268

A TREATISE ON MONEY

BK. IY

Thus all the new money will eventually find itsway either to M 1} corresponding to (1) the increasedearnings-bill MjVj, or to M 2 to look after either (2) theincreased entrepreneurs’ turnover or (3) the increasedStock Exchange turnover, or to M 3 to provide for (4)the enlargement of the “ bear ” position.

Now so long as the new money is absorbed by (3)and (4), without, however, stimulating the output ofnew investment, there will be no effect on the pur-chasing power of money, since, although I (the valueof the output of new investment) will have increased, I'(the cost of this output) will not have increased. Butin so far as the earnings-bill is increased, and alsoin so far as entrepreneurs change over from the pro-duction of consumption-goods to that of capital-goodsunder the influence of the profits obtainable fromthe production of the latter on account of their rise inprice, not only will P increase (i.e. the purchasingpower of money decline) but I' - S will increase, withthe result that P will increase (temporarily) by more

than

M.V,

0

has increased.

Thus the effect of the new money in the firstinstance is—unless it is needed to balance changes inV, or V 2 :

(i.) To increase M 3 , M 2 and P' (the price-level of newinvestment-goods), whilst leaving I' - S, MiVjand P unchanged ; or

(ii.) To increase I' -S and P, whilst leaving M 1 V 1unchanged ; or

(iii.) To increase I' -S, and P, whilst leaving

MiVi

0

unchanged ; or

(iv.)

To increase I' - S, M^,

MiVj

0

and P.

Changes in M 3 , M 2 and P' can, of course, also occurin cases (ii.), (iii.) and (iv.).