Prosperity and Depression.pdf

2.6 Ana!1JiJ of TheorieJPart IFJllcfuationJin investmentin fixedcapital.§ 8. SPECIAL FEATURES OF THE THEORYAs has been mentioned, Mr. HAWTREY'S theorystands in contradiction to many other relatedtheoriesin that it contends that a change in the rate ofinterest influences the economic system, not througha direct influence on investment in fixed capital,but through the provision of working capital andparticularly stocks ofgoods. The alternative view will be discussedlater. Hereit must beaskedhow Mr. HAWTREY'S theory can accountfor the undoubted fact that the instrumental industries experiencegreater cyclical fluctuations than the consumption industries. Theexplanation offered is that activity brings a more than proportionalincrease in profits; and, as profits (whether reinvested by corporadonsor distributed to shareholders) are the principal source ofsavings, the funds available from savings for capital outlay aresimilarly increased. The disproportionate fluctuations in theinstrumental. ,industries are therefore a consequence of changesin consumers' income and outlay, and are not due (as many writersbelieve) to any repercussions which credit expansion may havedirectly,or indirectly through changes in long-term-interestrates-on investment in fixed capital. That credit expansion has acertain effect· on investment in fixed capital is not altogether deniedby Mr. HAWTREY; but he holds it to be unimportant as comparedwith the direct influence on the merchant and on working capital.To complete the picture of Mr. ,HAWTREY'SImplications theory, a word must be said as to the policy banksfor· policy. should pursue in order to eliminate the credit cycle,and with it the trade cycle. The banks, andespecially the, leaders of the banking system, the central banks,should not watch the reserve proportions so much as the flow ofpurchasing power. The demand for goods, the flow of money,is the important thing-not the outstanding aggregate of moneyunits. The aim ofbanking policy should be to keep the consumer'soutlay constant, including (as has been pointed out) outlay fornew investment. But account should be taken of changes in thefactors of production-not merely the growth of population, but