Monetary Theory 

R. G. l lawtrcy was a firm believer in the 11I011- etary theory. According to him. \’,11iauons in flows of 1II1111e)arc the sole and sul] i~’icllt dctcruuuantx of business activity and account for alt(,lIIating phases of prosperity and depression. Non-monetary causes like drought. floods, earthquakes. wars. strikes. un balanced development (If certain industries, etc., can at best cause a P:II·ti••1 as distinguished from gCllc.-a1 depression. The argument is something like this: Most of the business is done with burrowed muney. When business prospects are good, thc banks freely extend credit facilities. Assured of cheap and easy credit facilities,
the businessmen go on expanding their business, entering into further and further commitments. A huge superstructure of credit is built up. This superstructure can be maintained by the continuance of cheap money conditions. if not their further extension. But a point is reached. When banks think that they have gone a bit tuo far in the matter of advances. Probably their reserve ratio has fallen dangerously low. In selfdefence, they apply the brake, curb further expansion • of credit, and begin to recall advances. This sudden suspension of credit facilities proves a t nub-shell to the business community. Businessmen have been counting on the renewal
of overdrafts and cash credit facil ties. But contrary to their expectation, moneys are being called in. TIley have to sell off their stocks in order to repay. This general desire for liquidity depresses the market, for the stocks arc being unloaded all round. Some firms, weaker links of the chain, fail to meet thcirobliganons and bring to grief those whom they could not pay. Very solvent firms ma  fail, simply because they do not receive timely financial assistance from tile banks.

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