Inventory profits in the business cycle

The greatest portion of industrial inventoires is analogous to water in the pipes of the economic production system. They cannot be drawn off and and consumed without stopping the operations of the system. An increase in the prices at which these inventoires are valued produces an apparent profit, but this gain is fictious and unexpendable; it could not be converted into cash without liquidating the inventoires. Such a profit is in effect an unrealized (and in practice largely unrealizable) capital gain, yet it has been treated by most accountants, statisticians, and economists as current income-even as a part of our national income. It is a comparatively easy matter to eliminate unrealized inventory gains and losses from statements of business income, but the methods for accomplishing this have not received any general acceptance. Business-men make their decisions as though ficticious inventory gains (amounting in some years to several billions of dollars) were expendable, and the effect of this misunderstanding is to aggrevate the cyclical fluctuations of business. The elimination of ficticious inventory gains and losses from current income statements would be an important contribution toward moderating cyclical extremes.