Businesses realize they are in trouble. They have too many workers, too much machinery, too large inventories, and too much debt. It is time to wind down. So the economy, which has grown like a balloon, begins to contract. People lose their jobs, businesses fail or are sold.
Inventories are unloaded at bargain prices.
A great inventory adjustment, called a recession, takes place. This progress from money inflation to malinvestments to collapse is the business cycle. Creating a business cycle has never been the goal of the Federal Reserve or any other government agency. Attempts by the federal government to guide and stabilize the economy began early in the 20th century, when, for the first time, unemployment became a political issue. For three quarters of the 19th century, most Americans lived in rural areas and were largely self-employed.