REDUCED  COST  CANNOT  REDUCE  ALL  PRICES  I  23

assumption  that  demand  would  increase  is  without  warrant.
Dr.  Smart  is  only  justified  in  assuming  that  demand  might
increase.  All  increase  of  supply  might  be  demanded  and
consumed  as  fast  as  it  grew.  If  that  actually  occurred
there  would  be  no  alteration  in  the  quantitative  relation
of  supply  and  demand  (quantity  demanded)  at  the  different
stages  of  industry.  Moreover,  there  could  then  be  no  fall  of
prices.  Dr.  Smart  thinks  that  scarcity  of  money  causes  the
general  fall  of  prices  which  others  have  attributed  to  reduced
cost  of  production.  But  if  every  increase  of  supply  was
taken  off  in  increased  demand,  no  scarcity  of  money
(assuming  there  were  such  a  thing)  could  affect  prices.
This  may  be  tested  by  a  closer  attention  to  any  class  of
prices.  Suppose  a  general  increase  of  supply  in  all  retail
shops  and  a  corresponding  increase  of  demand  as  a  necessary ­
  counterpart,  retailers  would  not  lower  prices  but  would
sell  the  increased  quantity  of  goods  at  the  same  prices  as
before.  If  scarcity  of  money  is  to  be  operative  in  reducing
prices,  it  can  only  be  by  preventing  demand  from  keeping
pace  with  increased  supply,  i.e.,  by  defeating  the  operation
of  what  has  just  been  assumed  as  a  necessary  law,  the
effective  demand  of  the  whole  of  supply.
It  is  of  course  true  that  with  every  increase  of  supply
an  increase  of  “  purchasing  power  ”  or  possible  demand  is
created.  If  this  power  is  exercised,  nothing  that  happens
to  the  supply  of  money  can  prevent  prices  from  standing
firm.  If  scarcity  of  money  does  operate  on  prices  it  can
only  be  by  preventing  some  of  the  possible  demand  from
becoming  effective.  If  prices  do  fall  it  means  that  those
who  have  the  power  to  demand  all  the  increased  supply,
do  not  exercise  it,  but  withhold  it.