Prosperity and Depression.pdf

Chap. IIThe Up-turn :. RevivalThe second prerequisite for an easy start andRestored smooth development ofthe expansion process-viz.,e/asticiry of an elastic money and credit supply-is eventuallycredit supplY. restored in the course of the contraction. As pricesfall, the value 'Of central-bank money which is atthe base ofthe credit structure will rise. So .long as the structureitselfremains undamaged"each tierwillbebroader-basedthanbefore.The gold reserve will cover a larger proportion of the central...bank money;' thecash reserve ofthe banks willrise relatively to theirshort-term liabilities; circulating currency and deposits in the handsof the public will rise relatively to the money income which theyreceive and the capital which they possess. But this process neednotbecontinuous: itmay encountera whole seriesofsetbacks. Themounting debt burdens and the struggle to avoid bankruptcy themselvescreate a need for ready cash, while bankruptcies and the fearofgood debts turning into bad ones give rise to a flight to liquiditywhich is notsatisfied evenbyincreased reserveproportions and risinghoards. Ifthe credit structure gives way spasmodically, we may seean oscillatory movement inwhich liquidity diminishes and increasesseveral times in the course of the. depression. It is, however,only a matter of time till the course to bankruptcy is arrested, andthe monetary munition accumulates for a new expansion.But, we must now ask, is there a bottom to theLimits to fall. of MV, the monetary contraction? In thethe fall corresponding problem of monetary expansion,of MV. we were able to show that there is a limit to therise in MV, beyond which the continuation of theexpansion becomes very precarious. The limit in .that case wasfound to· be inherent in the tendency of the expansion to produceincreasingly a rise in prices, rather than a rise in employment··andproduction, as the state of full employment is approached. Isthere a corresponding limit to thefall in MV? The deflation can,of course, be stopped by.anyone of the factors making for expansionanalysed in the· preceding section. (These factors may ariseby chance; but, as· will be shown in the following se,ction, theymay be expected to arise in any case with the lapse of time as areaction against the contraction process.) Supposing, however)that no such change for the· better, strong enough to turn the tide,