Prosperity and Depression.pdf

Nature and· Causes of the CyclePart nsituation assumed, find an immediate· outlet in new investment.It should be noted that this disrupting effect ofa cessation ofmonetary expansion is independent of: (a) any credit restrictionwhich the banks may be forced to make for the reason given byMr. HAWTREY; (b) the fact that, when MVis no longer rising, theeconomic system becomes sensitive· to chance deflationary shocks(as explained in § 4 ofthis chapter); and (c) the fact ofa substantial.rise in prices having taken place. The setback may occur in acompar~tively early phase of the upswing, when supply of factorsis still fairly elastic and prices have not perceptibly risen. Ifpriceshave gone up for a while and producers in various industrieshave been led to expect a further rise, the disappointmentcaused by the cessation of expansion and of the rise in priceswill be all the greater; but the rise in· prices is not an essentialcondition.In this case, the collapse of the boom and the onset of thecontraction could be avoided, for the time being, by removing thehindrances to a further expansion of credit. (Whether this isfeasible from political, social, or psychological points of viewis another question, which we need not discuss here.) But itgoes without saying that it does not follow that the boomcould go on indefinitely, if only the supply of credit were keptelastic.Let us now drop the assumption that the expansioncomes to an end prematurely because of aninsufficient money supply. Let us suppose thatit has a chance to develop without hindrance fromthe monetary side. What are then the possible andprobable outcomes?Inl the previous case, we have assumed thatthe gener(ll expansion of production comes to an end becausethe increase in the flow ofmoney is more or less suddenly stopped.Suppose now that the check to expansion comes at an advancedstage ofthe upswing when almost all idle factors, especially labour,Effect ofshortage offactors onderiveddemand.have been drawn into employment. On this assumption, thegeneral increase in employment and output must now come to anend (or, more.precisely, slow down to the rate which is made