HB3ri6 H3 ^txa Hath §tate Cl^olUge of AgtiCttltKte At Q^ornell Kntnerattg iCtbratg H3 UNIVERSITY OF WISCONSIN STUDIES IN THE SOCIAL SCIENCES AND HISTORY NUMBER 5 CYCLES OF PROSPERITY AND DEPRESSION IN THE UNITED STATES, GREAT BRITAIN AND GERMANY A STUDY OF MONTHLY DATA 1902-1908 BY ALVIN HARVEY HANSEN ASSOCIATE PROFESSOR OF ECONOMICS University of Minnesota MADISON, 1921 UNIVERSITY OF WISCONSIN STUDIES NUMBER 20 SOCIAL SCIENCES AND HISTORY NO. 5 DECEMBER, 1921 PRICE $1.00 Published bi-monthly by the University of Wisconsin, at Madison, Wisconsin, Kntered as second-class matter at the postofflce at Madison, Wis- consin, under the Act of August 24, 1912. Accepted for mailing at special rates of postage provided for in Section 1103, Act of October 3, 1917. Authorized September 17, 1918. No. 1. The colonial citizen of New York City, by Robert Francis Seybolt. 40 p. Fifty cents. No. 2. The restoration of the southern railroads, by Carl Russeil Fish. 28 p. Fifty cents. No. 3, The misinterpretation of Locke as a formalist in educa- tional philosophy, by Vivian Trow Thayer. 24 p. Fifty cents. No. 4. Scientific determination of the content of the elementary school course in reading, by Willis Lemon Uhl. 144 p. One dollar fifty cents. No. 5. Cycles of prosperity and depression in the United States, Great Britain, and Germany — a study of monthly data 1902-1908, by Alvin Harvey Hansen. 112 p. One dollar. UNIVERSITY OF WISCONSIN STUDIES IN THE S(X;iAL SCIENCES AND HISTORY NUMBER 5 CYCLES OF PROSPERITY AND DEPRESSION IN THE UNITED STATES, GREAT BRITAIN AND GERMANY A STUDY OF MONTHLY DATA 1902-1908 BT ALVIN HARVEY HANSEN ASSOCIATE PROFESSOR OF ECONOMICS University of Minnesota MADISON. 1921 C5_ 2. t 5" o ? CONTENTS Page Chapter I. Introduction: Subject Matter and Method.... 7 A. Comparison between this and other Studies 7 B. Description of Period 1902-1908 8 C. Three Types of Fluctuations 15 D. The EHmination of Secular and Seasonal Fluctuations 16 Chapter II. Analysis of Monthly Data for the United States 20 A. Scope of Data 20 B. The Three Groups 22 C. The Relation between the Groups 35 D. Comparison with other Groupings 39 Chapter III. Comparison of Monthly Data for Great Bri- tain, Germany and the United States 54 A. British and German Data 54 B. The British and German Investment Groups 56 C. Comparison of the three Investment Groups 57 D. Comparison of Bonds of the Three Countries 57 E. The British and German Barometers 59 F. Comparison of the three Barometers 61 G. The British and German Banking Groups 62 H. Comparison of the three Banking Groups 64 I. Comparison of the Amplitudes of Fluctuation of Dif- ferent Series 64 Chapter IV. The Theory of Prosperity Cycles 79 A. Introduction 79 B. Economic Theories of Prosperity Cycles 81 C. Criticism of Theories 96 D. Conclusions from the Study of Monthly Data 104 CHARTS Page Chart 1. Investment Composite and Average Prices of Ten Investment Stocks 27 Chart 2. Industrial Composite and Wholesale Prices 31 Chart 3. Banking Composite and Cash Reserves 32 Chart 4. Investment Composite and Industrial Com- posite 34 Chart 5. Banking Composite and Investment Composite.. 35 Chart 6. Industrial Composite and Commercial Paper Rates - 37 Chart 7. American, British and German Investment Composites 58 Chart 8. American, British and German Bonds 59 Chart 9. American, British and German Industrial Composites 61 Chart 10. American, British and German Banking Com- posites — - 63 Chart 11. Wholesale. Prices of Producers' and Consumers' Goods — United States 97 Chart 12. Wholesale Prices of Producers' and Con- sumers' Goods — Germany 98 TABLES Page I. Summary of Conditions in the United States, Great Britain and Germany 1902-1908 15 II. Railroad Gross Earnings, 1902-1908 19 III. Index Numbers of Railroad Gross Earnings 19 IV. Coefficients of Correlation between the Prices of Ten Investment Stocks and Other Series in the Investment Group 26 V. Coefficients of Correlation between Wholesale Prices and Other Series in the Industrial Group.... 30 VI. Coefficients of Correlation between the Reserves of the New York Banks and Other Series in the Banking Group 33 VII. Coefficients of Correlation between the Series in the German Industrial Group 60 VIII. Coefficients of Correlation between the Series in the British Banking Group „ 62 IX. Coefficients of Correlation between the Series in the German Banking Group 64 X. Standard Deviations of Series in the United States, Great Britain and Germany 65 XI. Index Numbers of Wholesale Prices of Producers' and Consumers' Goods in the United States and Germany 100 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013688985 CHAPTER I INTRODUCTION : THE SUBJECT MATTER AND THE METHOD A. Comparison Between This and Other Studies Two distinct differences appear between the earlier and the more recent books on prosperity and depression. One is a difference in the subject matter discussed; the other is a dif- ference in method. The earlier writers in this field centered their entire discus- sion on crises. They looked ,upon prosperity as the normal thing in industry. A crisis appeared to be a pathological con- dition, a temporary afifliction. The problem was to diagnose a malady. The study of crises was the pathology of Political Economy. The method applied was almost wholly a priori reasoning. Not until the twentieth century was the subject matter broadened. Quantitative studies in annual production and price movements revealed steady, progressive, wave-like move- ments beginning with a period of low prices, inactivity in trade and production, and culminating in high prices and great ac- tivity in industry and commerce. Attention was no longer di- rected solely to the monetary stringency of panic conditions, nor to the widespread inability of debtors to meet their obli- gations, but rather to the continuous cycles of prices, and the steady rhythmic waves of production. Business was no longer looked upon as though it were normally in a static condition of prosperity interrupted intermittently by cataclysmic inter- vals of panic and crises, but rather as a dynamic, changing thing which must be studied as a process. The method neces- sarily became statistical and historical. This book attempts two things, which so far as the writer knows, are relatively new in this field : first, a detailed analysis of monthly data for a single cycle of prosperity and depres- 8 UNIVERSITY OF WISCONSIN STUDIES sion; second, a comparative analysis of monthly data in the three great industrial nations of the world, the United States, Great Britain and Germany. B. Description of Period 1902-1908 The period selected for this study was chosen because it includes a well defined, world-wide cycle of prosperity and depression. The year 1902 was chosen as the starting point in order to include within the cycle not merely the trough pre- ceding the crisis of 1907, but also the preceding crest. The year 1908 was chosen as the end of the study in order to in- clude the succeeding depression and the beginning of the re- cuperation which followed. A general description of the period follows.