PURELY MONETARY THEORIES OF CYCLES
THE best exposition of a purely monetary theory of business cycles is that of Mr. R. G. Hawtrey, the British authority on banking and finance. It is his view that the upturn of the cycle from depression is caused by an expansion of credit brought about by the banks. They cause this expansion by making it easier and cheaper for bank customers to borrow, and they may do this not only by lending at lower rates than those that have previously been in effect, but by increasing the length of the loans, relaxing the requirements as to the security demanded as collateral, or by scrutinizing less severely the purposes for which the proceeds of the loans are to be used.
When the expansion of business has once been started it becomes a cumulative process and proceeds by its own momentum. It does not require further encouragement from the banks. Merchants have borrowed funds on easy terms, and they use them to increase theirs stocks of goods. They give larger orders to producers, and then increased production results in expansions of the incomes and outlays of consumers. All this brings about a cumulative expansion of productive activity, which is nourished and stimulated by a continuous expansion of credit. No further encouragement by the banks is required to keep it going, but on the contrary once it is well under way they have to be careful not to let it get out of control.
Prosperity comes to an end when expansion of bank credit ceases, and contraction of bank credit begins. Mr. Hawtrey's explanation of the reasons why there must come a curtailment in the expansion of bank credit applies rather to British banking practices while the gold standard was in effect than to American conditions before the