16 Generating Economic Cycles 



his description of ''How Prosperity Breeds a Crisis" 

 he has made an illuminating statement which is here 

 quoted at length. I have taken the liberty of italicizing 

 several sentences: 



"... The cost of materials exceeds wages in every 

 one of the leading branches of manufacture, and in a 

 majority of cases is over twice as large. Indeed, on 

 the average it makes practically two-thirds of the 

 total outlay. If wares for re-sale be substituted for 

 materials, this proportion must run far higher in 

 wholesale stores, while in retail shops it cannot be 

 much lower than in factories on the average and 

 may well be considerably higher. Even the trans- 

 portation companies and enterprises in the extrac- 

 tive industries have to buy vast quantities of current 

 supplies. Hence an increase in the cost of materials, 

 wares, or supplies is often an increase in the largest 

 single item of expense, and always an increase in an 

 important item. The relative fluctuations in the 

 prices of those commodities which are bought and of 

 those which are sold are therefore of great, in many 

 cases of decisive, importance in determining profits. 



" Concerning these relative fluctuations, our definite 

 information consists of index-numbers for raw ma- 

 terials, partially manufactured products, and fin- 

 ished goods; also for the same commodities at whole- 

 sale and at retail. Now this statistical evidence 

 points to the conclusion that what must be taken 

 as buying prices creep up on selling prices during 

 a period of prosperitj^ Of course this movement 

 . . . threatens a reduction of profits. 



