The use of fixed-term savings accounts, where the money is placed in fractional-reserve bank-deposits, provides the banks with credit and it usually circulates at a good rate. Only a small proportion of the savings, from which the banks previously borrowed, are stored in their vaults. The rest is credited to the newer investors (at greater rates of interest than the savers can obtain, which normally enables the banks to become rich). But now the banks have difficulty in calling in sufficient credit for its return to the savers, some of whom have panicked and are pulling out their loans in the form of cash or placing it in current accounts having greater liquidity. These banks are forced to sell their long-term holdings at reduced prices, in order to balance their income with the greater outflow, since they have no-one else from whom to borrow. Money demand can no longer be easily met by its supply and the short-term rate of interest on credit rises. The money starvation at the banks causes some of them to declare insolvency and to become bankrupt, which results in the return of the credit being deferred, if in the closing-down process these savings have not been lost.
The irony is that later when the slump begins to ease, much of the money that is now in the hands of the nervous savers will again need to find investment opportunities and it will be returned to the banks deposit accounts. So the bank crisis is temporary and is partly due to the psychological state of these savers.
2.4 Reduced National Income
Much of the money that is collected for the public purse comes from taxation. However the slump has resulted in less macro-economic activity of the kind from which these taxes are usually raised. Consequently in matters of national finance there is also a shrinking of available funds. The Government badly needs to help itself as well as the whole social system, to escape from the effects of this national depression.
3. DISCUSSION ATTEMPTS TO OVERCOME THESE FOUR MAJOR DIFFICULTIES
"Business cycles" of this kind are not new to our society. Various suggestions have previously been made about what a Government should do to reduce the adverse effects of slumps. The following proposals and discussions about them are presented from a holistic Finance-Ministry (or Treasury) viewpoint, where the complete system is considered taking into consideration all of the affected parts, as taught by Henry Hazlitt [2]. Various attempts to restore the macro-economy are examined below, passing from what appears to be the obvious remedy, up to some more-complicated solutions.
3.1 Call for Price Reductions and Price Controls
Usually there is a delay until the depression is recognized by the Government. The reasons for this are purely political, but as soon as it is official the first Government response is to call for a reduction in the prices of commodities. This is followed by the imposition of price controls to fix the amount charged for the more basic consumer goods, with some of them being subsidised. In fact, many of these prices have already been cut, due to the reduced demand and the need for the smaller businesses to compete and remain viable. Some of the monopolistic concerns, particularly those partly owned or controlled by the Government, need to receive formal notice before their bureaucratic systems of organization can make these changes. The effect of the lower prices is to increase the quantity of goods being consumed, which has a small positive effect on the employment figures. But for this type of commerce, the amount of money in circulation scarcely increases, so this change does not directly result in a significant improvement in the value of goods traded within the macro-economic system.
Lower prices do ease the pensioner's problem to a degree, although nothing more is done for them and much harm may yet be caused to their savings.
3.2 Direct Attempts to Increase National Income or to Reduce the National Expenditure
The Government wants to enact new statutes to give direct benefit to the ailing parts of the system be they pensioners, industrial concerns, workers or banks. However, to achieve this aim the Government must first increase its own income (which has recently declined) and reduce its spending (which has recently increased, due to the greater numbers of unemployed workers being paid doles, or subsidies). The proposed ways for reaching this preliminary objective are to:
#1 borrow from the public and raise the National Deficit,
#2 change the amount of taxation,
#3 reduce the Governmental expenditure and
#4 deliberately inflate the currency, by printing more money.
With the exception of deliberate inflation, these changes are regarded as being temporary and their effects can be stopped or reversed after the slump has passed. These four methods of modifying the distribution of the national finances are described in more detail below.