^ » The year 1902 was in the United States a period of general prosperity. Crops were excellent, the cotton crop being one of the largest on record. On the railroads there was heavy traffic resulting in severe congestion toward the end of the year. The demand for iron and steel products exceeded home production and there were heavy importations from abroad. The coal trade was disturbed by the anthracite coal strike. Stringency in the money market became very severe in September. The Secretary of the Treasury attempted to relieve this by substituting municipal bonds for government bonds as security for government deposits, thus inducing a great increase in the circulation of national bank notes by re- leasing the government bonds for use as the basis for further note issue. Another severe stringency occurred in December, which was partially relieved by the formation of a fifty million dollar money pool. On the stock market there was a consider- able rise during the first half of the year with a subsequent fall during the period of money stringency. Trading in bonds declined materially during the year. Foreign trade in Great Britain was adversely affected by the drought in India and Australia, the exhaustion of China alter the Boxer trouble, and the war in South Africa. A large 1 Cf. Financial Review, London Economist, and VolTcswirtachaftlicha Chronik, 1902-1909. HANSEN— CYCLES OP PROSPERITY AND DEPRESSION » foreign trade was carried on however with' South America and Turkey. The coal trade was stimulated by the coal strikes in the United States and France. The iron and steel industry supplied a strong demand from the United States and Canada, the United States alone importing nearly 680,000 tons of pig iron, rails, blooms, and billets. German competition in iron and steel was very severe, immense quantities being sold in both the United States and Great Britain frequently below cost of production. Depression ruled in ship-building and the textiles. The money market was affected by large shipments of gold to the United States, the Continent and Argentina. Open market rates ruled high. For Great Britain the year was a half-way stage between prosperity and depression. Germany suffered from depression in 1902. Crops were rather poor, and general business continued at a low ebb as in the preceding year. The stock market tended downward. Reserves were plentiful and money rates were very low throughout the year. Slight depression ruled on the whole in the United States in 1903. Crops were good but not as large as in 1902. Iron and steel production declined heavily toward the end of the year though the total for the year was good. Unemployment increased somewhat. Stock prices dropped severely, resulting in heavy liquidation and bankruptcies. Interest rates ruled high, loans were extremely hard to float arid short time loans were resorted to. Funds borrowed abroad were recalled by Europeans. This forced the banks in turn to recall loans, which in turn compelled the borrower to dispose of his securi- ties. New capital for industrials or railroads could not be secured by the flotation of securities and hence retrenchment was the policy pursued. Great Britain likewise suffered during 1903. Crops were bad, depression ruled in ship-building and the textiles, exports decreased, unemployment increased, and wages were lowered. The coal trade was fairly steady and was supported toward the close of the year by heavy buying from Russia and Japan. The pig iron trade was helped by a good demand from Ger- 10 UNIVERSITY OF WISCONSIN STUDIES many. On the stock market there was a heavy drop in govern- ment, railroad, and industrial securities. Germany fared better than the other countries in 1903, while she fared worse in 1902. The stock market was rising, there being improvement in almost every kind of security. Pro- duction in iron and steel ran high, foreign trade increased, crops were good, and unemployment diminished. Depression still ruled during the greater part of 1904 in the United States though a revival was apparent toward the end of the year. Railroad earnings and pig iron production ran low during the first few months of the year but soon recovered. The stock market turned upward with a great rise toward the last of the year. New issues were floated easily. Munici- palities made large bond offerings which were easily absorbed. Surplus bank reserves ran high and money rates ruled very low. Great Britain fared much the same as the United States. Production diminished and unemployment increased. Crops were slightly better. The colonies and municipalities had been unable to float bonds and public works were postponed. House building, which had previously gone on at a great rate, broke down. The cotton crop was short and factories ran on short time. The wool trade was poor. Spinners made scarcely any profit. Ship-building yards had little work until toward the close of the year. The iron and steel trade was injured from underselling by the United States due to depression there. Rail- road net earnings greatly decreased, dividends were cut down, and the companies found difficulty in borrowing. All past profits had been distributed in dividends, and nothing had been set aside for betterments. Hence retrenchment was necessary. Like the situation in the United States the condition of the stock market improved. Money rates were low. Toward the end of the year improvement occurred in the iron and textile industries. Germany's somewhat doubtful prosperity of 1903 declined during 1904. The Bourse had a severe panic in the early part of the year due to the outbreak of the Russian- Japanese war. Heavy failures resulted. Coal, iron and steel production de- HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 11 clined, while the electrical and textile industries fared better than in 1903. Crops were poor in some lines but good in others. The year 1905 was a period of tremendous prosperity in all countries. In the United States crops were good, the iron and steel industry was flooded with orders, and the rail- roads were unable to cope with the volume of traffic offered. Track and equipment were both insufficient. Freight conges- tion toward the close of the year was very severe. Great speculative activity ruled on the stock exchange. Stocks were generally advanced, a great rise occurring in coal, iron, steel, and copper securities. The money market grew tense particu- larly toward the close of the year, due to the great activity of trade, big crops, large speculative movements and government operations. Prosperity returned more slowly in Great Britain. Trade was active in the north, but London suffered because of the shifting of factories from the metropolis to the coal and iron fields of the north. The woolen trade was good, and the cot- ton trade was exceedingly profitable. Ship-building gained ground with a rush of orders toward the close of the year. The iron and steel trade was good. Municipalities still found some difficulty in floating loans. Money rates were easy. Germany's condition was quite similar to that of the United States. Railroad earnings increased enormously as did pig iron production. Unemployment was reduced to a minimum. On the Bourse there was great activity and stock prices rose to an unprecedented level. Cash in the banks decreased and money rates advanced. Loans were greatly extended. The extraordinary prosperity of 1905 continued through 1906 in the United States. Equipment and track shortage con- tinued. James J. Hill stated^ that between 115,000 and 120,000 miles of additional track were urgently needed. To provide this and necessary equipment he claimed was beyond human ability. "Why", he said, "there is not money enough, nor rails enough in all the world to do this thing." Said Secretary Shaw in December •} "We who pray should ask God to save ' Commercial and Financial Chronicle, January 5, 1907, p. 6. 