The causes of disequilibrium to be discussed in this chapter are not always separated by a sharp line from those discussed in the preceding chapter, and, after the initial stage has been passed, they shade off into one another. For a disturbance initially due to monetary factors will soon set up some disturbance on the investment side, and similarly a disturbance due to investment factors is likely, as we shall see, to cause some modification to monetary factors. But there is, nevertheless, the broad distinction that the former are due to changes on the supply side and the latter, generally speaking, to changes on the demand side.

Moreover there is a further characteristic of great importance which differentiates monetary disturbances (whenever, that is to say, the monetary change is of a quasi-permanent nature) from investment disturbances; namely that the former represents a passage from one equilibrium price level to another, whereas the latter (even when the investment change is of a quasi-permanent nature) is an oscillation about an approximately unchanged price level. Thus the former ends up in a new price structure; whereas the latter is calculated to generate an equal and opposite reaction later on. It is this characteristic which makes it appropriate to designate investment disturbances as credit cycles.

THE DEFINITION OF THE CREDIT CYCLE

Our fundamental equation has demonstrated that, if costs of production remain constant, the purchasing power of money suffers a seesaw movement up and down according as the volume of savings exceeds the cost of investment or the cost of investment exceeds the volume of savings. On the other hand, if the volume of savings is equal to the cost of investment, then the purchasing power of money fluctuates inversely with the costs of production. Moreover, the effect on the purchasing power of money of a change in the costs of production and the effect on it of a disequilibrium between the volume of saving and cost of the investment are additive and superposable.