Prosperity and Depression.pdf

Chap. IIThe Up-turn: RevivalThese hoards will grow in relation to real income as well as inrelation to real wealth. In other words, people will hold an increasingproportion of their real income and wealth in the liquid formofmoney. It should be noted that, so long as people are adding totheir hoards-in other words, so long as " the struggle for liquidity"goes on-the rate of interest (on investible funds) will bekept relatively high in spite ofthe fact that the demand ofproducersfor money for investment purposes is at a low ebb. Underunfavourable circumstances, such a situation may/ last· a longtime: but, as it implies that money hoards are growing all thetime in magnitude, we are probably justified, in the light of ourgeneral knowledge of economic behaviour, in assuming that therewill be a limit to such hoarding. After liquid resources havereached a certain high proportion of wealth, the·need for liquiditywill eventually become satisfied and people will stop adding totheir hoards. If the rate of interest remains high, because thereis still a demand for credit for purposes of real investment (as ,villbe the case in poor countries rather than in rich communities),hoarders will be tempted to put their funds on the capital marketssooner than if the rate of interest has already fallen to a low level.But, eYen if the rate is very low, there will come a point whenhoards reach such a· high proportion of income and wealth thatthere is no point in increasing them. One or both of twothings will then· happen. Either more money will be lentout on the capital market, with the result that interest _rateswill be forced down (beginning probably with the short-termrates and ending later with the long-term rates) and investmentwill revive; or, if the demand of producers for credit is absolutelyinelastic, people will become less disposed to save-in Mr. KEYNES'terminology, the propensity to consume will rise in addition tothe decrease in the liquidity preference-and the demand forconsumers' goods will cease to fall, or may even.. rise. Insteadof putting away their money receipts in their hoards, people willeither spend them on consumption or lend them out through thecapital market. lI.The whole analysis might be put into technical language; but itmaybe doubted whether much would be gained by so doing. In termsof our demand and supply schema, we can take the hoarding factor either