Prosperity and Depression.pdf

CHAPTER 2THE PURELY MONETARY THEORY§ I. PRELIMINARY. REMARKSMoney and credit occupy such a central positionCyclical in our economic system that it is almost certain thatf1uctllafjons they play an important role in bringing about theof· MV. business cycle, either as an impelling force or as a.conditioning factor. During the upswing, thephysical volume of production and of transactions grows whileprices rise or, in some rather exceptional cases, remain constant.)This means that the money volume of transactions rises. Duringdepression, the money volume of transactions falls. In otherwords, the work which money must and does perform rises andfalls with the ups and downs of the business cycle.. It follows,then, that the product (MV) of the quantity of money (M) and itsvelocity of circulation (V) rises and falls. This does not necessarilymean that the rise and fall ofM and lor V is inall cases the activecause of changes in business activity : it may equally well be apassive condition or even a mere symptom. It is conceivablethat MVmay adjust itself automatically to changes in the volumeof business without exerting any influence by itself. But, in anycase, the analysis of a theory which puts the monetary f~~or atthe centre of its scheme of causation will almost certainly reveal1 The outstanding example of a boom without a rise in prices is theAmerican boom of 1926-1929. The stability of prices was, however,confined to the wholesale-price level. A more general price index (asconstructed by Mr. carl Snyder) shows a marked rise.I It should be noted that this is not implied by the definition of prosperityanddepression. Itis conceivable thatthe riseandfall ofthevolumeof production mi~ht be accompanied by an opposite movement of prices,80 that the money value of the volume of production or of transactionsin general would remain constant or even vary inversely with the physicalvolume.