12 UNIVERSITY OF WISCONSIN STUDIES US from any increased prosperity." Dividends were raised by the Union Pacific, the Southern Pacific, the Atchison, Topeka and Santa Fe, the Baltimore and Ohio, the Pennsylvania, the New York Central, the Lehigh, the Michigan Central, the Lake Shore, and the Norfolk and Western. Dividends were renewed on the United States Steel common. Surplus reserves fell below the legal limit four times during the year. Money rates rose. Government receipts were in excess of disburse- ments, and the Secretary of the Treasury helped to ease the situation by increasing government deposits and by making treasury advances to banks importing gold. An immense vol- ume of American finance bills were floated in Europe repre- senting borrowing abroad. Loans at home were difficult to place. Syndicates formed in previous years still had unsold bonds. Life insurance companies were compelled to unload some of their securities in order to meet their obligations grow- ing out of the San Francisco earthquake disaster. Great Britain's exports for 1906 were extraordinary. The greatest expansion occurred in the iron, steel and machine in- dustry. Iron and steel were demanded in large quantities by Germany and the United States. This year marked the high- est record ever reached for the importation of iron ore, the production of pig iron, the output from steel works, the exports for manufactured iron and steel, and shipping tonnage launched. The coal trade was also enormous due to the ex- treme prosperity particularly of the United States and Ger- many. The textiles were unable to meet the demand. Eighty of the large spinning companies, averaged profits of about 18 per cent. Money was dear and scarce due to the strong de- mand from other countries for London gold. The bank rate was advanced to 6 per cent in October particularly to stop the large demand from New York. Russia, Germany, Egypt, India, Argentina and Brazil were also helping to drain the supply. The security market began to decline. Germany's prosperity continued. Railroad earnings and pig iron production continued at the high levels reached at the close of the preceding year, and unemployment sought a still lower level. Loans were greatly extended by the Reichsbank. HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 13 Reserves declined, and the already high money rates were raised. The industrial activity of the two preceding years continued in the United States until October, 1907. Pig iron produc- tion, railroad gross earnings and imports rose steadily higher. Industries gerierally flourished. Security values had been shrinking since the close of 1906. Corporations found it im- possible to float bonds advantageously, and were compelled to resort to short time notes. The New York Central issued $50,000,000 three-year 5 per cent notes, and the Pennsylvania $60,000,000. Tension continued in the money market, par- ticularly in June owing to large gold exports and treasury withdrawals. Finally came the disclosure of the affairs of the Mercantile National Bank of New York which had loaned heavily on copper securities. A run occurred on banks, first in New York, and later spread to other large cities. Many banks were compelled to close their doors. Cash could be se- cured only at a premium ranging from 5 per cent at the begin- ning of the period to 1 per cent toward the close of the year. Clearing-house certificates, and cashiers' checks were used as substitutes. The Treasury poured its resources into the banks, gold was imported in large quantities, and bank note circula- tion was considerably extended by the issue of Panama Canal bonds. After the panic, time loans were practically unobtain- able for the rest of the year, though they were quoted at from 10 to 12 per cent. In Great Britain, also, trade continued very prosperous for the greater part of the year. Her coal trade was greater than ever. Germany was so exceedingly prosperous that she re- quired for her industries almost as much British coal as did France in spite of her large home supply. South America, Egypt and Europe increased their demand for coal. The iron and steel trade was equally fortunate during the first half of the year. Germany and the United States still continued to buy large quantities of these products, though this demand of course fell off at the close of the year. The copper trade was very good during the first half of the year, owing to the elec- trification of railroads and the very large expenditures all 14 UNIVERSITY OF WISCONSIN STUDIES over the world for ships and guns. The spinning trade was even more prosperous than the year before, scores of com- panies paying dividends of 30 to 35 per cent, and many others paying 18 to 20 per cent. A large demand came from the continent, continental spinners being unable to supply the local demand. New mills were being rapidly built. Ship-building suffered a considerable falling off from the preceding year. The stock market was depressed all during the year, with prices falling steadily. Heavy selling occurred in March and again in August. New security issues were not taken by the investing public, very large proportions being left on the hands of the underwriters. The high money rate of the preceding year was lowered to 4 per cent in April, and in August raised again to 4j^ per cent. The panic in the United States forced it up to 7 per cent. France, Germany and Japan all helped to supply the London market with gold while London, in turn, was shipping enormous quantities to New York. Germany's industrial activity continued to increase until Oc- tober. Railroad gross earnings reached the highest figure in October as did also pig iron production. Unemployment reached its lowest point in September. Tension continued on the money market and rates averaged very high. Stocks de- clined rapidly during the course of the year. The year 1908 was a period of deep depression in the United States. Pig iron production was reduced to almost one-half of the production of the preceding year. Imports were reduced by over $300,000,000. Bank reserves rose to a high point and money was obtainable on very easy terms. The security market recovered rapidly during the entire year. Large issues of new securities were placed. In Great Britain depression, low profits, and unemployment prevailed. The iron and steel trade was greatly depressed. The pig iron market especially felt the lack of any demand from the United States and Germany. Ship-building was al- most paralyzed. The weaving branch of the cotton trade was very bad, though spinning was fairly good. The woolen trade suffered severely owing to large accumulation of goods in other countries and particularly in the far east. New issues HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 15 of securities were floated on an enormous scale. Still the stock market recovered slowly in spite of the rapidly rising market in the United States. Money was cheap throughout the year. Recovery became faintly evident late in the year. Germany's history in 1908 is in the main similar to that of the other countries. Her production of pig iron declined though it was reduced by only one-tenth as compared to one- half in the United States. Railroad gross earnings also di- minished some, but not severely. Unemployment was very great throughout the year. Wholesale prices dropped steadily until November. A slight revival of industrial activity was noticeable toward the close of the year. The stock market alone showed signs of marked improvement, the trend being upward from March on. A skeleton summary of conditions is given in Table I. TABLE I United States 1902 Prosperity 1903 Depression (partial) 1904 Depression 1905 Prosperity 1906 Prosperity 1907 Prosperity 1908 Depression Great Britain Semi-prosperity Depression (partial) Depression Prosperity Prosperity Prosperity Depression Germany Depression (partial) Semi-prosperity Depression Prosperity Prosperity Prosperity Depression C. Three Types of Fluctuations Three kinds of fluctuations are involved in financial and in- dustrial statistics, the seasonal, the cyclical and the secular. The seasonal fluctuations are those which are due to the in- fluence of the seasons, summer and winter, harvest and seed time. The seasons affect very greatly the prosperity of the clothing industry, railroad earnings, the coal trade, bank re- serves, unemployment, and so on through the entire realm of business activity, though in some fields the influence of the seasons is less marked than in others. Railroad gross and net earnings, for example, invariably rise to the highest point in 16 UNIVERSITY OF WISCONSIN STUDIES the fall of the year; building invariably reaches the highest point in the spring of the year, and exports are regularly great- est in the