§ 17. SUMMARY.

The lack of agreement among the various theories of the business cycle is, as Mitchell rightly remarks, less a disagreement over fundamentals than one over arrangement and emphasis. This is explained by the fact that the laws of economic movement cannot be described and analysed without pursuing all those numerous forces which determine the course of the economic process: production and consumption, the distribution of income and its expenditure, saving and investment, optimism and pessimism, natural and social forces, commodity and money influences, prices and costs. Consequently every simple explanation of the business cycle must be incomplete and therefore false. On the other hand, however, the theory would be lacking in form and superficial if it sought to give equal value to all the forces influencing economic phenomena. A classification of these forces is the more indispensable since some of them stand out as those which can claim the rank of a real cause while others subside into the background as forces which either only give the first impetus (which would remain ineffective without the “causes”) or provide the frame within which the “causes” unfold their effect. A satisfactory explanation has therefore three tasks: to enumerate the initiating forces, to establish the real causes of the cyclical movement, and to describe the mechanism of the movement through boom and depression. The first problem has been solved by reference to discoveries, natural and political events, changes in sentiment, and all the other circumstances which may give the first impulse to a boom. As regards the second problem which consists in tracking down the ultimate causes of cyclical movements, the choice can only fall on the monetary factors which were described in the preceding section. The last problem can only be dealt with by describing those processes which—reinforced by the dislocations in the distribution of income and in its expenditure, by changes in the structure of prices and costs, and by psychological and technical factors—culminate in the fluctuations in the scale of investment. The explanation in favour of which we have decided may be denominated a monetary over-capitalization theory: this sidetracks the futile dispute as to whether the monetary causation predominates over the non-monetary causation or vice versa.

This theory gives us the following schematic description of the cyclical process: In the depression, stocks are cleared, both households and business firms have held off their demand for goods for a long time, funds of money capital have accumulated and have caused the rate of interest to fall, the diseased parts of the economy have been cut out, elements of waste are eliminated, production costs generally are lowered. After the forces have in this way gathered in readiness for an economic boom, an impulse emerges from somewhere which releases the disposition for the increase of investment. This disposition grows by its own force to ever greater strength, partly out of psychological grounds and partly by reason of economic compulsion. But this increase in investment would not be possible if the economic system were not fed with additional credits proceeding by way of a relatively low interest rate. The over-capitalization made possible by credit expansion finally disrupts the equilibrium of the economy. It does not always end in a crisis but invariably ends in a depression during which by the painful process of recession and reconstruction a new equilibrium gradually establishes itself from which a fresh boom takes its start.

All these considerations lead to the conclusion that the theory of cycles and crises is essentially a theory of the boom. Once the boom and its real mechanism has been explained the explanation of the crisis and depression follows by itself. There is nevertheless still room for a special theory of the depression in so far as it may in certain circumstances acquire an independent character. This is the case when the depression acquires an obstinacy and an intensity which can no longer be designated as the mere reactions to the preceding boom, when it loses its real economic function of “readjustment” and degenerates into a process of economic contraction magnifying itself by its own force. To understand this, the depression must be conceived as a period in which the falling off of the will to invest, the fall in prices and costs, and the striving of the banks to write off their bad debts and increase their liquidity unite in a process of reciprocal reaction which leads to a shrinkage of the volume of credit and of production along with a glut of goods (deflation). This shrinking process can in certain unfavourable circumstances proceed further than the measure necessitated by the liquidation and readjustment function of the depression, and involve the economic system in a cumulative process of stagnation which lasts so long as the “slack,” in the form of reserves of productive resources, cost reductions and savings, arising out of depression, is not utilized for new investment. The primary depression which represents the necessary reaction of the economy to the disturbance of equilibrium by an excess of credit creation may be followed by a secondary depression whose real causes are to be sought in the circumstance that an independent and economically purposeless secondary deflation develops out of the unavoidable deflation of the primary depression. If in the primary depression the poison of the credit inflation is discharged, then in the secondary depression the new poison of the deflation penetrates the economic body. Undeniably the world has recently witnessed this second phase of the depression. The primary depression had fulfilled its economic function of readjustment but until quite recently the powers of self-healing which should now come into action had failed to appear and their place had been taken by a new further shrinkage.

