Treatise on Money, we may say that ". the financialcirculation is stealing money from the industrial circulation ".It would seem, however,'that this temporary absorption of purchasingpower in theaetual transference of assets is a comparativelyunimportant factor in the general scheme. A much moreimportant factor is the indirect influence of the fall in the pricesof the assets in question. If the price of securities falls, this isequivalent to a rise in the interest rate; and this must obstruct thefinancing ofnew investment through the issue of securities (bonds