THE INFLUENCE OF BUSINESS ACTIVITY ON THE VELOCITY OF THE BUSINESS DEPOSITS

It has long been held that, when business is brisk, cash is turned over quicker. Indeed the velocity may increase in such circumstances more than in proportion to the transactions; so that an increase of transactions, instead of being associated with a falling price level as it would be if ‘other things remained equal’, is in fact regularly associated in the minds of business men with a rising price level. We have seen in chapter 24 that there are obvious reasons why this conclusion should be plausible. When business is brisk the whole process of exchange is accelerated, and this acceleration diminishes the average amount of time for which it is necessary or convenient to retain cash between transactions: receipts and disbursements follow hotter on one another's heels. Moreover, when markets are good, satisfactory sales can be foreseen with greater confidence, so that, at least in the belief of the business world, there is less need for provision against the contingencies of frozen stocks or debts which cannot be collected. There is also the further reason that when business is brisk there may be more strain on the resources of traders for the provision of working capital, so that they economise their holdings of cash to the utmost possible extent. The argument may nevertheless rely too much on the mere fact that in actual experience brisker business is generally accompanied by a rising, not by a falling, price level.

FEBRUARY 1924

We have an admirable custom in this country by which once a year the overlords of the Big Five desist for a day from the thankless task of persuading their customers to accept loans and, putting on cap and gown, mount the lecturer's rostrum to expound the theory of their practice—a sort of saturnalia, during which we are all ephemerally equal with words for weapons. These occasions are of great general interest. But they are more than this. They have a representative significance; they hold up, as it were, financial fashion plates. What have they found to say this year about monetary policy?

Only one, Mr Walter Leaf, of the Westminster Bank, has refrained himself entirely. Each of the other four has had something to say. They fall into a pair of couples: one of which, Mr Beaumont Pease of Lloyds Bank and Sir Harry Goschen of the National Provincial Bank, feel that there is something improper, or at any rate undesirable, in thinking or speaking about these things at all; and the other of which, Mr Goodenough of Barclays Bank and Mr McKenna of the Midland Bank, so far from deprecating discussion, join in it boldly.

Keynes's earliest publication, apart from a few brief reports of Cambridge Union debates in The Cambridge Review, was a review of volume vn of The Cambridge Modern History.

From The Cambridge Review, 5 November 1903

THE CAMBRIDGE MODERN HISTORY

The seventh volume of the Cambridge Modern History differs somewhat from the general scheme of the series in the fact that it comprises what is to all intents and purposes the history of a single nation. The history of Canada is pursued up till 1761, but, apart from the introduction of two chapters dealing with this subject, the volume follows without intermission the history of the United States from the first foundation of the colonies up to the year 1902, the period of independence being treated mainly by American writers, the earlier chapters by English. Not unnaturally, perhaps it is the latter half that proves to be of the greater interest. Apart from a most admirable chapter by Miss Mary Bateson on the French in America, the earlier writers have not succeeded in presenting more than a clear and accurate narrative of events or in giving a very fresh presentment of what is, perhaps, a somewhat well worn theme; but from the Declaration of Independence onwards the treatment could scarcely have been better.

Mr Doyle gives a clear and succinct account of the early history of the British Colonies, but their foundation was altogether devoid of the glamour and the romance that makes Miss Bateson's account of The French in Canada one of the most fascinating in the volume.

In chapters 2 and 25 we considered the limitations on the discretion of a member bank in a monetary system to ‘create’ bank money. We found that any individual bank is compelled —unless it is prepared to allow its reserve ratio to be modified (up or down)—to ‘keep step’ with the other banks of the system, including the central bank. They can all march forward together and they can all march backward together. A tentative movement in one direction or the other on the part of a single bank may confirm, strengthen or stimulate a tendency on the part of the other banks to move in the same direction. But a single bank cannot move far unless the others move too; for otherwise its loss or gain of reserve resources will rupture its reserve ratio. Accordingly the total quantity of bank money created is closely governed by whatever causes determine the aggregate of reserve resources for the member banks as a whole.

