CHAPTER 20

AN EXERCISE IN THE PURE THEORY OE THECREDIT CYCLE

I propose in this chapter to take a particular typeof Credit Cycle and to work it out in full detail.Owing to the simplifying assumptions which have tobe introduced in order to rule out the various com-plexities which are usually present in actual life, theexample taken is somewhat artificial. Since, more-over, it does not add to the previous argument butonly illustrates it, some readers may prefer to leavethis chapter out. The method and the ideas of thepreceding chapters will, however, be better illustratedin this way than if I were to cover more ground lessintensively.

The type taken is one at the inception of whichsome of the factors of production are unemployed. Itis then assumed that the banks adopt a lending policywhich allows the production of consumption-goods toincrease, accompanied by a building up of an addi-tional stock of working capital inadequately com-pensated by additional saving, sufficient to permit allthe unemployed factors of production to returngradually to work. The chapter is, therefore, anessay in the internal mechanics of the price-wage-employment structure during the course of a Cyclewhich represents a recovery in the volume of employ-ment from a preceding slump which has reached anequilibrium between prices and costs of production,but is still characterised by unemployment.

VOL. I 305

x