fall. The seasonal fluctuations are therefore the short-time fluctuations which come and go with the seasons, and are due to the seasons. Cyclical fluctuations are those due to the recurring waves of prosperity and depression. They have nothing to do with the seasons. Each cycle, from the crest of one wave to the crest of the next, is spread over a period of years. The cause or causes of these cycles lie obscured in the mazes of modern in- dustry, explanations ranging all the way from meteorological cycles on the one hand to cycles of mob psychology on the other. Secular fluctuations are mainly those due to the growth fac- tor in progressive societies. Thus while railroad gross earn- ings for example rise and fall with the seasons, and in larger waves rise and fall with the cycles of prosperity and depres- sion, each succeeding crest in the cycles seeks higher and higher levels because the country is rapidly growing in population, production and wealth. But some secular fluctuations are in- dependent of the growth factor. Thus secular fluctuations in general prices may be due to changes in the issue of currency, increasing or decreasing production of gold. Hence secular fluctuations are the very long-time changes which in progress- ive countries generally are in the direction of growth. D. The Elimination of Secular and Seasonal Fluctuations A study of cycles of prosperity and depression is of course concerned with the cyclical fluctuations alone. We are not in- terested in the actual fluctuations in which are combined the seasonal, cyclical and secular movements, but only in those phases of the fluctuations which are due to cyclical causes. Hence, in order to study the fluctuations of prosperity and de- pression in the most advantageous manner it would be highly desirable to eliminate from the actual data the fluctuations which are due to seasonal or secular forces. If annual data HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 17 are used, seasonal fluctuations do not appear. Hence only the secular fluctuations need be eliminated. Over a long period of time the secular fluctuations would be very considerable, and it would become highly desirable if not essential to elim- inate them in order to concentrate attention on the cyclical changes. If the period considered is of short duration, the growth factor becomes less apparent, and may therefore more safely be disregarded. Especially is this true if the series under consideration have similar secular trends. On the other hand if the secular trends of two series are in opposite direc- tions it may become necessary to eliminate the secular trends. In comparing the Banking Group with the Investment Group, and the Investment Group with the Industrial Group it was found desirable to eliminate the secular trends. Likewise in comparing the American composites with the European com- posites the trends were eliminated. The secular trends were determined by the method of moments. The seasonal fluctuations also tend to obscure the cyclical movements. By eliminating the seasonal fluctuations the curves are smoothed out and the cyclical correlation between the series becomes more apparent. When the Pearsonian co- efficient is used to establish correlation it is true that the cyc- lical correlation is vitiated but little by the seasonal fluctua- tions. Nevertheless some gain results from the elimination of the seasonal fluctuations. That seasonal fluctuations should be eliminated might be ob- jected to on the ground that even seasonal fluctuations have their influence on cyclical movements. The position taken by the writer is that this is true only of extraordinary fluctuations. Normal seasonal fluctuations could obviously never operate as influences affecting the cyclical movements. Extraordinary seasonal fluctuations would however influence the cyclical movements, but such extraordinary fluctuations over and above the normal are not eliminated by the method used in this study. The method here used is to construct relative or index num- bers from the actual data by using a new base for each of the twelve months of the year. The average of the actual figures 18 UNIVERSITY OF WISCONSIN STUDIES for each January in the seven-year period is used as the base for January data, the average of the actual figures for the seven Februarys is used as the base for February data and so on. Thus the average of all the January figures is divided into the figure for each January, and similarly for each of the other months of the year. In this way the normal monthly fluctuations as nearly as they could be judged by a seven-year period are eliminated, but any extraordinary fluctuation in any one month would still remain in so far as it was above nor- mal. The method may be illustrated by giving the computa- tions for a single series, viz., railroad gross eiamings. The actual monthly data are given in Table II. The averages given in the right hand column are then used as bases, each base being divided into the actual figures for that month for each of the seven years. Table III gives the result of this computation. By reducing the actual numbers into relative numbers using the twelve averages for each month as bases, the seasonal fluctuations have been eliminated. The numbers for each month were summated to verify the result. Obviously the sum in each case should equal 700.0 but the use of the slide rule as well as the fact that the index numbers are car- ried out to only one decimal place makes this degree of ac- curacy impossible. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 19 Q H o CO O oa OS § O Q < O Pj H •as II 8 05 Oi SoOM05Tiian-HO^t~t-co NOi>OM'*NOOOMCCNOO ecosio^iomiooioeoooo 0»iOt~Ot»0505iO>-lOC5e<5 tDN00t~>OCClO(NU500>OCO moco'i'ootONOicoooOi-i eo05totoo5t^oooo5eot»e<5 -HNi-4r^oosooii350't>.O eC'Heooococot-MtDiNOOi ir3Tji-ocaOo» Ot>.U5eOTt(lOT*OOOCONO t" OS >o Til i-i w lo ■> OS •«ai w OS t- oj o ' OS t~ t- >o ;o 00 >o 1 t^i^i-iOOOOse<5!pt2t3"2 CO ^ "^ ^ ^ CO ^ ^ ^ ^ ^ w i-iosooosrtcotooNccosN «Dt^C0>Ot~>-lO5O«0C2rH00 eoia<-i;oMt~ooO!iocoac>-< 05io.-i^.-HONg<'*t-cocOt~OsO'*<00 eoeocoeoeocoeocOTii-*-*-* CO 03 O I? 02 M O o p i<«ot~oo ■*T)!-*t>^c)ooo- ot-^^ootoeoujosoosi^ OOOOt»tOt^OOSOOOSt»!OM eocoosododob-odoosco^ OSOsOSOSOSOOSOSOOSOO ookomu3^Tf4ioosi-iwcoo t^'^>-iiHasecoooc4o>raco ooosososooasoooooscoasa: ooaoeoasaot-inocoe^iNC) i-it~oeooascooasfflt-so osaoosososooososoooooooo coc- o> u: ■* ro + 4 - 4 • + ^ j^ ei a >Q Oc >« X CO + 4 ■ 4 d oc a a g S + 4 - 4 ^ ^ 0^ b. eq w a ■^ OS IC ec IC 00 IC -* t> IC ■« + + ■+ ■ 1 4 ■ 4 ■ 4 ^ o CT n t> o w a rH SS a <» >< lO t^ IC o + 4 ■ r 4 ■ 4 ■ 4 i ^ ^ g fH 5 00 >o 01 ^ 1 + 4 ■ 1 4 - 4 - 4 d f-^ "oc a s § T 1' 4 d c a T 4 s § a A .3 (b i 1 1 1 CQ 1 i_ 4a t ! a a i t ^ !? o pC .« 03 (4 M 3 H n 05 K HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 27 deviation of that series. Thus the items pf each series were reduced to new relatives, the standard deviation being used as the base. The standard deviation was used in preference to the average deviation because it gives greater weight to the extreme deviations, and therefore serves to equalize more per- fectly the fluctuations of the different series. The relatives for the composite thus constructed may be found in Table D, Appendix to Chapter II. In the case of the liabilities of business failures the signs were reversed since 3.0& CHART 3,AQ' 1902 ' 1805 ' X904 1905 X906 1907 190a this series correlates inversely with the rest in the group. The correlation between, the composite and the Ten Stocks is shown graphically in Chart 1. 