The primary weakness of any trade cycle theory invoking a ‘wave of optimism’ as its initiating impulse is that it begs the question of the origin of the wave of general optimism. Unless it answers that question it offers no account of why, from a state of equilibrium, there should occur a general shift in the demand curve for loanable funds, rather than simply a relative shift from declining to expanding industries. Secondly, it does not explain why such a shift would not simply raise the entire structure of interest rates – deposit as well as loan rates – in the market for loanable funds, leaving equilibrium in the market for currency balances undisturbed except insofar as the demands for currency and specie reserves are interest-elastic.
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