II

INFLATION AND DEFLATION

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consumption-goods will also make a loss. Inother words, all classes of producers will tendto make a loss; and general unemployment willensue. By this time a vicious circle will be setup, and, as the result of a series of actions andreactions, matters will get worse and worse untilsomething happens to turn the tide.

This is an unduly simplified picture of acomplicated phenomenon. But I believe thatit contains the essential truth. Many varia-tions and fugal embroideries and orchestrationscan be superimposed; but this is the tune.

If, then, I am right, the fundamental cause ofthe trouble is the lack of new enterprise due toan unsatisfactory market for capital investment.Since trade is international, an insufficient out-put of new capital-goods in the world as a wholeaffects the prices of commodities everywhereand hence the profits of producers in all coun-tries alike.

Why is there an insufficient output of newcapital-goods in the world as a whole? It isdue, in my opinion, to a conjunction of severalcauses. In the first instance, it was due to theattitude of lenders—for new capital-goods areproduced to a large extent with borrowedmoney. Now it is due to the attitude ofborrowers, just as much as to that of lenders.

For several reasons lenders were, and are,asking higher terms for loans than new enter-prise can afford. First, the fact, that enterprisecould afford high rates for some time after thewar whilst war wastage was being made good,