28 UNIVERSITY OP WISCONSIN STUDIES 2. THE INDUSTRIAL GROUP By preliminary tests of correlation I attempted in the second place to classify those series which seem the best indicators of prosperity and depression. Here we are interested in those series which constitute the essence of industrial activity. Obviously one such series would be the production of pig iron. In this age of steel no better barometer of prosperity and depression could be found. Pig iron is the basic material of the modern machine age. It is therefore a sensitive indi- cator of industrial prosperity. But most writers on crises and prosperity cycles have se- lected by general accord commodity prices at wholesale as a universal and dependable indicator or barometer of industrial conditions. Because of the somewhat greater uniformity of the fluctuations of commodity prices I have selected it as the standard series of this group. Of the remaining series under examination it was found that railroad gross earnings, imports, exports, unemployment and immigration belong to this general group. Railroad gross earnings would be expected to be a fairly good indicator of industrial conditions. The volume of transportation naturally varies with the volume of production, and with relatively fixed rates the gross earnings of railroads may be expected to vary with the volume of transportation. Imports and exports increase with increased prosperity be- cause the volume of production is greater both at home and abroad. The increase in production results in a greater vol- ume of exchanges between countries. Unemployment and immigration are closely bound up with industrial activity and belong to this general group. With a slowing down of the industrial machine, workers are thrown out of a job, and prospective immigrants are warned to stay at home. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 29 To the Industrial Group therefore belong the following : 1. Commodity prices at wholesale. 2. Production of pig Iron. 3. Railroad gross earnings. 4. Imports. 5. Immigration. 6. Unemployment. 7. Exports. The Index numbers for these series are given in Table B. Each of these series was correlated with wholesale prices which was taken as the standard representative of the group. The coefficients of correlation are given in Table V. From this table it appears that gross earnings and immigra- tion fluctuate concurrently with wholesale prices, while produc- tion of pig iron and imports precede wholesale prices one month. The exports series lags four months behind wholesale prices. Unemployment precedes prices three months. Rail- road net earnings has been included in the table. It will be noticed that it precedes prices four months. Unemployment, as was noted above, does not seem to corre- late synchronously with wholesale prices. This seems some- what puzzling as one would expect unemployment to be a very clear barometer of prosperity and depression, being in fact the very reverse of industrial activity. This may possibly be ex- plained in part at least by the fact that the building series precedes the industrial group by several months. The slack- ening of building operations would affect unemployment. The same is doubtless also true of other industries in the class of pure producers' goods. The five series which are substantially concurrent, viz., wholesale prices, production of pig iron, railroad gross earn- ings, imports and immigration, were then combined to form the Industrial Composite. The method used was the same as the one described above. New relatives were constructed with the standard deviation being used as the base. The results are given in Table D. The composite and wholesale prices are shown graphically in Chart 2. 30 UNIVERSITY OF WISCONSIN STUDIES jj O s S U5 + + d ?o a g Tl< .. + + ^ i ■"It C3 t^ Ph t CO + + P i o 1-H § 1 i ^ iJ ^ + + + J s ^ S S 55 s H IS t«" 00 00 CO I> u> § + + + + + + \ S> o l-( f-. « i Ui to HH 00 a> xs o i C4 M 1 J^ t» 00 00 « s t^ . J2 1 i 1 M l' JS + 1 i U + . o « u: M a a o- Tf lO 1 4 - 4 - 1 1 g S P4 ^ i o ,0 -»j •^ i ■d *= S si ;§ rt a; (T p. o a d O ts P-i CO p: "ea s *s xr ci h 02 ."t c S XT I H^ 1 C A "^ o h-^ e c O 34 UNIVERSITY OF WISCONSIN STUDIES From this table it is clear that reserves, deposits, loans, and call loan rates have synchronous cyclical fluctuations. The commercial paper rates series lags three months behind. A Banking Composite was next constructed. For this com- posite I selected the three closely related series — cash reserves. 3.00, CEAST 4 3.00 l905 1903 1904 1905 1906 1907' 3.908' loans and deposits. Call loan rates correlate synchronously but inversely with the banking series named above, and might well have been included in the composite. However I con- cluded to present separately the movement of money rates as it actually occurs without inverting the series. Hence the com- posite includes only the series that correlate directly with cash reserves. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 35 The Banking Composite was constructed by the method al- ready described. The relatives for the composite are given in Table D. Chart 3 shows the fluctuations of the composite and the cash reserves. 3.00, CHART 5 3.00 1902 1903 1904 1905 1906 1907 1908 C. The Relation Between the Groups The question now arises : What is the chronological relation of the three series — ^the Investment Group, the Industrial Group and the Banking Group — to one another? It is not the purpose at this point in the discussion to enter into the theory of their causal relations to each other. That will be treated fully in Chapter IV. The purpose here is merely to ascertain their position chronologically. 36 UNIVERSITY OF WISCONSIN STUDIES Charts 4 and 5 show the relation between the industrial, in- vestment and banking composites. In these charts the secular trends have been eliminated by the method of moments. The relatives appear in Table K, Appendix to Chapter III. The Industrial Composite lags behind the Investment Composite by several months. It will be noticed that the lag is very much more marked at the crest of the wave than it is at the trough of the wave. The relation between the Banking Composite and the Invest- ment Composite appears in Chart 5. The Investment Com- posite lags considerably behind the Banking Composite. Again it will be noticed that the lag is much more pronounced at the crest than at the trough of the wave. Chart 6 has been added in order to show the relation of dis- count rates to the business cycle. In this case the secular trends are not eliminated. It will be remembered that call loan rates correlate synchronously but inversely with cash re- serves, loans and deposits. Commercial paper rates also corre- late inversely, but lag three months behind. Discount rates, if inverted would therefore move in the same direction as re- serves, loans and deposits. In Chart 6, however, the real movement of commercial paper rates is plotted along with the industrial composite. It will be seen that the money rates lag somewhat behind. From this it is obvious that reserves, loans and deposits would also correlate with the industrial composite with only a slight lag. In this case, however, the correlation would be inverse. As a matter of fact all the banking series have commonly been thought of as lagging slightly behind the business barometer. In the opinion of the writer this rele- gates them altogether too much to the position of mere lagging reflexes of business conditions. For reasons that will be set forth fully in Chapter IV the writer believes that the causal relation works on the whole the other way. If it is thought that reserves, loans and deposits rise as a result of depression and fall as a result of prosperity, then naturally the fluctua- tions of these series will be thought of as lagging behind, and therefore moving inversely with the other series in the busi- ness cycle. If on the other hand the movements of reserves, HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 37 loans and deposits are thought to be causal factors resulting in similar movements in stock and commodity prices, produc- tion and profits, then the fluctuations of these series will nat- urally be thought of as moving in the same direction but pre- ceding the other series in the business cycle. Chart 5 suggests the latter view. Following out this line of reasoning it is clear 3.0O 2.50 2.00 CHABT 6 ISBUSTRIAL COMPOSITE COMMERCIAL PAPEP RATES 3.004- 1902 1903 J.904 1905 1906 1907 1908 that discount rates fluctuating in response to the movements of reserves, loans and deposits, constitute a causal factor af- fecting business conditions. But if one has his eye on the lag which appears in Chart 6, one is apt to conclude that discount rates are merely a result of business conditions. In inter- preting Chart 6 it is therefore necessary to be on one's guard. 