chapter  4
14 Pages

THE PSYCHOLOGY OF TRADE FLUCTUATIONS

THE PSYCHOLOGY OF TRADE FLUCTUATIONS

MEN'S actions are so dependent upon changes in their beliefs and feelings that economists and business men are often led to use language implying that industrial prosperity and depression are little else than reflections of a rhythmic movement of confidence and dejection in the minds of men. This psychological rhythm operating through Credit, the financial index of confidence, they regard not merely as an accompaniment and agent but as the efficient cause of industrial fluctuations. Once start with the assulnption that the business mind is by nature subject to these elations and depressions and that they are swiftly and easily communicated by business leaders to the rank and file, the theory of independent psychological causation becomes plausible. In a period of rising confidence business men not only apply their own resources, but borrow freely both from the investing public and from banks, in order to extend their business operations. This borrowing from banks~ _being the most elastic form of credit, is of the first importance. The bankers, sharing the same confidence with their customers, make large advances upon easy terms at such periods. This produces an industrial and commercial activity which later on culminates in a condition recognised

as over-trading. As soon as this is recognised, the confidence both of bankers and of business men begins to wane, credits are restricted and drawn in because of the belief that trade is going down, and this belief and this restriction are the means of reducing the volume of trade and contracting its profits. Thus a depression is brought on II because of their unbelief."