The world has registered remarkable economic progress especially during the last 150 years. But it would be wrong to think that this economic progress has been a . steady upward swing and a continuous movement forward. On the other hand.
every businessman knows that, after ten or twelve years, the production machinery receives a rude shock, which throws it out of gear for a number of years. There are upward swings and then downward swings in business. The periods of business prosperity alternate with periods of adversity. Every boom is followed by a slump, and vice versa. This is a trade cycle. The trade cycle simply means the whole course of trade or business activity which passes through all phases of prosperity and adversity. Economic Crisis An economic crisis, on the other hand, means a period of stress and strain when businessmen find it difficult to meet their commitments. In the words of Adolph Wagner,”Crises imply the overwhelming and simultaneous occurrence of inability on the part of independent entrepreneurs to pay their debts.”
Or in 1. S. Mill’s words, “There is said to be a commercial crisis when a great number of merchants have or apprehend they have a difficulty in meeting their engagement. It is a commercial crisis when only merchants are involved in a difficulty. But when it is accentuated and lead, to hank failures it is called financial crisis.
Depression. Let us briefly trace the course of a trade cycle. We might start at a point when business is at the lowest ebb and the economy is engulfed in depression.The lucky ones, who are employed, get distressingly low wages. TIle purchasing power of money is high but that of man low. The general purchasing power of the community being very low, the productive activity, both in the production of consumers’goods and producers’ goods, especially the latter. is at a very low level. Business settles down at a new equilibrium at a low level of prices, costs and profits. This new adjustment or equilibrium may last for a number of years Recovert But the things are not going, to continue to be in a depressed state, for ever. After the depression
has lasted for some time, rays of hope appear on the business horizon. Pessimism gives place to optimism. The depression contains within itself the germs of recovery. After the depression has lasted for some lime. the situation is found favourable for a business venture. Wages are low even for efficient workers. sufficient number of whom is now available. Money is cheap and so are the other materials and the factors of production. Prices may be low but the costs too are low. This induces an entrepreneur, who may have sufficient financial backing. to take the risk. He orders repairs, renewals and replacements and, perhaps,a new plant. Constructional and allied industries receive orders and re-employ workers who spend their newly-acquired purchasing power on consumers’ goods. This stimulates further investment and production in several other industries. Lo! the business has
turned the corner. Boom. Recovery once started gathers momentum. The slender stream of recovery, when it has started flowjng”, is”strengthened by numerous tributaries on its way. The revival of investment in one industry leads to a revival in another. With the general revival of dernand .
dernand, prices show an upward trend. TIle businessman’s income takes a forward jump while wages, interest, and other costs lag behind. Profit margins are thus widened. Optimism grows and spreads far and wide. Exceptional business prosperity turns businessman’s head, and they indulge in over-trading. This phase of the trade cycle is known as boom. End of Ihe 110010. But just as depression created the conditions for recovery. similarly the boom conditions generate their own checks. All idle factors have been employedand further demand for them must
raise their prices, but the quality available now is inferior. Less efficient workers have to be taken on higher wages. Rate of interest rises and so, also the prices of the essential materials. As a consequence, costs takean upward swing. They overtake prices and the profit “margins are first narrowed and then begin to disappear. The boom conditions are thus almost at an end.
Crisis. Then starts the downward course. Fearing that the era of profits has come to a close. businessmen stop ordering further equipment and materials. TIle Government applies the axe mercilessly. The bankers insist on repayment. The bottlenecks appear and stocks accumulate. Desire for liquidity increases all round. This accentuates the depression. Just as the recovery is self-reinforcing, the forces “of depression are also self-accumulating. There is g neral distress.This phase of t e trade cycle is known as the crisis -a point of critical convulsions .