Prosperity and Depression.pdf

16 AnalYsis of Theories Part Ivelocity" as it figures in .IRVING FISHER'S famous equation ofexchange. But, V being thus defined as the ratio of consumers'outlay to the quantity of money, the two magnitudes-MVandconsumers' outlay-are by definition the same; and not much isgained by the substitution of one expression for the other.)Non-monetary factors such as earthquakes, wars, strikes, cropfailures, etc., may produce a general impoverishment: others,such as harvest changes,· over-development of certain industries(e.g., over-investment in constructional industries), may producea partial depression in particular branches of industry. But ageneral depression in the sense of the trade cycle-i.e., a situationin which unused resources and unemployment are general-cannotbe induced by non-monetary forces or events except in so far as theygive rise to a fall in consumers' outlay-i.e., in the flow of money.Changes in consumers' outlay are principallyInstability due to changes in the quantity of money.of money Everyone agrees that a sudden diminution inand credit. the quantity of money, an outright deflation,has a depressing influence on economic activities,and that an increase of the circulating medium, an inflation, hasa stimulating influence.If the quantity of money diminishes, demand falls off, andproducers who have produced in anticipation of the usual demandwill find that they cannot sell the usual output at the anticipatedprices. Stocks will accumulate; losses will be incurred; productionwill fall; unemployment will be rife; and a painful processin which wages and other incomes are reduced will be necessarybefore equilibrium can be restored.Inflation has the opposite effect. Demand exceeds anticipations,stocks decrease, dealers give larger orders to producers,and prices rise. Production increases and unemployed factorsof production are gradually absorbed.This is the familiar picture o~ a "Government deflation orinflation ". According to Mr. HAWTREY, the trade cycle is nothingbut a replica, on a small scale, of an outright money inflation anddeflation. Depression is induced by a fall in consumers' outlay dueto a shrinkage of the circulating medium, and is intensified by adecline in the rapidity ofthe circulation ofmoney. The prosperity