Prosperity and Depression.pdf

66 AnalYsis of TheorieJ Part Ipositive terms that they should vary the rate in such a way thatno credit expansion or contraction ensues in the face of changingdemand for credit. But this, again, seems simple and exact onlyon a superficial view. It has been pointed out above how difficultit is, even in theory, to define exactly what is meant by saying thatthe effective quantity of money should be kept constant. In additionto the theoretical difficulty of giving exact criteria, there is theextremely difficult task of applying these criteria in concrete cases.Professor HAYEK has pointed out that, for the individual banker,it is impossible to distinguish between deposits which have beencreated by voluntary saving and deposits which have an inflationaryorigin. The velocity of circulation of money, especially of bankmoney (deposits), may change without affecting the reserves ofthe banks. Neither bank reserves nor reserve ratios nor the pricelevel are an unfailing criterion of the correct credit policy fromthe standpoint of the theory under review. Expansion maytake place '\vithout any action on the part of the banks.Professor MACHLUP 1 has called attention to oneCyclical factor which helps to explain the recurrence of theimplications cycle and throws into relief the passive role ofof seasonal the banks, at any rate during the first phase of thevariations upswing. It is this. A considerable portion ofin credit. the payments which have to be made during agiven period, say a year, are not evenly distributed,but are concentrated at certain dates, some of them at the end ofeach month and others at the end of each quarter. Therefore,even with the most elaborate clearing and compensation arrangements.no complete continuous offsetting of the debts andliabilities of each firm is possible. At the critical dates, at the endof the month and of the quarter, there is therefore always a strongdemand for short-term credit and a resultant strain on the moneymarket. If the banks were not able and willing to relieve thismonthly and quarterly tightness of money by granting temporarycredits, individual firms would be compelled to provide for theirrequirements at the critical dates by accumulating cash duringI See his book, BOfssnkredit; 11'ldustriekredit und ]{apitalbildung, Vienna,1931, pages 161-178.