Earlier in the chapter it was shown that a period of rising prices is a period of business boom, inasmuch as profits of the enterpriser are then unusually large. Interest on the manufacturer's growing investment and the wages and salaries of his employees are then stationary, whereas the value of his product grows more than normally during the process of production, his materials rising with the general price level, and marketing costs are relatively low, in a sellers' market. The unusual profits induce enterprisers to increase their producing capacity, and they borrow more heavily to finance their enlarged production and their plant extensions. The increased borrowing brings about the creation of deposit currency which when used tends to raise the price level still higher, causing the borrowing of greater and greater sums. A vicious circle is thus formed.

But these operations obviously cannot go on indefinitely. The cycle is stopped by the rising costs of doing business and the exhaustion of credit. The excess of demand over supply of loans finally forces up the rate of interest; labor, which has become pinched by the high cost of living, finds itself strategically well situated for demanding higher compensation. Meanwhile the extensions of bank credit have reduced the ratio of cash reserve to deposits to the danger point, and bankers are forced to refuse new loans or even to refuse to renew time loans and to call demand loans. This contraction forces a halt in business promotions; projects come to nothing or suspend unfinished. Finance houses suddenly find themselves surfeited with undigested securities. Borrowers have to liquidate securities to raise funds, or lenders have to sacrifice collateral to cover unpaid loans. Interior banks taking fright recall their funds deposited in metropolitan banks, and thus force further liquidation. The result is a financial stress and break - a precipitate crash on the stock market - a panic. Some disturbances of this type stop at this point and are known as "money panics," or "bankers' panics," or "Wall Street panics." The undertone of commerce and production may be strong, and only the surface phenomena - that is, money and finance- need be adjusted. If such be the case, the recovery of normal conditions will be speedy and the losses will have been sustained largely by the financing and speculating group of business men. Such, for instance, were the panics of 1884 and 1903.