Debt and the Business Cycle

Abstract

One of the most characteristic features of the business cycle is the alternating expansion and contraction of credit. During the upturn from a recession or depression, business firms need more money than is flowing into the till. They must rush to grab every emerging profit-making opportunity and to fend off competitors from encroaching on their share of the market. Money is therefore sought for a variety of needs, such as expanding capacity, filling up inventory pipelines, adding labor-saving machinery, and intensifying sales promotion. Banks, most of whose profits come from making loans, are happy to accommodate this rising demand for money. In fact financial institutions add their bit to the expansion of credit during the upswing of the cycle by stimulating new uses of debt by business and consumers.

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