304

A TREATISE ON MONEY

BK. IV

increase the requirements of the Financial Circulation.It may be, therefore, the tendency of the FinancialCirculation to increase, on the top of the increase inthe Industrial Circulation, which will break the backof the Banking System and cause it at long last to im-pose a rate of interest, which is not only fully equalto the market-rate but, very likely in the changedcircumstances, well above it.

Or it may be that the attractions of new invest-ment will wear themselves out with time or with theincreased supply of certain kinds of capital-goods.

Or, finally,—failing a turn-about from any of theabove causes—there is likely to be a sympatheticreaction, not much more than one production periodafter the secondary phase of the boom (the increasedactivity in the production of consumption-goods) hasproperly set in, owing to the inevitable collapse inthe prices of consumption-goods below their higherlevel.

Thus the collapse will come in the end as theresult of the piling up of several weighty causes—theevaporation of the attractions of new investment, thefaltering of financial sentiment, the reaction in theprice level of consumption-goods, and the growinginability of the Banking System to keep pace withthe increasing requirements, first of the IndustrialCirculation and later of the Financial Circulationalso.

The order of events is, therefore, as follows.First, a Capital Inflation leading to an increase ofInvestment, leading to Commodity Inflation; second,still more Capital Inflation and Commodity Inflationfor approximately one production period of consump-tion-goods ; third, a reaction in the degree of theCommodity and Capital Inflations at the end of thisperiod; fourth, a collapse of the Capital Inflation;and finally, a decrease of Investment below normal,leading to a Commodity Deflation.