Mr. Gilbert's Defence of a Constant Circulation

Abstract

IT is the purpose of this note to examine the reasons given by Mr. J. C. GILBERT (ECONOMICA, May 1934) for stabilising the quantity of money at a time when the income velocity of circulation is forced down by an increase in the commercial stages through which intermediate goods must pass as the capital of the community increasesl or for any other reason. The problem then arises whether equilibrium is preserved by the stabilisation of the amount of money multiplied by its income velocity or by holding the circulation constant. If the former policy is pursued the total money income of a constant population will be stabilised while if the latter policy is pursued money income will be rapidly reduced. In my view the first policy should be pursued (Purchasing Power and Trade Depression, Chapter VI, §. 2), while in Mr. Gilbert's view the second policy alone will prevent maladjustments in the real structure of production. Now the only reason that Mr. Gilbert gives for this view is the somewhat ambiguous statement that in order to obtain the increase in the quantity of money necessary to stabilise the income velocity of circulation the Rate of Interest must be lowered below the equilibrium rate of interest. . .. The new supplies of money are injected into the economic system via the producers by means of lowering the money rate of interest below the new and lower equilibrium rate. When the quantity of money has been sufficiently increased to compensate for the decrease in income velocity, the money rate of interest must be raised to the new equilibrium rate ....