If we wish to make use of the knowledge we have acquired about the causes of cycles and crises to explain the present world economic depression, then the first thing that we must realize is that the present depression is the result of a combination of the most varied factors and only this combination explains the unexampled acuteness and stubbornness of this the most severe of all depressions yet experienced.⁴ The origin of the depression is to be sought, like that of every former depression, in the over-investment of the preceding boom caused by credit expansion, so that to this extent it can be fitted into the historical rhythm of cyclical movements. The main seat of this unhealthy economic expansion was the United States whose credit expansion has already been described. From here the credit expansion spread over the whole world supported substantially by the monetary policy of the Bank of France and the Bank of England. Germany took part in the international credit expansion mainly via enormous imports of capital. These gave the incentive there also to an investment boom in which there lay a special danger, enhanced by the loan policy of the then Reichsbank President Schacht, by the fact that the foreign credits had the increasing tendency to take short-term form. If we want to go still further back, it is the World War and the destruction that it left behind it which must be designated as the ultimate great driving force behind this strenuous exertion of the nations as this enormous wave of the last investment boom may be described.

On the one hand, the war destroyed an enormous amount of the capital wealth of the world and, as a consequence of decidedly short-ssighted peace treaties, it disturbed the world economic equilibrium. On the other hand, besides speeding up technical progress, it stimulated men through necessity, economic pressure, and impoverishment, to develop their economic energies to the furthermost limits. So long as this stimulation lasted, the disturbance of equilibrium due to the war and the peace treaties was more or less suspended in its effect, being superseded by the hectic activity in making good the war destruction. But the ultimate collapse was bound to be the more terrific: the structural strains and disturbances brought about by the war combined their sinister effects with the unavoidable reaction to the boom, the latter in its turn being largely created by the same war. So there stands over the present world economic crisis with all its misery and destruction the shadow of the World War: it is essentially only a continuation of the atrocious drama which began in August 1914, and perhaps nothing has contributed so much to its aggravation as the circumstance that the world is to-day more distant than ever from real political and economic peace and that the harassing fear of new political adversities, in a moment when the consequences of the last war are shaking the stability of our social system, is paralysing the economic forces all over the world.

We repeat: in its essence and in its outcome the depression in the United States and in Germany—the two main seats of the depression—derived from the unhealthy economic expansion which was in turn caused by developments in the money and credit system. In accordance with the height of the investment wave the depression would have been severe even if no further aggravating circumstances had been present. But such circumstances happened to supervene to a disastrous extent.

As fate would have it, this economic depression coincided with an unusually severe agricultural depression which shook the agriculture of all areas and hit cereal-growing with exceptional vehemence. On top of all this there came all kinds of harmful State interference (tariffs, valorization, wage-manipulation, subsidies, &c.), reparations and other huge political debts, the carrying too far, both in tempo and in extent, of rationalization, disturbances in the mechanism of the international monetary standard, the dislocation of world markets through Russian dumping, wasteful expenditure by governments, the decrease of the elasticity of the economic system through the growth of monopolistic elements of every kind, and, finally, that cumulative aggravation of the depression of which we have already spoken.

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¹ A good and up-to-date history of the doctrines on crises and cycles is still lacking. The only comprehensive monograph on the subject, to the best knowledge of the author, is : E. v. Bergmann, Geschichte der nationalökonomischen Krisentheorien, Stuttgart, 1895, but the point of view of this book is somewhat antiquated. Other references are : Alvin Harvey Hansen, Business-Cycle Theory, Its Development and Present Status, New York, 1927; J. Lescure, op. cit., pp. 313-414; W. Fischer, Das Problem der Wirtschaftskrisen im Lichte der neuesten nationalökonomischen Forschung, Karlsruhe, 1911; K. Zimmermann, Das Krisenproblem in der neueren nationalökonomischen Theorie, Halberstadt, 1927; Rolf Wagenführ, Die Konjunkturtheorie in Russland, Jena, 1929. Views of different writers on the present status of trade-cycle theory are assembled in the Festschrift for Arthur Spiethoff: “ Der Stand und die nächste Zukunft der Konjunkturforschung,” Munich, 1933.

² Wesley C. Mitchell, op. cit., pp. 49-53.

³ Alvin Harvey Hansen, op. cit., pp. 1-10.

⁴ By far the best available book on all these questions of economic methodology is L. Robbins, An Essay on the Nature and Significance of Economic Science, 2nd ed., London, 1935.

