Page 93 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

causes (3) a fall in the level of prices, in other words, a
swelling of the dollar. Assuming, as stated above, that
this fall of prices is not interfered with by reflation or
otherwise, there must be (4) a still greater fall in the net
worths of business, precipitating bankruptcies and (5) a
like fall in profits, which in a “capitalistic,” that is, a pri-
vate-profit society, leads the concerns which are running
at a loss to make (6) a reduction in output, in trade, and
in employment of labor. These losses, bankruptcies, and
unemployment lead to (7) pessimism and loss of confi-
dence, which in turn lead to (8) hoarding and slowing
down still more the velocity of circulation. The above
eight changes cause (9) complicated disturbances in the
rates of interest, in particular, a fall in the nominal, or
money, rates and a rise in the real, or commodity, rates
of interest. 14

Fisher said that the combination of overindebtedness and
deflation is devastation. “The two diseases act and react on
each other,” he said. The first leads to the second, “and, vice
versa, deflation caused by the debt reacts on the debt. Each
dollar of debt still unpaid becomes a bigger dollar, and if the
overindebtedness with which we started was great enough, the
liquidation of debts cannot keep up with the fall of prices which
it causes. In that case, the liquidation defeats itself. While it
diminishes the number of dollars owed, it may not do so as fast
as it increases the value of each dollar owed.”
Fisher identified two ways to get out of an economic
depression. One is the natural and long way, through bank-
ruptcy, unemployment, and starvation. The other way—artifi-
cial and quick—is to “reflate the price level to the average

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