Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIlogical order the various possibilities and determining their mutualrelationship.Monetaryversusnon-monetarydisturbances.The purelYmonetaryexplanationof thedown-turn.We may distinguish two groups of disturbanceswhich may possibly be created by the expansionitself or, to speak more precisely, may be expectedto arise in the economic system in the course of anexpansion. (1) There may be a mechanism whichworks in such a way that a monetan expansion isafter a while turned into a contraction without the latter beinginduced by previous loss, orthe expectation ofloss,.in any particularindustry. In otherwords, there may beno difficultyinany particularindustry: cost may everywhere be covered by actual and expectedselling price; but there comes a hitch in the flow of money, thetotal· demand for goods falls off, and this gives rise to a cumulative.process of contraction. (1.) The other and (as we shall see) muchmore promising hypothesis is that, as a result ofthe maladjustmentsin the structure of production which are regarded as inevitable inany expansion, some particular industry or group of industries isforced to curtail output and employment, and thereby start ageneral CODtraction in the manner described in § 3 of this chapter.The first hypothesis may be called a purely monetary explanationof the down-tum, while the second has a non-monetary character.But it is not intended to attach special importance to thisterminology.We begin by discussing the first hypothesis.Under any monetary arrangement which implies alimitation of the quantity of legal tender money,such as the gold standard, there is an upper limit(gradually approached during the upswing) to theexpansion ofMV. This, as we have seen, explainsthe fact that the economic system becomes moreand more sensitive to deflationary shocks. It does not) however,explain why, 'in the absence of such shocks, an expansion ofMVshould immediately be followed by a contraction rather than bya period of stability in MV:Mr. HAWTREY (as was shown in the first part of this book) hasendeavoured to establish the existence of a monetary mechanismin which the mere cessation ofcreditexpansionleads toa subsequent