⁵ Most distinguished work was done also by the Russian Institute for Cycle Research in Moscow established after the war, with men like Kondratieff, Wainstein, Oparin, and others among its staff. Unfortunately, this activity was abruptly stopped, several years ago, because the Government deemed it “reactionary,” and the staff was sent to Siberia or shot. It is in reverential commemoration of these fine men, some of them personally known to the present writer, that this note has been added.

⁶Cf. O. Morgenstern, Wirtschaftsprognose, Eine Untersuchung ihrer Voraussetzungen und Möglichkeiten, Vienna, 1928.

⁷ The literature on this subject is mostly in German, for instance : F. Lutz, Das Konjunkturproblem in der Nationalökonomie, Jena, 1932 (a very commendable book); A. Löwe, “Wie ist Konjunkturtheorie überhaupt möglich?” Weltwirtschaftliches Archiv, October 1926, pp. 165-197; E. Carell, Sozialökonomische Theorie und Konjunkturproblem, Munich, 1929; E. Preiser, Grundzüge der Konjunkturtheorie, Tübingen, 1933. Some very relevant remarks are now also to be found in English in the English translation of F. A. Hayek’s book, Geldtheorie und Konjunkturtheorie (Monetary Theory and the Trade Cycle, London, 1933).

⁸ The best treatment may be found in the aforementioned book by F. Lutz of which the argument in question is the main theme.

⁹ See W. Röpke, “Sozialökonomische, Betrachtungen über den abnehmenden Bevölkerungszuwachs,” Economist (Dutch), September 1930, pp. 637-655.

¹ This view is opposed to the widespread belief that the slackening rate of population growth is a factor of growing instability, a belief which has already been dealt with in chap. i. It must be added, however, that this question constitutes a rather intricate problem in which there are many points with which we have to reckon. Thus it has been shown in chap, i that the slackening rate of population growth may bring a number of industries—especially agriculture—into grave difficulties. Another question is the political effect of the slowing-down of population growth which may also have economic consequences. In this respect, the slackening rate of population growth works in two directions. On the one hand, by reducing the pressure of population, it diminishes the strength of one of the most active forces behind modern imperialism. On the other hand, if the growth of population slows down faster in one country than in another, this may produce a feeling of insecurity in the first country, and thus poison the atmosphere of international politics.

² The best book on these questions, accessible to the English reader, is now Collectivist Economic Planning (ed. by Professor von Hayek), 2 vols., London, 1935. Of special interest therein is the treatment, given by Professor Brutzkus, of the problems and the experiences of Soviet Russia.

³ The problem of the Dynamics of the Socialist Economy will be resumed later on from a more theoretical point of view. Unfortunately, it has not, up to the present, been adequately dealt with in economic literature. Some remarks, running somewhat parallel to the argument presented here, may be found in Professor Aftalion’s book Les Crises Périodiques de Surproduction, vol. 2, pp. 405-411.

⁴ The first representative, of this theory seems to have been the astronomer Herschel (Philosophical Transactions of the Royal Society of London, 1801). It was he who gave Jevons the idea for his theory which connected up the periodicity of sunspots with the fluctuations of harvests and with the trade cycle (Investigations in Currency and Finance, London, 1884). To the same school belong : H. Dietzel, article “Ernten” in the Handwörterbuch der Staatswissenschaften, 3rd ed., and H. Moore, Generating Economic Cycles, New York, 1923. The most has been made of this argument recently by John H. Kirk, in his very interesting book, Agriculture and the Trade Cycle, Their Mutual Relations, with special reference to the Period 1926-1931, London, 1931. See also § 2 above.

⁵ Attempts have been made in this direction by L. Pohle (Bevölkerungsbewegung, Kapitalbildung und periodische Wirtschaftskrisen, Göttingen, 1902), and by M. B. Hexter (Social Consequences of Business Cycles, Boston and New York, 1925).

⁶ Literature on this subject : J. B. Say, Traité d’Economie Politique, first published in Paris, 1803; L. Miksch, Gibt es eine allgemeine Ueberproduktion? Jena, 1929; W. Röpke, “Kredit und Konjunktur,” Jahrbücher für Nationalökonomie und Statistik, March-April 1926, pp. 256-262; A. Aftalion, op. cit., vol. 1, pp. 274-286; vol. 2, pp. 261-351; Hans Neisser, “General Overproduction,” Journal of Political Economy, August 1934, pp. 433-465. Somewhat similar Anti-idiotica, as used in the text above, are administered by Professor Cannan, in his paper “Not Enough Work for All,” Economic Journal, September 1932 (reprinted in his book, Economic Scares, London, 1933).