Now the behaviour of an international system, made up of several national systems of member banks each clustering round its central bank, with a uniform currency standard, is essentially the same in principle as that of a closed national system. The discretion of the central banks in respect of their lending policies is limited by the effect of these policies on their reserves—on whether these policies are causing them to draw reserve resources from, or to lose reserve resources to, their neighbour central banks; and there is a similar pressure on them to ‘keep step’—unless they are prepared to see their reserve ratios modified.

From The Evening Standard, 31 July 1928

HOW TO ORGANISE A WAVE OF PROSPERITY

In the spring of every year there is a seasonal recovery of certain industries which have been held back by the winter. This comes handy for the annual speeches of the chairmen of the big banks and for the Chancellor of the Exchequer introducing his Budget. So at each of their annual celebrations the professional optimists assure us, on the strength of the spring trade, that at last the revival is at hand.

By July we always know that we have been had again. This year particularly so. It is certain that trade on the whole is bad. There are 200,000 more unemployed than at this date a year ago. Indeed, there are as many unemployed as in any July in the last six years except during the great strike.

The railway traffics confirm these figures. So does the condition of the staple industries considered separately—coal, agriculture, cotton, shipbuilding, iron and steel, motors, and (more doubtfully) building and construction. A small increase in certain classes of exports is the only favourable feature.

In short, both profits and employment are disastrously poor. Moreover, the more successful the efforts which are being made to restore the margin of profits by ‘rationalisation’, the greater the likelihood—at first anyhow—of increasing unemployment.

This volume, one of three dealing with Keynes's more academic writing, forms a companion volume to A Treatise on Money and The General Theory of Employment, Interest and Money. In it appear his related articles, memoranda, correspondence with other economists and what survives in the form of drafts connected with his activities as an academic monetary economist between 1924 and 1939.

The material for this volume comes from the papers he kept from the period concerned, from his published contributions to journals and books, from the correspondence retained by his contemporaries. In this connection, we should like to thank Sir Ralph Hawtrey, the late Professor Sir Dennis Robertson in his lifetime and subsequently his executor Professor S. R. Dennison, Joan Robinson, Mr P. Sraffa, Professors J. E. Meade, Sir John Hicks, B. Ohlin, F. A. von Hayek, D. G. Champernowne, W. B. Reddaway and N. Kaldor for their assistance in preparing this volume. They have provided us with correspondence and with memories that have helped to shape this material.

It has been necessary, in order to make this material intelligible to a generation which did not live through the events and may be unfamiliar with some of the personalities and issues involved, to provide a minimum of factual background. We have tried to make this background sufficient for clarity and ease of use, but neither obtrusive nor argumentative. The purpose has been to provide the material from which the reader can form his own judgment rather than to impose the judgment of the editor.

When it diverged greatly from the text on page 42 above, the original article ‘Inflation as a Method of Taxation’ concluded as follows:

This is another way of putting what economists mean by the velocity of circulation increasing when a currency loses credit. The public try to protect themselves in this way when they have been convinced by experience that their money is always falling in value and that every holder of it loses.

These theoretical considerations are of the utmost practical importance at the present time, because several currencies have now entered on this second phase. In the last stages of inflation the prodigious increase in the velocity of circulation may have more effect in raising prices and depreciating the exchanges than the increase in the volume of notes; and the note-issuing authorities cry out against what they regard as the unfair phenomenon of the value of the notes falling more than in proportion to their increased volume.

In Moscow the unwillingness to hold money except for the shortest possible time reaches a fantastic intensity. If you buy a pound of cheese in a grocer's shop, the grocer runs off with the roubles as fast as his legs will carry him to the Central Market to replenish his stocks by changing them into cheese again, lest they lose their value before he gets there. This is what keeps the new bourgeoisie so thin, and justifies the prevision of economists in naming the phenomenon ‘velocity of circulation’.