Prosperity and Depression.pdf

;;8 Nature and Causes of the Cycle Part IIIt is even conceivable that the direct effect is rather inflationarythan deflationary. If the assets sold to cover losses are taken upby the banks and new deposits are created against them, or ifsomebody else is tempted to dishoard in order to buy them, theflow of money may be increased rather than decreased.We are left with the conclusion that we have here no new formof deflation. It is the losses which tend to bring about deflationand not the fact that losses are covered by the sale ofassets. Onthe contrary, the effect may even be to mitigate the force of thedeflation. The alternative method of coping with losses-viz.,retrenchment of expenditure-is certainly in its immediate effectin a higher degree deflationary.Sales ofsecurities,etc.,forfearof a fall intheir price.If the sales of securities and other assets areinduced, not by the necessity for repaying debtsor covering losses, but by the speculative motivethatis, by the expectation that prices will fall, or inother words that the value of money will rise-wehave a deflationary move pure and simple. It is,however, important to note that what makes fordeflatio~ is not the demand for money for the p\lrpose of thesetransactions, but the tendency to hoard-i.e., to change less liquidassets into more liquid assets and to keep the latter unspent. Itdoes not matter much whether the seller performs the act ofhoarding after having'disposed of the assets at a low price orwhether the price of the assets falls without any transaction'shaving taken place. When·everybody is equally pessimisticabout the future trend of security prices, prices will quickly fallall round without any securities changing hand at all. On thestock exchange, this is a well-known phenomenon. Prices are" talked down " on a bear market, ifthere is a consensus ofopinion.If there are actual transactions, that is because the consensus ofopinion is not complete, those who buy being less pessimisticbeing spent on real goods. Whether they buy old securities and coverlosses or new securities and finance new investment, they reach thecommodity market at the same time.It is unlikely, however, that this difference is of much practical impor~tance.