Just how old are underconsumption theories of the cycle? We know that Malthus (1820) and even Marx (1910) held that fluctuations in output could be caused by temporary deficiencies in the demand for goods ("general glut"), but they did not have it as a regular pattern (i.e. cyclical). Sismondi (1819) had argued some form of regularity, as indeed had Mill (1848), but there was really no sense of an "underconsumption theory" of the cycle until the English economist John A. Hobson.
It is in his Industrial System (1910), that we find John Hobson's argument laid out. In a sense, it eschews all monetary and credit factors and relies instead on the idea of a propensity to consume out of income in a very Keynesian fashion. In expansions, Hobson argues, incomes rise and so too does consumption but by less than the full amount of change in income, implying that savings are being increased. These savings are then invested which leads to the increase in the capacity of industry and output. But as consumption have been trudging up more slowly than capacity output, we have insufficient consumption and thus excess supply of goods. Output subsequently collapses bringing incomes back down with it. But as incomes fall, then savings fall and the proportion of consumption in income increases. Eventually, Hobson claimed, consumption catches up with output, so then the recovery ensues.
Hobson eschewed monetary factors in his account, but the remarkable American duo, Willard Foster and William T.Catchings put it at the heart of their system (1923, 1925, 1928). Foster and Catchings' account relies on a careful division between stocks and flows with money as the medium in the "circuit of wealth". Savings, they claim, are both the blessing and the curse - a blessing because they permit investment and thus growth; a curse, because investment implies an increase in capacity output.
During the construction of an investment project, incomes are paid to workers in complete accordance with the rise in output, thus consumption increases accordingly. However, once an investment project is "finished" and output from that project begins to be produced, no more people are being paid from the "investment project". Consequently, output will rise without a concurrent rise in income and consumption. Consequently, there is overproduction.
What about credit filling in the gap? Admittedly, credit increases purchasing power, but credit is given to producers not consumers, which implies a further increase in capacity and thus output. Furthermore, even if consumers receive credit, these will not necessarily find their way into consumption or investment demand. Noney, they claim, can be hoarded by consumers - these are "uninvested savings". That will do nothing but siphon off demand for goods even further.
The cyclical pattern emerges, Foster and Catchings claim, because during the downturn, as output collapses. But if no hoarding ensues, the collapse in output will be brought down to a point that the incomes paid out of (the lower) output will catch up with (the lower) consumption and thus a new flow equilibrium is found. But if any savings is being done by consumers, thus investment ensues and output grows and the recovery begins. A problem might arise if, in the downturn as prices and output fall, more money is hoarded by fearful consumers and this may exarcebate the downturn and/or prevent a recovery. Thus, unless that hoarding can be discouraged or short-circuited, there might not be a recovery.
Naturally, the most famous "underconsumption" theory is that of J.M. Keynes himself as laid out in his General Theory (1936) - which we discuss in a section of its own.