¹ Among the large number of publications dealing with this question mention should be made of : Alvin H. Hansen, “Institutional Frictions and Technological Unemployment,” Quarterly Journal of Economics, August 1931 (reprinted in his book Economic Stabilization in an Unbalanced World, New York, 1932.) For a different point of view, see Emil Lederer, Technischer Fortschritt und Arbeitslosigkeit, Tübingen, 1931, and A. Kähler, “The Problem of Verifying the Theory of Technological Unemployment,” Social Research, November 1935.

² Modern representatives are, for example, J. A. Hobson, The Industrial System, London, 1909; E. Lederer, “Konjunktur und Krisen,” Grundriss der Sozialökonomik, part iv, 1, Tübingen, 1925, from p. 354; W. T. Foster and W. Catchings, Profits, Boston and New York, 1925; R. Luxemburg, Die Akkumulation des Kapitals, Berlin, 1913; Erich Preisser, Grundzüge der Konjunkturtheorie, Tübingen, 1933.

³ This remark has some bearing on the present situation. For there are to-day many who, while opposing the idea of an internal expansion of credit, believe in fighting against the depression by using the idle plant at home for the economic development of backward countries, without seeing the identity of the two cases. So far as the real nature of the economic process is concerned, it makes really no difference whether the unused capacity of the cement industry is used for slum-clearance at home or for building a water-dam in Tibet, though the one scheme may be preferable to the other for a number of other reasons. It may happen, however, that the water-dam project in Tibet might attract entrepreneurial initiative at a time when equally attractive objects for investment at home are wanting. This is the only small vestige of truth in the theory of Economic Imperialism.

⁴Cf. E. F. M. Durbin, Purchasing Power and Trade Depression, a Critique of Under-Consumption Theories, 2nd ed., London, 1934 (a book with which the present writer is especially in sympathy); L. Robbins, “Consumption and the Trade Cycle,” Economica, November 1932; H. T. N. Gaitskell, “Four Monetary Heretics,” in What Everybody wants to know about Money, ed. by G. D. H. Cole, London, 1933.

⁵ An outstanding example is to be found in the numerous books of Messrs. Foster & Catchings (Profits, 1925; Business without a Buyer, 1927; The Dilemma of Thrift, 1928, and others).

⁶ For instance : F. A. Hayek, “The ‘Paradox’ of Saving,” Economica, May 1931; A. H. Hansen, Business-Cycle Theory, New York, 1927.

⁷ Represented by : A. C. Pigou, Industrial Fluctuations, London, 1927; F. Lavington, The Trade Cycle, London, 1925. Schumpeter also is in a certain sense to be included among this school—see his Theory of Economic Development: An Enquiry into Profits, Capital, Credit, Interest and the Business Cycle, translated by R. Opie, London, 1934, and “The Explanation of the Business Cycle,” Economica, December 1927. An analysis of the psychological factors in the business cycle is given in Röpke, Die Konjunktur, loc. cit., pp. 70-84.

⁸ M. v. Tugan-Baranowski, Studien zur Theorie und Geschichte der Handelskrisen in England, Jena, 1901 (first Russian edition 1894).

⁹ Spiethoff, Vorbemerkungen zu einer Theorie der Ueberproduktion, Schmollers Jahrbücher, xxvi, 1902; Cassel, The Theory of Social Economy, 2nd ed., London, 1932; Schumpeter, op. cit.; Aftalion, op. cit.; M. Bouniatian, Wirtschaftskrisen und Ueberkapitalisation, Munich, 1908; D. H. Robertson, A Study of Industrial Fluctuations, London, 1915. For the views of the present author, see W. Röpke, Kredit und Konjunktur, loc. cit.

¹ J. M. Clark, “Business Acceleration and the Law of Demand,” Journal of Political Economy, March 1917, and also the same author’s books, Studies in the Economics of Overhead Costs, Chicago, 1923, and Strategic Factors in Business Cycles, New York, 1934. Consult also the discussion between C. and R. Frisch in the Journal of Political Economy, October, December 1931, and April 1932.

