A 'Business Cycle' Model:
"Nine Point Summary"

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• Because of increased reliance on debt during the expansion phase of the business cycle, the corporations' financial condition increasingly deteriorated.
  
  
• As profits declined, the corporations experienced increasing difficulty in meeting debt payment requirements and other fixed commitments such as those due to involuntary investment.
  
  
• Corporations borrowed to try to obtain the funds they needed to meet debt payment  requirements and involuntary investment commitments; they relied primarily upon bank loans, and, for large corporations, also on commercial paper borrowing.
  
  
• The banks suffered losses on their business loans, which adversely affected their own financial condition, and were restricted by tight monetary policy; they tightened their lending policies, but at the same time attempted to meet the neccssitous loan demands from their long-standing customers.
  
  
• They did so by decreasing the growth rate of investments in relation to loans and by decreasing the growth rate of nonbusiness loans in relation to business loans, by restricting the business loans they extended to new customers (as opposed to established customers), and by relying on purchased funds, particularly large negotiable certificates of deposit.
  
  
• A surprise event either the sudden imposition of an institutional constraint or an unexpected bankruptcy (or the threat of one)-disrupted these financing patterns.
  
  
• The disruption of financing patterns initiated a financial crisis a sudden, intense demand for money.
  
  
• The urgent demand for money came either from corporations or banks whose sources of funds were disrupted, or from investors who feared the loss of their funds.
  
  
• Thc immcdiate crisis was resolved by lender-of-last-resort operations of the central bank, the Federal Reserve Board.
  
  $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ SOURCE: Martin Wolfson,"Financial Crisis: Understanding the Postwar U. S. Experience",1994.
  
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  Charles P.Kindleberger, "Manias, Panics, and Crashes: A History of Financial Crises",1994.
  
  Hart & Mehrling, "Debt, Crisis & Recovery",1995.
  
  John K. Galberaith, "The Great Crash 1929",1979.
  
  John K.Galbraith, "A Short History of Fiancial Euphoria",1990.