for wages, are paid back to the banks, which, in turn, fail to lend them out again, partly because of an increased liquidity preference of their own and partly because of lacking demand for loanable funds. The impact of this decrease in effective demand leads to a general fall in prices.
Later on it may be possible to stem the deflationary tide by the injection of new purchasing power into the economy in order to prevent the contraction from going further than required by the disproportionalities which developed during the expansion period.
This short recapitulation of modern business cycle theory will serve to show that expansion as such cannot claim to be an economic policy which can be applied with equal success under all circumstances. Even when used in times of underemployment it remains a treatment which, while indispensable, needs most careful supervision while it is applied.
Of course we cannot expect to find a solution of this most difficult problem of credit control in a plan which is mainly devoted to international currency stabilization. But we could expect to find either a neutral instrument for international monetary policy or else an elaborate plan for an integrated world credit control. That the Keynes Plan is neither is its greatest shortcoming. Its neutrality as an instrument is impaired by Lord Keynes's prejudice against deflation and contraction; and its provisions for an integrated credit control are too vague and too one-sidedly expansionist to serve as a reliable guide for post-war credit policy.
In fairness to Lord Keynes it should be said, however, that the proposals for an International Clearing Union constitute only one of "four main lines of approach" which "taken together . . . may help the world to control the ebb and flow of the tides of economic activity" ( Keynes Plan, Preface).22.____________________