Prosperity and Depression.pdf

Chap. 3 The Over-investment Theories 57savings. 1 If they do occur, evil consequences· must be expected,even in the absence ofcredit inflation. (We shall see, in connectionwith the discussion ofother theories, that there are numerous otherdisturbances possible which may interrupt the upswing andstart a vicious spiral downward-disturbances which are probablyof the same, or even of a higher, order of magnitude than thefluctuations in the rate of forced or voluntary saving discussedabove.) -To sum up, we may say that the theory has not proved rigorouslythat a stabilisation of prices in a progressive economy mustalways lead to over-production, crisis and depression. 2 Thepractical importance of this conclusion is considerable in view ofthe American prosperity in the twenties, a notable feature of whichwas the fact that wholesale prices did not rise.§ 5. THE DOWNSWINGThe theory of the depression is not nearly soThe depression fully elaborated by the authors of the monetaryas It period over-investment school as the theory of the boom.of readjust- The depression was originally conceived of by themmente as a process of adjustment of the structure of production,and was. explained in non-monetary terms.During the boom, they argued, the process ofproduction is undulyelongated. This elongation has accordingly to be removed andthe structure of production has to be shortened or, alternatively,expenditure on consumers' goods must be reduced (by retrenchmentof wages and other incomes which are likely to be spent1 Ct. C. Bresciani-Turroni, II The Thee>ty of Saving" in Economica, 1936,pages 165 et seq.• The following statement of a prominent adherent of the monetaryover-investment theory is significant: "This theory does not makethe pretence of being the only explanation of all cycles and crises thathave ever occurred, nor does it pretend that it states unconditionalnecessities" (F. MachIup, "Professor Knight and the 'Period ofProduction' " in Journal ot :Political Economy, Vol. 43, October 1935.page 622.