Prosperity and Depression.pdf

Anafysis of TheoriesPart Irisen, but demand has not risen (or not sufficiently risen), becausethe necessary funds are no longer forthcoming.This is the exact and full interpretation of what is loosely calleda " shortage of capital "; and it is a shortage ofcapital in this welldefinedsense that is supposed to be the real cause of the breakdown."Shortage ofcapital " in this sense is equivalent to undersavingand over-consumption. If people could be induced tosave more-that is, to spend a smaller part of their income onconsumers' goods and devote a larger part (through the intermediaryofthe capital market) to the purchase ofcapital goods-theflow of money and the structure of production would be broughtinto harmony and the breakdown avoided.If this cannot be achieved-and the chances thatThe fruits of it will be achieved are almost nil-the new extentheboom lost sions to the structure of production are doomedin. the crisis.. to collapse. With some slight exceptions which areintroduced as after-thoughts and treated as theoreticalcuriosities of no practical importance~ the authors ofthemonetary over-investment school conclude that every credit expan..sian must lead to over-investment and to a breakdown. It isasserted over and over again with great emphasis thatitis impossibleto bring about a lasting increase in the capital stock ofsociety as awhole by means of forced saving and that no permanent extensionof the structure of production can be accomplished with the helpof an inflationary credit expansion. What is thus built up duringthe upswing will inevitably be destroyed in ~he breakdown. 1In the specific case of the American boom of 1925-1929, theauthQrs are emphatic that the same thing applies to an expansionwhich does not lead to a rise in prices, but is just enough to preventa fall in prices that would otherwise have taken place because of1 The durable means of production constructed during the upswingoutlast, of course, the boom. But the contention is that they are losteconomically. They are not used at all or are used in such a way thattheir marginal product does not cover the cost of reproduction. Itshould, however, be noted that important qualifications are called forin. respect of permanent goods or instruments where the cost of maintenanceis negligible compared with production cost.Compare H. S. Ellis, German Monetary Theory 19°5-1933 (1934),pages 425-431, on other views on "The 'Productivity' of Bank Credit".