When the supply of money alters, the effect produced upon prices depends upon the effect alterations in the supply have upon the willingness to hold stocks. At first the effects of increasing supplies upon the price level, when spent by the issuer, are not in any case likely to be very great. If, at such a time, people's will ingness to increase their stocks extends, the rise in the price level will not be in proportion to the increase in the output of money. But if this output increases continuously, the rise in the price level will tend to be more and more rapid and to outstrip the increase in the quantity of money, and that for two reasons. The larger the stock already held, the lower must be the price at which addi tional amounts must be offered to holders in order to induce them to take more. It may be argued that, as prices rise, individual holders need to hold more, because otherwise the stock held will be inconveniently small in view of the new price level. This is so, but it by no means follows that in the course of the process of adaptation, individuals have not altered their ideas as to what a convenient stock is; in fact, the rise of prices shows that they must have done so. In any case, if the supply of money goes on
increasing and prices go on rising, anticipation of the future value of money begins to play an important part. Just as individuals will refuse to add to their stocks of cotton at a time when they believe that cotton will continue to fall in value, so they will refuse to add to their stocks of money at a time when that is falling in value, and unwillingness to add to their stocks is in itself a cause why the fall in the value of money should proceed more rapidly.
It makes no essential difference to the new formulation whether credit is regarded as a form of money or not. If it is so regarded, then the demand for stocks must be regarded as a demand for so much cash plus so much credit. It is thus that the position is treated by Keynes and Hawtrey. If credit is regarded as a sub stitute for cash, as it is by Cannan, then the demand for cash will fall off if credit arrangements are regarded as more convenient, and in the absence of appropriate arrangements for withdrawing superfluous cash, prices will rise, since part of the stock of cash will have become redundant.
See also INFLATION AND DEFLATION ; MONEY ; BANKING AND CREDIT ;