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A TREATISE ON MONEY

BK. IV

always sell consumption-goods for an aggregate sumwhich, is at least equal to their cost of production.Thus there is no theoretical necessity for a reactionleading to windfall losses ; when the over-investmentcomes to an end, the boom may just cease. Weshall examine a particular case of this in detail inChapter 20.

Nevertheless, there are many reasons why in actualfact the downward price phase is likely to usher in,not merely the end of windfall profits, but the begin-ning of windfall losses.

First of all, on the investment side new influenceswill be coming into operation. Some entrepreneurswill, as a result of inaccurate forecasting, have been ledinto producing in conditions of sub-normal efficiencyin which they cannot cover their costs of productionunless prices are such that entrepreneurs as a wholeare making a windfall profit. The fall of prices will,therefore, cause these entrepreneurs to cease suchproduction—which will, by reducing investment inworking capital, reduce the total rate of investment.The sight of falling prices, and perhaps of a decliningvolume of output also, may change financial sentimentin two ways,—“ bear ” views may develop, with theresult of augmenting the demand for money in theFinancial Circulation and so reducing the supply ofmoney for the Industrial Circulation, thus causingthe banks to force a reduction of investment, and theCapital Inflation (which, as we have seen, is influencedmore by opinion than by the volume of money) maydisappear, perhaps giving place to a Capital Deflation( i.e . a fall of P'), thus removing one of the stimuli toover-investment.

Meanwhile, on the monetary side also the positionwill be changing. Apart from the cessation of thebullish unanimity which had temporarily augmentedthe Industrial Circulation at the expense of theFinancial Circulation, the other short-period factors,