Prosperity and Depression.pdf

392 Natllre and Causes of the Cycle Part IIIn § 7, it was shown that an expansion can be started by someevent or factor which brings about in the first instance an increaseof consumers' spending, or by one that stimulates producers'spending (investment). (After the expansion has once beenstarted, both types of expenditures stimulate each other : investmentgenerates income and demand for consumers' goods, and anincrease in consumption induces further investment.) When welook for automatic expansionary impulses, we shall find themprimarily in the shape offactors which directly stimulate producers'spending (investment). Here, again, it is convenient to distinguishbetween changes on the side of the supply of, and demand for,investible funds; but it must not be forgotten that there are factorswhich affect demand and supply at the same time.We begin with changes on the supply side. WeReturn of assume that demand for investible funds has notconfidence. completely vanished-that is to say, that there isa latent demand at a positive rate of interest whichcannot be satisfied because the 'ruling rate of interest is too highowing to the supply situation (lack of confidence on the partof the banks and the investing public, high liquidity preference).This being so, the cessation of the hoarding process, as describedin the preceding section, will not only bring the contraction inMV to a halt: it will also lead in course of time to an expansion.When the banks, industrial firms and private individuals haveon the whole reached the conclusion that their cash reserves arelarge enough-in other words, when they have attained the degreeofliquidity which they deem in the circumstances to be desirable ornecessary I-the rate of interest will fall, because a certain amountof money will be put on the capital market instead of going intohoards. Investment will pick up a little; and this will stabilise MVand·· the aggregate demand for goods. It will also bring abouta stabilisation of employment and production. If such a state of1 If the theory put forward in the text of the automatic cessation ofhoarding and contraction is not accepted, it will be necessary to rely onthose active stimulants which are likely to arise sooner or later (asexplained in the following pages). The rest of the argument is not afIected.In particular, the proposition that MV is likely to rise, as soon as it hasstopped falling. holds good-whatever the factor may have been whichbrought the fall of M V to a halt.