Prosperity and Depression.pdf

Chap. II The D()Wn-f/~rn : Crisis 35 1arising from different causes, there is no such instantaneous andautomatic increase in demand at all, as we shall see presently.We shall discuss first the probable influences on total demandof such a partial breakdown under different circumstances irrespectiveof automatic counter-influences s~t up by the cause whichbrought about the breakdown. Afterwards we shall enquireabout the latter.A reduction in the level of output of a particular industry willreduce the earnings of the factors employed: the wage-bill willdiminish: and this will cause some decrease in the demand forwage goods. Ifsales go on for a while in the process ofliquidatingstocks, the proceeds may be used for·· repaying bank loans andother debts instead of being reinvested in the purchase of labour,materials, etc--and this will have a deflationary effect.We have furthermore to consider the repercussions on thesubsidiary industries. The magnitude of these repercussions willdepend on a number of circumstances. It will be greater ifthe reduction in output occurs unexpectedly than if it has beenforeseen. If the industry in question has been expanding forsome time and a further expansion has been anticipated, a correspondingexpansion in the subsidiary industry may come to asudden end and the repercussions may be very serious. Theconditions may vary in detail, international complications maycome into the picture-e.g., the·industries furnishing raw materialsand other means of production may be located in another (:ountrythan the industries using them-and thus many cases withquantitatively different reactions and repercussions are conceivable.In any case, howev~r, there is a clear tendency towards a reductionin the flow of money, a fall in total demand.This tendency will be intensified if the firms involved happento be heavily indebted to the banks. Ifa bank gets into difficultiesand proceeds to contract credit, we have a clear deflationarymove: we may refer to what has been said on earlier pages foran explanation of the consequences. But, even if no. bank is soseriously involved that it is forced to liquidate credit, difficultiesof an important industry or of.particular big fitms may be takenas a warning signal for caution and may make the banks morereluctant to grant or renew loans.