Prosperity and Depression.pdf

%0 AnalYsis of Theories Part Ibanks have then to be careful not to let the expansion get out ofhand and degenerate into wild inflation. They should raise therate of interest drastically : slight increases will not deter peoplefrom borrowing if prices rise and are expected to rise further.That is what is meant in saying that the process has gainedmomentum. A discount rate which would have sufficedto nip the expansion in the bud would later be much toolow to stop it.§ 4. THE UPPER TURNING-POINTProsperity comes to an end when creditCredit expansion is discontinued. Since the processrestriction of expansion, after it has been allowed to gainreJponsible. a certain speed, can be stopped only by a jolt,there is always the danger that expansion will benot merely stopped but reversed, and will be followed by aprocess of contraction which is itself cumulative. (There areother' reasons for this, which will be discussed presently.)" If the restriction of credit did not occur, the active phase ofthe trade cycle could be indefinitely prolonged, at the cost, nodoubt, of an indefinite rise of prices and an abandonment of thegold standard." 1Man-made limitations on the amount of theThI wage-lag, circulation-that is, limitations imposed bythe cash drain law and custom-constitute the barrier whichand the prevents our present economic system fromgold standard. getting rid of its cyclical movement with allits .bad consequences. So long as there is agold standard, or other restriction in the supply of legal tendermoney (e.g., that· involved in the attempt to ~tabilise the exchangerate vis-a-vis another country which does not itself expand credit),the banks are sooner or later forced to stop expansion and even tocontract.Cash-i.e., legal tender money-is predominantly used for smalland retail transactions, because for these purposes credit has no1 Tf'ade and Ct'edit, London, 1928, page 98.