ABSTRACT
On the velocity of fi nal-buying. When money withdrawn from the public by taxation is applied by a government to the reduction of the national debt of the country, the velocity of fi nal-buying is decreased to the extent that the public abstains from fi nal-buying in order to reserve the money for paying the taxes. When the money remains in the hands of the public, a large portion of it is used for fi nal-buying; whilst when it is taken from the public and is all applied by the government to the repayment of loans from the public and to the repayment of bank loans, none
of it is normally used for fi nal-buying. For in the case of the repayment by the government of loans obtained from the public, the public does not use the repaid money-which is money capital-for increased fi nal-buying of consumable goods, and it is unlikely to use it for increased fi nal-buying of equipment and for increasing stocks of goods-except on the rare occasions when, owing to real or technical monetary shortage, the purchase of the said commodity capital is conditional upon the repayment of loans by the government. And, in the case of the repayment by the government of loans obtained from bankers, this does not increase the velocity of fi nal-buying of the public, except on the rare occasions when, owing to the real or technical monetary shortage, an increase in bank loans to the public for increased requirements of industry and trade is conditional upon a reduction of bank loans to governments. Moreover, pronounced reduction of government fi nal-buying for the purpose of applying the money to the reduction of government debts tends to cause a decrease in the effective demand for loans for industry and trade. On the price-level. As a matter of fact, a process consisting of the application of the proceeds of taxation to repayment of government debts, resulting, as it almost invariably does, in a decrease in the velocity of fi nal-buying of both the government and the public, constitutes the process of defl ation as operated by a government. In such cases, there can be no rise in the price-level as a result of new taxation, it being purely a question of whether a fall can be averted by some means or another. The taxation, instead of being passed on to fi nal buyers, is taken out of producers’ and distributors’ profi t-and-loss accounts, wages andeventually-rents. In the case of a tax on a particular article, if the earnings of the people engaged in the different stages of its production and distribution are too slender for the tax to be borne in whole or in part by them, the tax may be passed on to fi nal buyers to the extent that the latter are willing to buy at a higher price; but, at a time when the process of defl ation is being operated by a government, other things being equal, fi nal buyers decrease the velocity of fi nal-buying in all directions to an extent more or less proportionate with any higher price that they may have to pay for a particular article, and this, by depressing profi ts, wages and rents, tends to lower the price-level. Taxes on imported goods, when the proceeds are applied to the repayment of government debts, operate in a similar manner-namely, fi nal buyers have to decrease their purchases of goods and services in general because they have less money after paying the taxes on the imported goods, and this depresses the price-level-if not the prices of the imported goods. On the commodity value of the debts. Reduction of government debts when accompanied by defl ation does not, in view of the lower price-level, result in any reduction of the commodity value of the debt. The British Chancellor of the Exchequer, in 1926, supplied information showing that, whereas the total interest paid on the National Debt, exclusive of American Debt, had fallen since the Budget year 1920-1921 from £326,000,000 to £274,000,000 for 1925, the burden in terms of commodities at the lower price-level had risen in the same period from £225,000,000 to £274,000,000.59
Reduction of the money value of national debts may, therefore, cause a decrease in the velocity of fi nal-buying in relation to the velocity of production, without bringing about a decrease in the commodity value of the debts.
