Prosperity and Depression.pdf

Chap. IIThe Up-turn: Revivalmay be stronger than the tendency to dishoard. To be sure, acertain amount ofnet hoarding, as evidenced by a decline in MV, isconsistent with an'increase in·employment and output. But, ifit goes beyond a certain poin~, the stimulating effect of a reductionin money wages may be frustrated, the fall in wages being accompaniedby a fall in demand and in prices. Employment and outputwill be no higher; they may even be lower than they would havebeen without the fall in wag~s.But, even in this unfavourable. and perhapsWage improbable case, where a reduction ofmoney wagesreduction.! has the immediate effect ofintensifying contraction,increase the policy of reducing wages and prices, if pursuedliquidity• long e1iough, will be sufficient to create a situationout of which a revival (a new expansion) is likelyto emerge sooner or later without any special expansionary stimulus,from without being required.!This follows from what has been said earlier in this and theprevious section. We there demonstrated that, with the continuanceof contraction, banks and individual firms become more andmore liquid. Money hoards grow, both in terms of money andsinceprices fall-still more in purchasing power. Now, it isclear that this process rill be accelerated if wages are reduced andprices fall more than they would without a fall in wages. Inother words, the fall in money wages and prices reduces the volumeof work which money has to perform in mediating the exchangeof goods and services in the different stages of production.Money is set free in 4this line of its employment, and becomesavailable for hoarding.- Pari passII with the fall in prices, existingmoney hoards (M ) 2rise in real value and, sooner or later, the pointwill be reached where even the most cautious individuals willfind an irresistible temptation to stop hoarding and to dishoard.We may put the matter in yet another way. Assume for themoment that, independently of the behaviour of money wages,1 Compare footnotes Ion page 390 and 392 .• In Keynesian terminology, less money is needed to satisfy the transactionsmotive and more becomes available for" speculative holding" :M 1 decreases ; M i increases.