38 UNIVERSITY OP "WISCONSIN STUDIES When discount rates for example begin to drop, one should consider it not so much a belated index of depression as a harbinger of better things to come. The writer does not deny, however, that the causal relation works both ways. The exact lag of the various series shown in these charts can be established more definitely by means of the Pearsonian coefficient. The coefficients of correlation between the Bank- ing Composite and the Investment Composite are as follows : Banking Composite precedes 11 months, +.581 12 " +.593 13 " +.561 It therefore appears that the Investment Composite lags 12 months behind the Banking Composite. It must be remem- bered however that the lag is very much more marked at the crest of the wave than it is at the trough of the wave. The coefficients of correlation between the Investment Com- posite and the Industrial Composite are as follows : Investment Composite precedes 7 months, +.756 8 " +.770 9 " +.735 The Industrial Composite then lags 8 months behind. Here again the lag is greater at the crest of the wave. The coefficients of correlation between the Industrial Com- posite and the Commercial Paper Rates are as follows: Industrial Composite precedes 4 months, +.681 " 5 " +.688 6 " +.676 The Commercial Paper Rates series therefore lags 5 months behind the Industrial Composite. To summarize the foregoing, it appears that the Banking Group moves first chronologically ; lagging behind it is the In- vestment Group ; and lagging behind the Investment Group in turn is the Industrial Group. Of the twenty-three series ex- amined the following belong in each group. The different series for each group are substantially synchronous. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 39 I. Banking Group. 1. Reserves in New York clearing house banks. 2. Deposits in New York clearing house banks. 3. Xioans in New York clearing house banks. 4. Call loan rates. II. Investment Group. 1. Prices of ten investment stocks. 2. Prices of forty common transportation stocks. 3. Shares traded on the New York Stock Exchange. 4. Liabilities of business failures. III. Industrial Group. 1. Wholesale prices. 2. Production of pig Iron. 3. Railroad gross earnings. 4. Imports. 5. Immigration. To the Banking Group belongs also commercial paper rates but it was omitted from the above classification since it lags 3 months behind the rest. To the Investment Group belong in a general way ten bonds, Building permits, bank clearings and railroad net earnings. But they were omitted above because the ten bonds precede 2 months, bank clearings and building permits lag behind 3 months, while railroad net earnings lag 6 months behind. To the Industrial Group belong in a general way unemploy- ment and exports. They were excluded from the composite Because unemployment seems to precede the group by 3 months, while exports lag 4 months behind. D. Comparison With Other Groupings The results of this study differ in certain particulars from the groupings used by the Brookmire and Babson services, and from the grouping made by Professor W. M. Persons in his study of annual data." This may best be shown by outlining the groupings of each of the two services, and of Professor Persons. Their groupings are as follows: •W. M. Personp, "Construction of a Business Barometer," American Bconomio Review, VI, 739-769. 40 UNIVERSITY OF WISCONSIN STUDIES 1. BROOKMIRE'S GROUPINGS I. Banking Group. 1. Reserves. 2. Deposits. 3. Percentage of loans to deposits. 4. Percentage of reserves to loans. 6. Rate of commercial paper. II. Investment Group. 1. Thirty-two leading stocks. III. Business Group. 1. Bank clearings. 2. Railroad earnings. 3. Pig Iron production. 4. Pig iron prices. B. Commodity prices. 6. Imports. 7. Building. 8. Immigration. The writer would offer no objection to the first two group- ings, but the results of the investigations given in this chapter would indicate that bank clearings and building should not be included in the business group. 2. BABSON'S GROUPINGS I. Monetary Group. 1. Domestic money rates. 2. Foreign money rates. 3. Foreign trade. 4. Commodity prices. II. Investment Group. 1. Leading crops. 2. Railroad earnings. 3. Stock prices. 4. Political factors. III. Mercantile Group. 1. Immigration. 2. New building. 3. Commercial failures. 4. Bank clearings. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 41 The present study indicates that these groupings are badly mixed up. Foreign trade and commodity prices belong more properly with immigration. The present study would also in- dicate that commercial failures is entirely in the wrong place when grouped with immigration. Bank clearings and business failures may more properly be placed with the Investment Group. 3. PERSONS' GROUPINGS I. Forecaster. 1. Shares traded. 2. Prices of stock. 3. Bank clearings. 4. New railroad mileage. 5. Percentage of business failures. II. Barometer. 1. Gross receipts of railroads. 2. Net earnings of railroads. 3. Coal produced. 4. Exports. 5. Imports. 6. Production of pig iron. 7. Price of pig iron. 8. Immigration. 9. Relative wholesale prices. III. Classed as Synchronous with Barometer. 1. Ratio of loans to resources. 2. Ratio of cash to deposits. 3. Surplus Reserves of New York Associated Banks. The study of monthly data shows that exports lag 5 months behind imports; that railroad net earnings precede railroad gross earnings and the rest of the industrial group by 4 months. As has already been pointed out the group classed as syn- chronous with the barometer by Professor Persons, the writer believes might more properly be classed as a separate group.'" »» Unfortunately, this was written before Professor Persons' able studies of monthly data were published in the Review of Economic Statistics. He there does classify a separate banking group, but the position he gives it In the business cycle differs from mine. 42 UNIVERSITY OF WISCONSIN STUDIES O o Eh I? 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C.S 46 UNIVERSITY OF WISCONSIN STUDIES § O « Eh CO Q I? ■< o Pi OS PJ W Eh ca Pi » n ;? n s ^ H o li ^1 PiS o a 2^ Ph-s tlO u5 N iH t- o Til CO CO 00 o in to r- lo o ^ to f~ CO N to r» «D lo Nt~02'0050COt^eQOt>oo usioootoiomtKNTjitotot-. ooosoooasQOooaooooioo •d to o 0 to tC t- ^ (M 00 ■* »H O CT "H Tjl CO t- O CO to Tfi O O O C<) CO t- >-i »H CO CO CO lO 00 1-1 1~ lO 00 lO o» tHl0 05t*Tj*OTt*t-(t>-MO COCO(N(NeOCO ej t- CO CO iM OS CO CO oooocooioo«>moeoNNM OicOtiJoOOQOINOi-km't-ico i-lt~Oc0O0>C0O0>O>«^tD t> t^ t^ !>• 00 1> 00 00 00 00 00 00 a> 00 a> OS o> 00 a> OS 00 00 00 00 COO>-lt»C0050500tOeOtO^ 05C000OOt~e0<-IC000'HO COCONOJeqOt-INNb-CDCO 00f»00t~O0000000O>0000O5 vo O »H lO b- OS O T}< t^ lO »0 O -^ *H lOiOiO 00 W OOO tot* 00 t^ot^iooioc^coia-^^ CO W t* N U3 00 b- 00 t* lO CO -^ to COCO ^»Ot*t^t^t*l^t^ 0000 ooooo303r*t*t.io»otoio-^ 0303030303030303030303O >,h ■ ■ ■ ■ ■ --B fc^^^ w =3 rt • * -■ .^ fl q3 fl p^ C3 «» § 8 03 HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 47 »^ i-H »H *H i-J 1— I »^ 1-^ VI ^^ CO Tt* CO C4 O O t» a> t^ C4 Ud CO us *-l 00 0» lO ?o »C t* O U3 1^ 00 ■*ci3CONOi-l^OOOOOO eoo:Oi-i'o t-«ooooooot^ooa3a>o>a>o i-ioousococoooraooco >o to « m ti< to ^ t^ oj oo m o» §T-tCq^cOf*C05D^Hg5COO ^HTjlFHTt1t^t»WOTtJodu3(0 aooooococ«3i-c4 o <-i i-i oi a> o o o> oo o «o ou3>Q'^T)<>na>r4t^coo t^ T* 1-1 ^ o> o to 00 N oi CO CO cocoosododot-^odooJe 00 OS 03 oa 00 C3 00 00 era 00 ca o> oaoaoaaaoaooscaoosc NN'-lt-OOOOOOt^tO'OtO 00 N t- OS 00 ■-< O CO t>- CO CD o (^ U5 OS t~ t- OS oi N 00 N CO "5 SeOt^OSOO^Qfc-fcSS 00 OS 00 00 00 00 1^ OS 00 OS OS OS o*-HOosooasOOOoso m. i-l CO <-l Tl< CO CO 04 ^ >-< OS CO OS CO 00 U3 00 CO i-l '^ O CO CO >0 00 osOTtidi^ooooddoad ^«C3>o<-]gst!