19 - SOME SPECIAL ASPECTS OF THE CREDIT CYCLE

Summary

THE ‘JUSTIFICATION’ OF COMMODITY INFLATION

The experiences of the post-war period led many of us to advocate stability of the price level as the best possible objective of practical policy. Amongst other things, this would mean an attempt on the part of the banking authorities to eliminate the credit cycle at all costs. This advocacy has led to criticism, of which Mr D. H. Robertson (in his Banking Policy and the Price Level) is the main author, to the effect that the credit cycle, though guilty of disastrous excesses and grave crimes, has a part to play in a progressive society, and that an attempt to check it altogether might produce stagnation as well as stability. It may be convenient, therefore, to examine at this point how much force there is in Mr Robertson's contentions.

The main basis of Mr Robertson's argument is that the commodity inflation phase of a credit cycle, so long as it lasts, causes the wealth of the community to increase faster than would otherwise be the case. This is undoubtedly true. The result of commodity inflation is to cause the current output of the community to exceed its current consumption to a greater extent than would be the case otherwise; whilst, on the other hand, the higher real wages which are enjoyed during a slump are at the expense of normal capital accumulation.