Prosperity and Depression.pdf

Nature and Causes ~I the Cycle Part IIincreasingly independent of one another. We shall eventuallyarrive at the very opposite extreme to complete world unificationnamely,complete independence in the monetary systems ofdifferent countries: i.e., completely free exchanges. 1When we were arguing on the assumption of aA "unified closed, spaceless system; we postulated the existencemoney system of SOme basic money such as gold and a note circuwithmobility lation on that basis issued by a central bank. Theofcapital. central-bank money (which includes deposits withthe central bank) forms in turn the basis for a creditstructure built up by the commercial banks. Evidently, we must-make some assumptions about the supply of the central-bankmoney : that is to say, we have to define the policy.of the bankofissue in respect to the ratio between the note circulation and thegold reserve which it seeks to establish at any given moment oftime.Our previous postulate was maintained when we first introducedthe space factor by" assuming a certain geographical distributionof resources and transportation cost for goods and services. Thesame money circulated everywhere, and the conditions of thesupply of investible funds as furnished by the central bank~ commercialbanks or other" sources were everywhere the same. Wesaw that in this case, in spite ofthe fact that the supply ofinvestiblefunds was uniform-consisting~ as it did, of a single pool to whichwould-be borrowers from all parts ofthe system had equal accesslocalbooms and depressions were not excluded because, owmg toa certain localisation of real resources, the demand for investiblefunds might be concentrated in pa.rticular localities.We may conceive of the central-bank money as supplied by asingle institution with branch offices in various localities, all ofwhich pursue the same policy. They issue notes by discountingbills at the same rate (and under the same conditions) or bybuying and selling securities at the same prices. The cash (gold)reserve-if any-is pooled and not kept separately for eachbranch.I" Professor John H. Williams has attempted a similar analysis: U InternationalMonetary Organisation and Policy", in Lessons ot MonetaryExperience, New York, 1937. Ct. also Viner, loco cit.