How Money Influences the Rate of Spending

The level of spending and the cost-price structure are not determined statically by certain specifiable magnitudes existing at a moment. An economy is a living thing. What it does is current history and largely a product of recent history, though the impact of events may skip over time in an uneven way. In dealing with practical situations we are well aware of this continuity. We know that people go to work in the morning, spending money to get there, because they have a job. They buy food, clothes, and things for the house, see the doctor, engage to make payments for a house and a car, and the like on the basis of the income they have been getting and expect to get. They make financial investments on this basis too, and sometimes direct investments in buildings, improvements, or equipment. Receiving and spending money in a particular pattern is literally a mode of life with them.

Those who run businesses also have a routine. They have established trade and financial connections and a regular working force. They take for granted that certain basic conditions in the economy will remain very much the same in the immediate future--for instance, consumer spending behavior, the pattern of price relationships, and the general state of business. The sales they expect to make are the main reason for their outlay. Money that is coming in and expected to come in serves both as a profit motive and as a means of making further outlay. As is well known, outlay for capital expansion by business corporations is strongly influenced by their cash flow. This is true also of the capital outlay of small businesses and farmers. The rate of spending is influenced both by the prospect of profits and by the desire to maintain a workable relationship between money receipts and outlay. In deciding what to do on both counts, people are guided by recent experience, and so they make the immediate future somewhat of a reflection, though not an exact image, of the recent past.

We all make one anothers' markets; we adjust our commitments to what we can expect from others. But it is not enough to say that we are mutually dependent. One man's recent experience as regards income and prospects for income is the basis for action that becomes a part of other people's economic environment in the near future. The lines of connection between one member of the economy and another may run through time. Thus there is a continuity in the rate of spending, just as there is in other aspects of economic life and of social life in general.

But there is no arithmetic requirement for present spending, or any class of it, to be like yesterday's. Money does not flow; to say that it does is only a metaphor. It is merely that it seems reasonable to most people to act in a way that brings no sharp break with the past. Sometimes historical accidents, such as unusual weather conditions, sudden shifts in consumers' tastes, strikes, or a financial casualty, may have sharp impacts upon spending. There are thousands of these, great and small, but to an important extent they tend to cancel. A change in business prospects causes business and consumer outlay to change fairly rapidly at times, but the change is not discontinuous. Moreover, the economic system has a great deal of self-correcting power over the short run, which tends to prevent a movement from becoming explosive.

A change in monetary ease or pressure may accelerate spending, but its influence is usually slow and cumulative and not easily discernible at a given time. However, it exerts a continuous gravitational pull and may in time change the general business climate. The realization that it can do so may cause a pronounced change of monetary policy to affect the business outlook immediately.

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