CH. 22

NOTES ON THE TRADE CYCLE

3i9

capital; after the lowest point has been passed there islikely to be a further disinvestment in stocks whichpartially offsets reinvestment in working-capital; and,finally, after the recovery is well on its way, both factorswill be simultaneously favourable to investment. It isagainst this background that the additional and super-imposed effects of fluctuations of investment in durablegoods must be examined. When a decline in this typeof investment has set a cyclical fluctuation in motionthere will be little encouragement to a recovery in suchinvestment until the cycle has partly run its course . 1

Unfortunately a serious fall in the marginal efficiencyof capital also tends to affect adversely the propensityto consume. For it involves a severe decline in themarket value of Stock Exchange equities. Now, onthe class who take an active interest in their StockExchange investments, especially if they are em-ploying borrowed funds, this naturally exerts a verydepressing influence. These people are, perhaps, evenmore influenced in their readiness to spend by risesand falls in the value of their investments than by thestate of their income. With a “stock-minded” public,as in the United States to-day, a rising stock-marketmay be an almost essential condition of a satisfactorypropensity to consume; and this circumstance, gener-ally overlooked until lately, obviously serves to aggravatestill further the depressing effect of a decline in themarginal efficiency of capital.

When once the recovery has been started, themanner in which it feeds on itself and cumulates isobvious. But during the downward phase, when bothfixed capital and stocks of materials are for the timebeing redundant and working-capital is being reduced,the schedule of the marginal efficiency of capital mayfall so low that it can scarcely be corrected, so as tosecure a satisfactory rate of new investment, by any

1 Some part of the discussion in my Treatise on Money, Book IV, bearsupon the above.