Sec. 6. #A business cycle#.  Let us now sketch in broad outline a business cycle, bearing in mind that this series of changes does not repeat itself with unvarying regularity, but that it is fairly typical in the modern business world.  The period leading up to a crisis is one of relative prosperity; then occurs a crisis in which prices fall, at first rapidly, and afterward for a while going slowly lower.  When prices are at the lowest point many factories are closed, and much labor is unemployed.  Let us start at that point.  Conditions are worse in some industries than in others.  General economy and great caution prevail; few new enterprises are undertaken.  For those persons having available funds this is a good time to buy, and property begins to change hands.  Then hoarded money begins to come out of its hiding places.  Money and credit flow in from other countries, particularly if business conditions are better abroad than here, for when prices are lower than they have been, relative to those of other countries, a country is a good place in which to buy.  At the same time that the money in circulation thus increases, there is a general return of confidence that increases credit.  Not only are there more dollars, but each does more work.  Then old enterprises are resumed and new ones are undertaken.  The purchase of materials in larger quantities causes a rapid rise in the prices of many raw materials and of all kinds of industrial equipment.  The less efficient laborers and others that have been out of work, begin to find employment, and then, more tardily, wages begin to rise.  As a result, the costs of many products begin to rise rapidly.  The only classes not sharing in this improvement are the receivers of fixed incomes.  As prices rise, the purchasing power of their incomes correspondingly falls.

At length prices begin to go up less rapidly, and the question arises in many minds whether the movement can continue, and if not, when it will cease.  Men wish to hold on for the last profits, and are willing to risk something to gain them.  When prices rise not only as compared with former domestic prices, but as compared with current foreign prices, foreign imports are stimulated and exports fall.  This calls for a new equilibrium of money and requires at length large and continued exportation of specie.  This checks prices, and, reducing the specie reserves of the banks, compels them to be more cautious.  At the same time the increase of costs in many industries begins to reduce profits.  The fall in the value of many stocks and securities held by the banks forces many brokers and speculators to convert their resources into ready money.  This is the moment of danger; weak enterprises find their foundations crumbling, and there are many failures.[6] The falling prices, the shattered credit, and the financial losses force many factories to close, and many workmen are thrown out of employment.  This moment of widespread loss is the crisis, It is followed by another period of low prices and of small output, and therefore of profits small or negative in many industries.  Business must again enter upon a period of retrenchment, for it has completed another cycle.