270

A TREATISE ON MONEY

BR. IV

tion) of investment has worked itself out in an increase(or decrease) of will the lending capacity of

the banks be again restored to equilibrium withsaving (for the excess loans will be balanced bythe accrual of profits at the end of each productionperiod and will, therefore, be again available, directlyor indirectly, for the next production period) andwith the task of furnishing an Industrial Circula-tion appropriate to the now increased (or decreased)

I / - S

earnings-bill. But, finally, the second term will

have to fall back again to zero ; the banks no longercommanding a surplus lending power wherewith tostimulate investment to outstrip savings (or viceversa). A new equilibrium will have been established

with both P and

M 1 Y 1

0

at a higher (or lower) level

corresponding to the increased (or decreased) volumeof money.

It must not be supposed, however, that this transi-tion from an enhancement of prices as a result ofan increase in the second term of the FundamentalEquation to their enhancement as a result of an increasein the first term will necessarily take place smoothly.If it is a case of reducing the rate of earnings, thefactors of production may resist the fall, with theresult that their period of unemployment may beprolonged. Moreover investment may continue toexceed (or fall short of) saving after what should bea sufficient alteration of Mi Vi has taken place, withthe result of driving prices to a higher (or lower) valuethan can be permanently sustained. Thus a series ofminor oscillations backwards and forwards will be setup before the final position has been reached.

Furthermore, if we are not dealing with a closedsystem, part of the initial increase (or decrease) in thesupply of money relatively to the demand at the oldequilibrium will probably be obliterated by an export or