Prosperity and Depression.pdf

Chap. 2.The PurelY Monetary Theoryphase of the cycle, on the other hand, is dominated by an inflationaryprocess.If the flow of money could be stabilised, the fluctuations ineconomic activity would disappear. But stabilisation of the flowof money is no easy task, because our modern money and creditsystem is inherently unstable. Any small deviation fromequilibrium in one direction or the other tends to be magnified.Mr. HAWTREY starts with the assumption that, in the modernworld, bank credit is the principal means of payment. Thecirculating medium consists primarily of bank credit, and legaltender money is only subsidiary. It is the banking system whichcreates credit and regulates its quantity. The means of regulationare the discount rate and open-market purchases and sales ofsecurities. The power to expand credit is not, of course, vestedin each individual bank, but in the banking system as a whole.A single bank cannot go very far in expanding credit on its ownaccount; but the banking system as·a whole can, and there is atendency to make the whole system move along step by step inthe same direction. If one bank or group ofbanks expands credit,other .banks will find their reserves strengthened and will beinduced, son1etimes almost forced, to expand too. In this way asingle bank or group ofbanks may carry with it the whole system.(These are familiar propositions of modern banking theory.It does not seem necessary at this point to work them out in detailwith all necessary qualifications.)!§;. THE UPSWINGThe upswing of the trade cycle is broughtDriving force about by an expansion of credit and lasts soof bank long as the credit expansion goes on or, atexpansion. least, is not· followed by a credit contraction.A credit expansion is brought about by thebanks through the easing of conditions under which loans are1 C/., e.g., the exposition in I{eynes' Treatise on Money. The historyof thought on this subject has been written in great detail by V. Wagner,Geschich.te der Kredittheorien, Vienna, 1936, and A. W. Marget, The Theoryof Prices: A Re-examination 0.1 the Central Problems of Monetary Theory,Vol. I .• New York, 1938.