Sunday, April 26, 2009

why Bother About inflation ? (5)

A fifth reason for rejecting inflation, Which is closely related to the one just discussed has been well expressed by Hicks in the following way:
If one examines the balance-sheet of the business "at a moment of time" it will usually be found to have among its assets not only some money which is not earning interest, but also some debts owing to it on which it is not charging interest. If one asks why it should hold assets in this latter from, the answer is surely that it is a matter of convenience, Just like the reason for holding money. A debt that is due from a regular customer is not regarded in isolation; it is part of the regular relation between customer and supplier, which it is to the interest of both to maintain in way that is convenient to both. On This, as on the money holding, inflation exercises a pressure. when money rates of interest are high.... the loss of interest that is involved in unpaid debts becomes more serious. It thus becomes profitable to take more trouble in collecting debts promptly, exerting pressure on debtors which would otherwise not need to be exerted. There is a real loss, measurable in lab our-time, in exerting such pressure. And since the debtor himself has a similar incentive to delay payments, it is easily intelligible that the loss can be considerable.

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