Prosperity and Depression.pdf

Chap. IIThe Down-turn : CrisisIt may be argued that a decrease of investmentDelayed in a number of branches of industry will liberatereaction of investment funds, reduce the rate of interest, andinvestment. thus provide an incentive to invest the funds somewhereelse. But this is unlikely tohappenall atonce.Even in the most favourable case, where no business failures resultfrom the cessation of investment and no banks are affected so thatno special inducement to hoard is produced, there will usually be adelay between the new funds' becoming available and their use fornew investment. Investment plans are not always prepared inadvance, so that they 'can be put into operation at short noticewhen the situation changes. They must be planned; and, evenwhen they are planned, a certain amount of pteparatory· work isusually required before orders are given and the money is actuallyspent. Therefore, a temporary hQld-up in the flow of money isan eminently probable contingency.The same is true where a shift in demand is such that the increaseis to the advantage of foreign goods, while the decrease is· to the. disadvantage of home industries. ,We turn now to the case where the curtailmentRjse in fost ofoutput is due to an increase in cost items. Iftheas caNse capital cost, that is the rate ofinterest, rises becauseofapartial the hanks are forced to restrict credit or becausebreakdown. capital goes abroad, the situation is clear. Herethe rise in cost is the modus operandi ofa contractionin the supply of funds and the reduction in output caused therebywill intensify the contraction. There are,in this case, no automaticand instantaneous offsets provided by the crircumstance (viz.,the rise in cost) which is responsible for the reduction in output.Nor, again, is there any direct offset in the important case wherethe increase in cost is due to public intervention or to the monopolisticaction of the owners or producers of one of the means ofproduction. Suppose that wages are being raised by trade-unionaction or by Government decree and that this' rise in cost leadsto a reduction in output. In this case, no offset is provided againstthe deflationary influences set up by the reduction in output.The same will usually be true where the price ofa raw material orsemi-finished good is raised by the producers' monopolistic action.