² J. M. Clark, Strategic Factors in Business Cycles, op. cit., p. 36.

³ D. H. Robertson, Banking Policy and the Price Level, 3rd ed., London, revised 1932 (a small book of the greatest importance though somewhat difficult for the uninitiated reader).

⁴ There is a second meaning of “over-saving” relating to the situation during the depression when more is being saved than invested, so that saving leads to the disappearance of purchasing power from circulation and thus to its sterilization. This sort of “over-saving” is the driving force behind the cumulative process of depression about which more will be said in § 16. But its nature is quite different from that of the type of “over-saving” discussed above. Over-saving as discussed above means that too much is being saved compared to the power of the economic system to adapt itself to rising investments, while over-saving in the second sense means that savings exceed investments with deflationary effects.

⁵Cf. Berle and Means, The Modern Corporation and Private Property, New York, 1933; O. W. Knauth, “The Place of Corporate Surplus in the National Income,” “Journal of the American Statistical Association, vol. xviii, 1922.

⁶ This theme has been developed more fully by the present author in his little book Die Theorie der Kapitalbildung, Tübingen, 1929. Cf. also R. Weidenhammer, “Causes and Repercussions of the Faulty Investment of Corporate Savings,” American Economic Review, March 1933.

⁷ The most has been made of this argument by Professor Francesco Vito in his interesting paper “Il Risparmio Forzato e la Teoria dei Cicli Economici,” Rivista Internazionale di Scienze Sociali, January 1934.

⁸ J. M. Keynes, A Treatise on Money, 2 vols., London, 1930.

⁹ Keynes, op. cit., II, pp. 148-149.

¹Cf. especially his book Prices and Production, 2nd ed., London, 1935. For a fuller understanding of Dr. Hayek’s ideas his numerous other publications must also be consulted (“Das intertemporale Gleichgewichtssystem der Preise und die Bewegungen des ‘Geldwertes,’” Weltwirtschaftliches Archiv, July 1928; “Kapitalaufzehrung,” Weltwirtschaftliches Archiv, July 1932; Monetary Theory and the Trade Cycle, London, 1933; “Capital and Industrial Fluctuations,” Econometrica, April 1934).

² The most advanced book of this school on the theory of capital is now R. von Strigl, Kapital und Produktion, Vienna, 1934. This book is of special importance as it shows that it is possible on the base of the post-Böhm-Bawerkian theory of capital to explain the cumulative process of depression on lines not very dissimilar from those of Mr. Keynes. It must be said, therefore, that Dr. v. Hayek’s theory is by no means the logical consequence of this theory of capital based on the fundamental conception of the subsistence fund. It is now generally recognized that the post-Böhm-Bawerkian theory of capital is badly in need of a thorough revision in several of its fundamental conceptions. Especially, the idea of the “length of the production period” has, recently, become an object of a very critical attack by a host of writers in different countries (Howard S. Ellis, Frank H. Knight, O. Morgenstern, Gifford and others). Of still greater importance for trade-cycle theory is the dubious character of the Böhm-Bawerkian conception of the “subsistence fund.” Nobody can deny that this conception has a real meaning inasmuch as increased accumulation presupposes a restriction of consumption, but this meaning is by no means so clear as the post-Böhm-Bawerkian school supposes it to be. The idea that accumulation and consumption are mutually exclusive alternatives, in other words, that an increase in investment must always mean a corresponding absolute restriction of consumption looks rather defective in view of the palpable fact that, during the upswing, investment and consumption rise simultaneously. Even in this case, it is, of course, still true that accumulation means non-consumption, but the point is that this restriction of consumption is only relative while the absolute amount of consumption rises owing to the rise in total productivity resulting from the mobilization of idle productive reserves which has, in turn, been brought about by the increase in investment. Therefore, to some extent—i.e., to the extent to which idle productive reserves are again brought into profitable use—an increase in investment stimulates an increase of the subsistence fund. If this reasoning is correct, the subsistence fund ceases to be an independent variable whenever the extraordinary conditions of depression have created a large increase of “idle capacity.” Then, to reiterate, we have really a case not only of eating the cake and having it but of having still more of it while eating, though it is still true that the bit we eat we cannot have at the same time. Without this, neither the nature of capitalism nor its history can be really understood. It is important to note, however, that this applies only to the first phase of the upswing (the compensatory phase) not to the second (inflationary) phase in which the reserve of idle capacity is already exhausted. In the latter phase, accumulation and consumption become, indeed, strictly alternative in character.

