THE INFLUENCE OF BUSINESS ACTIVITY ON THE VELOCITY OF THE BUSINESS DEPOSITS

It has long been held that, when business is brisk, cash is turned over quicker. Indeed the velocity may increase in such circumstances more than in proportion to the transactions; so that an increase of transactions, instead of being associated with a falling price level as it would be if ‘other things remained equal’, is in fact regularly associated in the minds of business men with a rising price level. We have seen in chapter 24 that there are obvious reasons why this conclusion should be plausible. When business is brisk the whole process of exchange is accelerated, and this acceleration diminishes the average amount of time for which it is necessary or convenient to retain cash between transactions: receipts and disbursements follow hotter on one another's heels. Moreover, when markets are good, satisfactory sales can be foreseen with greater confidence, so that, at least in the belief of the business world, there is less need for provision against the contingencies of frozen stocks or debts which cannot be collected. There is also the further reason that when business is brisk there may be more strain on the resources of traders for the provision of working capital, so that they economise their holdings of cash to the utmost possible extent. The argument may nevertheless rely too much on the mere fact that in actual experience brisker business is generally accompanied by a rising, not by a falling, price level.