Subject to the necessary conditions (which will be elucidated in the later sections of this chapter) an increase in the volume of employment will usually require a more or less proportionate increase in the volume of working capital. Thus fluctuations of investment in working capital will be closely correlated with fluctuations in the volume of employment. An increased volume of employment may result either from abnormal activity due, for example, to an investment boom, or to a recovery from a preceding slump. In any case a credit cycle will, as we have seen, tend to be associated with an increased investment in working capital—if not in its primary phase, then in its secondary phase. Furthermore, it is generally impossible to increase the volume of employment (even when it is at a level far below the optimum) unless it is practicable to increase pari passu the volume of investment in working capital.

Now the practical importance of the fluctuations in the amount of the revolving fund of working capital, which result from these conditions, depends on their order of magnitude. If these fluctuations are substantial relatively to the time rate at which new investment can be made available to replenish working capital either from new savings or by diminishing the volume of investment in liquid capital, then the question before us is of great practical significance; and our analysis may furnish us with an important clue to the explanation of the time element in booms and depressions.