Prosperity and Depression.pdf

Nature and Causes of the OclePart IIThe upshot ofthis analysis is that on very general grounds thereis a strong probability 1 that there is a limit to the fall inMV, evenin the absence of any special stimulus for expansion. An assump..tion to the contrary would imply an increase ad infinitum of moneyhoards in relation to income and wealth. When MV has ceasedto fall, when (that is) contraction has come to an end, the economicsystem becomes very responsive to expansionary impulses andcomparatively immune from deflationary shocks. 2This analysis is not intended to suggest that contractions alwaysor usually develop up to that very distant limit or that it is safeor good policy to allow them to pursue their course to this" natural U end. The object has been to present the probleminits most general form to serve as an introduction for the followingon the supply· or on the demand side. We may either say that theamounts which are hoarded reduce the supply of investible funds, or wemay say that hoarding is a special sort of demand which competes withthe demand for industrial purposes. We have chosen to take it on thesupply side because we have defined demand as demand for the purposeof actual investment.1 There is no question, of course, of an absolute certainty. Theremay be a rational incentive for indefinite continuation of hoardingviz.,the expectation of a continued fall in prices. But. in all circumstances,it remains true that the incentive to dishoard must grow continuouslywith the growth of hoards in terms of money and goods. Comparethe interesting analysis by Professor J. Viner on the abhorrence of idlecash-like the horrot' vacui of nature--displayed by the economic system,and the various devices employed by the modern financial organisationto satisfy the need for liquidity without increasing liquidity in terms ofcash. J. Viner, "Mr. Keynes on the Causes of Unemployment : AReview tt, in Quarterly ]ouf'nal QJ Economics,- November 1936, Vol. 51,pages 147-148 passim.I This analysis does not exclude the possibility of a .more or less sta·tionary state with unemployment and fairly stable prices as envisagedby Mr. Keynes and hisfollowers. This has been discussed in Chapter 8,§ 5, where it has been shown that a downward rigidity of money wages andprices is a necessary condition for that to happen (which is admitted atpoints but not sufficiently stressed by Mr. Keynes). Here we areconcerned not with .such an equilibrium state with unemployment, butwith the contraction process. A contraction may tail off into a more orless stationary situation at a low level of employment (" depressionequilibrium tt, " bumping along the bottom of the depression "), but thepoint made in the text is that it is more likely that the system wiltautomatically start on the up-grade again as soon as it has come to astable point.