Kevin L. Kliesen and John A. Tatom take a historical view of credit crunches and their relevance to the nation’s cyclical performance. They explain the origins of the credit crunch concept and point to the consistent misapplication of the concept to cyclical credit market developments. For example, they show that movements of interest rates and of interest rate spreads in recessions generally have not provided support for the credit crunch hypothesis. The most recent case is no exception. According to the authors, the recent decline in the growth of credit is mostly attributable to two factors that are inextricably linked. First, the demand for credit, especially by business, is cyclical. When economic activity ebbs in a recession, the demand for credit falls as well. Second, because bank lending to business is typically short term, it is used to finance short-term assets such as inventory. Thus when businesses expect their sales to slow or decline in a recession, they no longer need to add to their stocks of inventory. Accordingly, business inventories and the demand for bank credit to finance them are reduced. Similarly, in the early stages of an economic expansion, when businesses add to inventory holdings, they typically rely relatively more on internal cash flow and other sources of financing, than on bank loans. Only later do businesses begin to expand bank borrowing in line with their burgeoning financial requirements. The authors maintain that in the final analysis, the conventional wisdom espoused by credit crunch theorists is not helpful in assessing recent movements of interest rates, business loans and business inventories.