Prosperity and Depression.pdf

%2. AnaIYsjJ of Theorjes Part Ifurther. The vicious spiral downward is in all respects thenegative counterpart of the vicious spiral upward. The detailsneed not be repeated.§ 6. REVIVALDuring a depression, loans are liquidated andSufficiency gradually money flows back from circulation intoof credit the reserves of the banks. The reserve ratioexpansion. becomes normal, and· reserves above normalare slowly built up. Interest is by this timefallen to an abnormally low level; but, with prices sagging andwith a prevalence of pessimism, it may be that even an exceedinglylow level ofinterest rates will not stimulate people to borrow.According to Mr. HAWTREY, however, there are almost alwayssome people who are willing to increase their borrowing; and thisshould enable the banks to get over the dead point. But if, ashappens in abnormally deep depressions, pessimism is so widespreadthat no rate above zero will induce an expansion, thecentral bank has another weapon for overcoming the reluctanceof the business community to make use of existing creditfacilities-and that is the purchase of securities in the openmarket.When the central bank buys securities in the open market, cashis pumped into the banks and their liquidity 'increases. For a time,the new money may be used to repay debts to the banks, so thatthe only result is a change in the composition of the assets of thebanks (cash increases, loans decrease). But Mr. HAWJ;REYis confident that eventually, if only the purchases of securities arecarried far enough, the new money will find an outlet into circulation,consumers' income and outlay wi~ begin to rise, and a selfreinforcingprocess of expansion will be started. Mr. HAWTREYbelieves that the ordinary measures of banking policy~scountpolicy and open-market operations-may be trusted to bringabout a revival and that -it is therefore· not necessary to haverecourse to m9re drastic methods (such as public works) to startan expansion. .. This attitude of his is closely connected with histheory that changes in the rate of interest must operat~ through