Portal de Periódicos da CAPES

Cheap Money Policy

1947; Wiley; Volume: 14; Issue: 55 Linguagem: Inglês

10.2307/2549786

1468-0335

F. W. Paish,

European Monetary and Fiscal Policies

IN its simplest terms, a cheap money policy is a policy of driving down, or preventing a rise in, interest rates by increasing the quantity of money. The effects of an increase in the quantity of money are not always the same. They depend mainly on two things: first, the point in the system where the money is injected; and second, the state of business confidence ruling at the time. Money is parted with mainly for two purposes-spending and lending (under lending is included the purchase of variable dividend securities), and we can classify money held into two categories according to the use to which it is intended to put it-money-to-spend and money-to-lend. Now if we increase money-to-spend-if, for instance, each of us one morning found an official envelope on our breakfast plates containing ten one-pound notes, with a polite letter from the Government asking us to buy ourselves a present with it--the result will be a rapid increase in demand for goods and services. If there is widespread unemployment of resources at the time, this will normally lead to an increase in output with little or no rise in prices, and probably to an increased demand for capital to finance the increase in output and a tendency for interest rates to rise. Only if business confidence is at a very low ebb indeed will the shopkeepers or others whose stocks are depleted by the increase in demand use their extra receipts for repaying debts instead of buying new supplies, so that their creditors, in seeking new channels for investing the money repaid, will tend to force down the rate of interest. If, on the other hand, resources are already fully employed, the increased demand will merely cause a rise in prices and, unless interest rates are raised sharply or other measures are taken to check it, will start or intensify a monetary inflation. In contrast to this, when money-to-lend is injected into the system its immediate effect will be to reduce interest rates. Where business confidence is low, it may be a long time before the lower rates of interest encourage increased borrowing for expenditure on additional capital goods, and interest rates can be forced down a long way before any large part of the new money becomes money-to-spend. When, however, business confidence is high, the new money will be quickly borrowed and spent, with a resultant increase in output if there are many unemployed resources and an increase in prices if there are not. In conditions of very high business confidence, it is possible that an increase in the supply of money-to-lend may very quickly induce a more than proportionate increase in the demand for it, and, if full employment has been reached, may generate a runaway inflation just as certainly and almost as quickly as an increase in money-to-spend.