The chief exponent of the monetary theory of the business cycle is Sir Ralph Hawtery. He attributes the cycle to the expansion and the contraction of the bank credit. According to him most of the business now a days is carried on with borrowed money from the banks. When trade is brisk, the bank expands credit by the purchase of securities or by lowering the rate of interest. The merchants attracted by the low rate of interest build up their stocks and give more orders expand output.
Employment, outlay and money income increases. The expansion of credit thus brings an upswing of him business cycle. A stage comes when the commercial banks realize that they in competition with one another have gone too far in the matter of advances to the businessmen. Some of the banks also find their cash reserve ratio has reached the danger point.
They then immediately try to restrict the credit and raise changes. They also begin to recall the bank advances. When the businessmen are not able to get working capital at low rate of interest from the banks, they reduce their stocks. The manufacture who receive fewer orders from the merchants, begin to curtail production, employment, money income and outlay decreases. The contraction of credit thus leads depression.
Employment, outlay and money income increases. The expansion of credit thus brings an upswing of him business cycle. A stage comes when the commercial banks realize that they in competition with one another have gone too far in the matter of advances to the businessmen. Some of the banks also find their cash reserve ratio has reached the danger point.
They then immediately try to restrict the credit and raise changes. They also begin to recall the bank advances. When the businessmen are not able to get working capital at low rate of interest from the banks, they reduce their stocks. The manufacture who receive fewer orders from the merchants, begin to curtail production, employment, money income and outlay decreases. The contraction of credit thus leads depression.