³ F. A. von Hayek, “Capital and Industrial Fluctuations,” Econometrica, April 1934, p. 155 (reprinted in the new edition of his book Prices and Production, p. 140).

⁴ Dr. von Hayek’s theory has been criticized on rather similar lines by Alvin H. Hansen and Herbert Tout, “Investment and Saving in Business Cycle Theory,” Econometrica, April 1933. The views of these authors seem to coincide particularly closely with the views of the present writer.

⁵ It is interesting to observe that in his most recent publication (“Preiserwartungen, monetäre Störungen und Fehlinvestitionen,” Nationalokonomisk Tidsskrift, LXXIII, pp. 175-191) Professor von Hayek comes rather near to the view expressed in the text.

⁶ The origin of the monetary theory of the cycle can be traced back to the English monetary theorists of the first half of the nineteenth century (the Currency school). More modern representatives are: R. G. Hawtrey, Currency and Credit, 2nd ed., London, 1923; L. von Mises, The Theory of Money, London, 1934 (first published in 1912 in German); F. A. von Hayek, op. cit.; L. A. Hahn, Volkswirtschaftliche Theorie des Bankkredits, 3rd ed., Tübingen, 1930; Irving Fisher, The Purchasing Power of Money, New York, 1911 (recently Professor Fisher has suggested a different explanation of cycles, the “debt-deflation” theory).

⁷ F. A. v. Hayek especially has done much to refine the monetary theory of the trade cycle. See also J. Akerman, Some Lessons of the World Depression, Stockholm, 1931, and F. Machlup, Börsenkredit, Industriekredit und Kapitalbildung, Vienna, 1931.

⁸ The process is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philipps, Bank Credit, New York, 1920; W. F. Crick, “The Genesis, of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London, 1933. Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Crédit et conjuncture, Paris, 1933.

⁹ Wicksell, Geldzins und Güterpreise, Jena, 1898, and also his Lectures on Political Economy, vol. ii, London, 1935. The pioneer work done by Wicksell has given rise to an extensive literature refining and modifying his propositions (L. Mises, op. cit.; Hayek, Monetary Theory and the Trade Cycle; F. A. Fetter, “Interest Theory and Price Movements,” American Economic Review, Supplement, March 1927; J. A. Schumpeter, op. cit.; G. Halm, “Das Zinsproblem am Geld- und Kapitalmarkt,” Jahrbücher für Nationalökonomie und Statistik, 1926; W. Röpke, “Kredit und Konjunktur,” Jahrbücher für Nationalökonomie und Statistik, March-April 1926; G. Myrdal, “Der Gleichgewichtsbegriff als Instrument der geldtheoretischen Analyse,” in Beiträge zur Geldtheorie, edited by F. A. von Hayek, Vienna, 1933).

¹ The dislocations proceeding in the economic process are gone into in detail by Pigou, Industrial Fluctuations, loc. cit.; Hayek, Prices and Production; R. Strigl, “Die Produktion unter dem Einflusse einer Kreditexpansion,” Schriften des Vereins für Sozialpolitik, vol. 173/2, Munich, 1928, pp. 185 ff. (in this latter collection there are also other pertinent contributions).

That the shrinkage of consumption may, in the compensatory phase of the upswing be only relative in character has been demonstrated in the previous section (p. 109, footnote).

²Cf. C. Reinold Noyes, “The Gold Inflation in the United States, 1921-1929,” American Economic Review, June 1930.

³ I. Fisher, Booms and Depressions, New York, 1932.

⁴Cf. chap, iii, pp. 57-58

⁵ It must be noted, moreover, that at this period the volume of cash will represent a larger percentage of the total volume of circulating media (i.e., including credit money) than formerly. In other words, the proportion between cash and credit money has now been changed in favour of cash. It follows from this that the reversal of the process of depression will lead to an increase of credit money rather than of cash, a conclusion which may go far to correct certain fanciful ideas about the process of recovery, and to strengthen the nerves of the public against the bogy of inflation so dear to many economic puritans.

