If the impairment of working capital during the slump were balanced by a corresponding accretion of suitable kinds of liquid capital, then the replenishment of working capital during the boom could be effected by drawing on the high stocks of liquid capital. Business would never lack the means of working at full steam, and the problem of recovery would merely be one of furnishing business with the motive to work at full steam. But enquiry in this case will be found to lead us to the opposite conclusion to that which we have reached in the case of working capital. Instead of the fluctuations in the amount of liquid capital being larger than one might expect, we shall find that they are small and that there are cogent reasons why we cannot expect much assistance from this source to balance fluctuations of investment in fixed capital.

The question of the actual order of magnitude of fluctuations in the stocks of liquid goods is of considerable importance, because it is not obvious a priori that these may not furnish a balancing factor capable of looking after short-period increases and decreases in the rate of investment in fixed and working capital without any change being required in the rate of total investment. Indeed, Mr Hawtrey's theory of the credit cycle is largely based on this supposition. A short criticism of this point of view may be a useful introduction to an appreciation of the significance of this chapter.