-'N^rJR; W3 00 00 OS 00 1* CO t^ 00 00 00 O 1-H O 1-H »-H 1-t O O »-* *^ ^-^ W N lO 00 CO CO CO CO U3 OS OS "O N C^ OOWt^OO vteONQOINCDCO b^o6o6t>^i>cD-*'u3U5cbi>t- 90cooocoooooooQi:HQgso SffloosbosSososososcjs OSOSOSOSOSOSOSOOOOSO 48 UNIVERSITY OF WISCONSIN STUDIES I a o O H 60 'a a ^a 2 M o a •a M O O ^ OOOS ^ IC005N OOOCO O (M C: lO r^ •-* CO O IC t^ »-4 U5 SI> t^ CC CO N 00 05 CD CO t— I CO »-< »-( Oi CO t* ■^i* U5 t^ CO 00 r-( lO i-iNOr^ 0500 W3»-H ONCD OOO Cfl»-* OONOOIOIOOOJ •"-tOt^CO-^^OOOCSOOiO^-tCO CO-*COCOC-i C0C0Tt*C-iTi!i 00 CO i-H Til T-( CM O i-l C- to IM t~ •* 00 CO CO "-H 02 O ^ (N CO CO (M *-o o» oo co os as o co co w os o oj »-< O O .-I C ^_ 00 1>-_ 00 O >-i eoi-i'^t-^oejoooiooos O r- ■"*! t- >-l ■* 00 O •* d M m ■035D^~0 ■* lO O lO 05 ■* ai CO to "5 N o O t* CO CO o cc »H -^ji i-( ,-H *-4 1^ oa o 1-t ^ t^ lO 00 O CO oa t-H u3 i>^cocoeoco^^"3U3»ot^ * * " "■ " ' ■ " ' ~ " ^..-ijiww-r-,- OOOOt-NOiOincOTllOSNOS eO-*05rHN050tOt»t^t-lO OClOOOQOOOOQO C4 u? lO >0 X ^ CO O 1-H 1-H U3 OOOQOOQQQOOQ oooooooooooo "ft lO CO OS 00 -ii-Hc^e^o>oqt-05N oooooooooooo u3 to o o 00 u5 (M >-i o CD lO 1-1 oooooooooogo oooooooooooo SSSSoSooi-iooS cOTij<>o ^ ^ ^ S i-l <-( — I 1-1 tH 1-1 >-l OH tH 00 CO a> -^t OS iH O 1-1 t> t- CO N 05 >o CO-* Noq o N CO cq 00 COOSlCTiHlOlOlOOSOCOOOO i^C0icH^i*TtH'^Tt*lOlO»O^ 80000000QQ00 - _ _22222222222 _• oooooooooooo OSOCDi-li-li-tCDCOCOi^lOO - -- - - - - - " " " " oooooososooaojoooi-i i-i si o t^ 'O ea Oi ao ta >n t~ c^ S iHtH>-Ii-I 1>0000Oi-IO2i-I(MC0C001 t~ lO lO IM 05 coo CO t> 0'>*2SSi 050500305050505C50C50 OOOOOOOQ0222 iH OS Tjn> eo ■* iH OS o in CO t- 22222222SSSS oooooooooooo h— i-HrHCDCDCDlOiH^t^lOCO ~ " ~ * " " " * " " " " CO t^ t^ CO CO CO t^ 00 00 00 OS O O CD 1-1 00 "^ CRICE8 WEST SHOBE BOHD •---•-•-• BRITISH COKSOL VRVaBlAS CONSOL 1902 1903 1904' 1905 1906 1907 1906 E. The British and German Barometers Exports, imports, and traffic receipts are the British series which fall in the industrial group. Traffic receipts however fail to register any cyclical fluctuations. The receipts follow a level course until the close of 1905 when a sudden drop oc- curs after which the receipts continue relatively constant again. 60 UNIVERSITY OF WISCONSIN STUDIES Only two series, therefore, remain for the industrial group, imports and exports. The relative numbers are given in Table G. The coefficients of correlation between the two series are as follows : Imports precedes 1 month +.816 " +.882 lags behind 1 " +.759 High concurrent correlation is evident. In the case of the United States, exports were found to lag considerably behind the rest of the industrial group. In Great Britain, because of the extraordinary importance of her foreign trade, exports as well as imports constitute a sensitive indicator of prosperity and depression. Of the monthly data available for Germany the analysis of groupings in the United States would indicate that production of pig iron, railroad gross earnings and wholesale prices should be classed together in the industrial group. The prices of consumers' goods and producers' goods might also be classed here, but as both are represented in wholesale prices the analysis of these two groups, as in the case of the United States, may be deferred until the following chapter where the theory of prosperity cycles will be discussed. The relative TABLE VII COEFFICIENTS OF CORRELATION— GERMAN INDUSTRIAL GROUP Each series precedes ( — ) or lags behind (+) wholesale prices by: +3 mo. +.845 numbers for the remaining series are given in Table H. In Table VII are given the coefficients of correlation between Wholesale Prices and the other series in the group.* Pig iron ':^ slight error Is Involved in the coefflcients given in Table VII owing to the fact that the deviations from the average of a seven-year cycle are correlated with deviations from the averages of six and five-year cycles. Series correlated with Wholesale Prices: — Imo. mo. +lmo. +2 mo. Pig Iron Production: +.917 +.922 +.926 +.920 Railroad Receipts: +.784 +.805 +.837 +.844 HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 61 production is substantially synchronous with prices, lagging as it does only one month behind. Railroad receipts lags some- what more behind. Hence wholesale prices and pig iron pro- duction were the only series included in the German industrial composite. These two series were combined by the usual method. CHART ftt TSTmiRtJO. COltEOSITBa 1902 1905 1904 1908 1996 1907 1966 F. Comparison of the Three Barometers We turn now to the chronological relation between the in- dustrial barometers of the three countries under considera- tion. The relatives for the American, British and German In- dustrial composites appear in Table K. The three composites 62 UNIVERSITY OF WISCONSIN STUDIES are plotted together in Chart 9. The secular trends have been eliminated by the method of moments. From this chart it is evident that the cyclical movements are quite closely concur- rent. G. The British and German Banking Groups In the Banking Group we find among the available British data the following: reserve of note and coin of the Bank of England, bank rate of the Bank of England, open market rate, bullion in the Bank of England, public deposits of the Bank of England, and "other deposits" of the Bank of England. Of these it was found best to make use of only the first three named. Bullion in the Bank of England was found to be al- most exactly identical in its changes to the reserve of note and coin. Hence only one was used, and the reserve of note and coin was selected. "Other deposits" showed no cyclical movements, and public deposits proved to be very irregular. Both were ruled out. The index numbers for the other series are given in Table I, Appendix. The coefficients of correlation between the bank rate, open market rate, and the reserve of note and coin were computed. The coefficients are given in Table VIII. TABLE VIII COEFFICIENTS OF CORRELATION— BRITISH BANKING GROUP Each series precedes ( — ) or lags behind (-|-) Reserves by: Series correlated with Reserve of Note and Coin — 1 mo. mo. +1 mo. Bank Rate — .254 — .538 — .519 Open Market Rate — .236 — .501 — .474 Concurrent inverse correlation obtains in each case. These three series were averaged together to form the British Bank- ing composite by the method used above.. The relatives thus derived appear in Table K. In constructing this composite the bank and open market rates were inverted. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 63 Of the available German data the following fall in the Bank- ing Group: note circulation, coin and bullion in the Reichs- bank, discounts and advances of the Reichsbank, deposits of the Reichsbank, bank rate, open market rate. Note circulation shows a steady secular growth, but no cyclical movements of CHASI 10: BASKIirO COUFOSITSS 5.0& 19Q2" 1903 a»Oi 1906 ^ 1906 1907 1906 ' any note. It was therefore omitted. The index numbers for the remaining five series are given in Table J. Coin and bullion in the Reichsbank was correlated with the other series in the group. The coefficients of correlation ap- pear in Table IX. 64 UNIVERSITY OP WISCONSIN STUDIES TABLE IX COEFFICIENTS OF CORRELATION— GERMAN BANKING GROUP Series correlated ■with Coin and Bullion Each series precedes ( — ) or lags behind In Relchsbank: (+) coin and bullion by: — 1 mo. mo. +1 mo. +2 mo. +3 mo. +4 mo. +5 mo. Deposits: +.426 +.502 +.389 Loans: — .523 — .588 — .584 Open Market Rates: —.603 —.671 —.711 —.732 —.676 Bank Rate: —.504 —.636 —.699 —.756 —.769 —.739 From this it appears that deposits and loans are substantially synchronous with coin and bullion. In the case of deposits the correlation is perfectly synchronous, while in the case of loans there is a lag of one month. The open market rate and bank rate lag three and four months behind, respectively. Coin and bullion, deposits and loans (inverted) were there- fore combined to form the German banking composite. H. Comparison of the Three Banking Groups The three banking composites are compared in Chart 10. The relatives are given in Table K. It appears that the three groups are fairly concurrent, though not entirely so. On the whole the American series seems to precede the European series slightly. I. Comparison of the Amplitudes of Fluctuation of Different Series It will be of interest to compare the three countries as to the amplitude of the fluctuations of the different series. Table X is therefore appended showing the standard deviations of the different series. It is of course clear that the larger the standard deviation the greater is the fluctuation of the series. