I propose in this chapter to take a particular type of credit cycle and to work it out in full detail. Owing to the simplifying assumptions which have to be introduced in order to rule out the various complexities which are usually present in actual life, the example taken is somewhat artificial. Since, moreover, it does not add to the previous argument but only illustrates it, some readers may prefer to leave this chapter out. The method and the ideas of the preceding chapters will, however, be better illustrated in this way than if I were to cover more ground less intensively.

The type taken is one at the inception of which some of the factors of production are unemployed. It is then assumed that the banks adopt a lending policy which allows the production of consumption goods to increase, accompanied by a building up of an additional stock of working capital inadequately compensated by additional saving, sufficient to permit all the unemployed factors of production to return gradually to work. The chapter is, therefore, an essay in the internal mechanics of the price-wage-employment structure during the course of a cycle which represents a recovery in the volume of employment from a preceding slump which has reached an equilibrium between prices and costs of production, but is still characterised by unemployment.

THE STANDARD CASE

Let us begin by simplifying the problem so as to set out the essential mechanism (which, as we shall find, is substantially similar in the more generalised cases) in a manner which is free from non-essential complications.