It does not make much difference to the subsequent course of the argument whether the balance between the demand and supply of money for the industrial circulation is changed as a result of a change in the total supply of money or of a change in the requirements of the financial circulation, or of a change in the requirements of the industrial circulation relatively to the value of output, or of a change in the volume of incomes. For example, if the requirements of the industrial circulation are falling relatively to the value of output, this means that entrepreneurs are getting back against current sales more money than they require to maintain output at the existing bill of costs, so that the banking system finds itself with redundant lending power at the old equilibrium, just as it would if the total supply of money had been augmented. It will be sufficient, therefore, to consider the case of a change in the total supply of money.

THE INDUSTRIAL CONSEQUENCES OF A CHANGED SUPPLY OF MONEY

By what route will the injection of an increased quantity of money into the monetary system, or a withdrawal of money from it, bring about a new equilibrium at a changed price level?

Since the injection of an increased quantity of cash (using this word to include central bank reserves) into the monetary system will increase the reserve resources of the member banks, it will, for reasons already explained, render the latter more willing lenders on easier terms; that is to say, the new money stimulates the banks to put resources at the disposal of those borrowers who are ready to employ them, if they are offered on satisfactory terms. Conversely, a withdrawal of cash from the monetary system, by reducing the reserve resources of the member banks, influences the latter to withdraw resources from borrowers.