⁶ That the hoarding of cash means sterilization of purchasing power is evident. But it is not always understood how money held in bank deposits can also lead to sterilization of purchasing power. The important point is that the extent to which sterilization takes place will depend on how far these bank balances are idle or active, i.e., what is the rate of turnover of the accounts. Now, it is characteristic of the secondary depression that the rate of turnover of banking accounts slows down tremendously for the reasons enumerated in the text above, one of the contributing factors being the inflow into the banks of money which would otherwise have been invested on the securities market. While this “catalepsis of banking accounts,” the common disease of chronic depressions, afflicts the banking system, the latter has—except for saving accounts proper—to maintain a high degree of liquidity and, for a number of reasons, actually endeavours to increase its normal degree of liquidity. In other words, whereas banking accounts are now largely inactive, exerting no demand and moving no goods, the banks can and will dispose of this inert purchasing power only to a limited degree. For these reasons it is evident that inactive demand-deposits possess a deflationary character.

In this connexion it must also be noted that as long as savings exceed investment, savings will largely evaporate in covering the losses of entrepreneurs incurred in the course of the secondary depression. This is, ultimately, a factor retarding the depression, but it takes some time to do so and involves a number of frictions. It must be clearly recognized that savings are in this way largely used to make good the losses they have caused which is not exactly what they are meant for.

⁷ Mr. Keynes has succeeded in making this process particularly clear in his picturesque example of the banana plantation where a Thrift Campaign breaks out (Treatise, i, pp. 176-178). But see Mr. Robertson’s objection in Economic Journal, 1931, p. 399.

⁸ See chap, ii, pp. 24-25.

⁹ See the Memorandum of the League of Nations on Commercial Banks, Geneva, 1934.

¹⁰ The so-called “Shiftability Theory” of bank liquidity, developed especially by Waldo F. Mitchell, The Uses of Bank Funds, Chicago, 1925. Cf. Br. Suviranta, “‘The Shiftability Theory’ of Bank Liquidity,” in Economic Essays in Honour of Gustav Cassel, London, 1933, pp. 623-635.

¹ Quoted from the Monthly Review of the Midland Bank, April-May 1935.

² J. J. O. Lahn (N. Johannsen), Depressions-Perioden und ihre einheitliche Ursache, Brooklyn, 1903. The present writer found this obscure pamphlet while rummaging among old books in the University of Constantinople. Mr. Johannsen died in 1928 before the great depression drew attention to his early contribution to the problem of the secondary depression.

³ N. Johannsen, A Neglected Point in Connection with Crises, New York, 1908, and later post-war pamphlets. All these publications are mainly variations of the theme contained in the pamphlet of 1903.

⁴ D. H. Robertson, Banking Policy and the Price Level, London, 1926.

⁵ J. M. Keynes, Treatise, II, p. 100n.

⁶ See the author’s articles “Praktische Konjunkturpolitik, die Arbeit der Brauns-Kommission,” Weltwirtschaftliches Archiv, October 1931, and “Trends in German Business Cycle Policy,” Economic Journal, September 1933.

⁷ Especially in his contribution to the Festschrift für Gustav Cassel, “Die sekundäre Krise und ihre Ueberwindung” (Economic Essays in Honour of Gustav Cassel, London, 1933, pp. 553-568). See also his article “Die Nationalökonomie des ‘New Deal,’” Zeitschrift für Nationalökonomie, 1934, vol. 5, No. 5.

⁸ In various writings mostly published in the Economica and in the Economic Journal.

⁹ Bertil Ohlin, “Ungelöste Probleme der gegenwärtigen Krisis,” Weltwirtschaftliches Archiv, July 1932; articles in the Index (Stockholm), and his book Penningpolitik, Offentliga Arbeten, Subventioner och Tullar Som Medel mot Arbetslöshet, Stockholm, 1934

¹ Jacob Viner, Balanced Deflation. Inflation or more Depression, Minneapolis, 1933.

² Alexander Mahr, Hauptprobleme der Arbeitslosigkeit, Vienna, 1931. Professor Haberler’s contributions are contained mostly in unpublished manuscripts.

³ G. M. Verrijn Stuart, “Das Reflationsproblem im Lichte der Theorie des ‘neutralen’ Geldes,” Economic Essays in Honour of Gustav Cassel, pp. 605-622.

⁴ The best analysis of the present depression is now to be found in Professor Robbins’ brilliant monograph The Great Depression.