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 65 TABliE X STANDARD DEVIATIONS OF SERIES IN UNITED STATES, GERMANY, AND GREAT BRITAIN Sebies United States Great Beitain Gebmaky Stock Prices 13.0 (Ten 3.8 (Stocks & 10.0 stocks) Bonds) 16.0 (Forty 6.2 (Nineteen coi^mon) Ord.) Shares Traded 34.7 29.6 Liabilities of Busi- ness Failures 98.0 Wholesale Prices... 4.6 8.5 Production ol Pig Iron 22.4 10.8 R. R. Gross Earnings 13.9 Immigration 32.7 Imports 15.7 7.8 Exports 15.4 Cash Reserves 9.3 7.2 9.3 Deposits 12.6 9.7 Loans 11.1 13.4 Money Rates 16.0 (Com. 22.6 (Bank) 23.5 (Bank Paper) Rate) 94.3 (Call 27.5 (Open 25.3 (Open Loan) Market) Market) 66 UNIVERSITY OF WISCONSIN STUDIES APPENDIX TO CHAPTER III TABLE E— INDEX NUMBERS OF THE SERIES IN THE BRITISH INVESTMENT GROUP Prices of Stocks and Bonds Prices of 19 R. R Ord. Stocks Prices of Stocks and Bonds Prices of 19 R. R. Ord. Stocks 1902 1003 1904 1905 January. February March . April... May . . . June . . . July... August. September October. . November December January. February March. April . . May.. , June.. , July.., August September October. . November December January . February March. April . . . May . . . June.. . July... August. September October. . November December January . February March . April . . May . . , June . . . July . . August September October. . November December 102.3 103.0 103.3 103.3 103.8 105.0 104.7 104.7 104.1 104.1 103.8 103.6 102.7 103.0 102.9 102.3 102.4 102.3 101.9 101.8 101.1 100.9 100.7 100.6 98.8 96.2 97.3 98.9 99.9 100.5 100.1 99.8 100.6 102.0 102.1 102.2 100.9 102.1 103.6 103.1 102.2 102.5 102.6 103.6 104.2 104.2 104.0 103.3 106.4 108.3 108.2 107.9 109.2 111.0 110.0^ ,109.6^ 106.8 106.9 107.7 107.7 105.0 107.5 106.4 105.3 104.6 104.7 105.0 105.7 103.7 104.7 100.2 99.0 97.1 89.0 95.3 100.0 102.8 101.4 100.5 100.0 101.7 105.4 101.8 103.3 99.9 103.8 105.2 102.2 101.4 100.8 101.2 101.8 104.5 105.4 106.7 105.6 1906 1907 1908 Base January.. February . March. . . April May June July August . . . September October. . November December January . . February . March. . . April May June July August . . . September October. . November December January . February March. April... May.. . June . . . July. . . August. September October . . November December January . . . February . . March . . . . April May June July August September October. . , November December . 102.5 102.9 las.o 102.2 101.8 101.3 100.7 102.4 101.2 100.3 101.4 101.5 100.1 99.6 96.8 96.6 95.6 94.1 95.4 92.2 93.0 92.9 91.4 92.5 92.8 92.9 93.1 92.9 94.1 94.3 94.4 95.0 95.6 95.3 96.5 96.7 (000) 3,019, 3,010, 2,997, 3,004, 3,007, 3,000, 2,994, 2,981. 2,982, 2,971, 2,973, 2,975. 102.3 103.4 101.7 100.2 99.5 99.2 100.1 103.0 100.7 94.0 99.8 99.6 97.1 96.4 93.6 94.0 92.7 91.1 93.2 90.3 91.2 91.1 92.5 94.7 92.3 92.0 89.7 90.1 89.6 91.5 89.8 89.6 91.5 92.3 90.8 90.3 (000) 258,900, 252,000, 251,900. 253,800, 253,300. 253,100, 250,500. 246.600. 245,800. 243,700. 248.800. 248.100. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 67 TABLE F— INDEX NUMBERS OF SERIES IN THE GERMAN INVESTMENT GROUP Trade Prices Trade Prices on of 12 on of 12 Bourse Stocks Bourse Stocks January . . . 104.1 85.4 January... 114.7 113.0 February . . 112.0 88.3 February.. 105.9 112.8 March 91.3 88.1 March 114.8 112.2 April 86.3 85.7 April 147.8 113.2 May 99.9 86.0 May 146.3 113.3 1902 June 112.1 87.8 1906 June 133.8 112.5 July 91.9 85.8 July 107.8 110.5 August 76.3 84.4 Au^t .... 98.3 110.6 September 79.2 83.2 September 122.4 109.1 October . . . 78.7 81.9 October . . . 93.4 108.2 November. 76.0 82.8 November . 92.6 108.0 December . 84.0 83.8 December . 110.6 109.0 January . . . 102.1 87.0 January . . . 97.5 109.9 February.. 100.0 88.9 February . . 83.5 108.1 March .... 102.0 91.4 March 107.6 103.8 April 100.3 91.5 April 74.2 101.6 May 81.3 90.0 May 78.4 100.9 1903 June 80.7 89.2 1907 June 78.9 99.8 July 87.0 90.1 July 69.9 99.0 August 74.7 90.7 August 59.8 95.0 September 69.4 90.3 September 68.7 96.8 October. .. 118.0 93.2 October . . . 61.7 97.6 / November. 105.7 96.1 November. 57.5 94.6 December . 119.2 97.4 December . 49.5 93.9 January... 94.1 97.6 January... 57.2 96.8 , February . . 108.1 94.1 February . . 49.7 96.1 March 77.9 95.2 March 54.3 95.8 April 84.9 97.0 April 51.8 97.2 May 74.9 98.2 May 80.9 97.9 1904 June 102.0 99.5 1908 June 78.4 96.3 July 108.3 100.8 July 70.4 97.2 August 131.4 104.2 August 76.8 98.5 September 103.4 104.3 September 96.4 99.9 October. . . 115.9 104.8 October. . . 80.8 97.7 November . 140.9 107.3 November. 93.5 97.8 December . 137.9 108.2 December . 78.7 (000) 1,569 97.5 (000) 2,227 January . . . 130.2 109.8 January... February . . 140.5 112.2 February.. 1,361 2,239 March .... 151.7 113.8 March 1,297 2,219 April 154.2 114.0 April 1,411 2,242 May June 138.5 113.5 May 1,197 2,238 1905 114.9 115.1 Base June 954 2,220 July 164.8 116.9 July 1,035 2,197 "***j ...... August .... 182.8 117.6 August 1,094 2,223 September 170.5 116.1 September 1,329 2,255 October. . , 151.3 115.9 October... 1,361 2.254 ■ November . 133.9 114.2 November. 1,218 2,246 December . 120.0 110.5 December . 1,072 2,252 68 UNIVERSITY OF WISCONSIN STUDIES TABLE G— INDEX NUMBERS OF SERIES IN THE BRITISH INDUSTRIAL SERIES Imports Exports Imports Exports January . . . 97.3 85.7 January . . . 103.8 108.5 February.. 90.6 79.0 February . . 103.3 106.5 March .... 82.1 78.2 March 106.9 111.7 April 98.2 88.3 April 100.0 101.6 May 93.3 80.6 May 110.6 111.9 1902 June 91.5 79.9 1906 June 108.0 115.2 July 95.6 85.9 July 105.2 110.3 August 90.1 82.2 August .... 109.0 113.3 September 93.0 83.5 September 100.2 107.0 October . . . 92.2 83.7 October . . . 107.3 110.5 November. 87.6 85.9 November . 108.2 114.6 December . 90.2 85.2 December . 102.3 110.5 January . . . 89.9 87.8 January . . . 117.5 123.8 February.. 88.2 84.4 February . . 115.1 118.9 March .... 94.2 88.5 March .... 115.9 122.2. April 93.1 86.9 April 120.9 129.3 May 90.2 85.8 May 113.2 130.2 1903 June 93.1 83.7 1907 June 107.9 124.2 July 98.8 85.4 July 113.1 133.4 August 95.4 86.8 August .... 110.0 126.3 September 101.1 81.7 September 100.9 123.2 October . . . 94.9 86.1 October. . . 113.3 127.5 November . 94.6 80.1 November . 111.0 124.6 December . 97.9 86.6 December . 104.8 115.1 January . . . 89.3 85.0 January . . . 109.3 121.4 February . . 95.9 88.6 February . . 114.0 129.5 March .... 97.7 85.4 March .... 104.5 115.9 April 96.1 88.3 April 100.1 115.2 May 96.4 85.8 May 95.3 109.7 1904 June 97.5 90.5 1908 June 104.0 108.8 July 88.8 81.7 July 101.5 111.2 August 94.6 89.1 August 95.4 102.5 September 95.9 90.9 September 106.8 111.0 October. . . 97.3 84.8 October . . . 99.7 109.9 November. 98.4 90.8 November. 96.9 101.3 December . 98.9 98.8 December . 106.4 103.4 January... 92.8 88.1 (000) (000) February . . 93.1 93.6 January . . . 61,500. 28,360. March .... 98.2 98.9 February.. 46,010, 27,000. April 92.1 90.7 March .... 49,800, 28.410. May 100.9 96.2 April 47,060, 26.630. 1905 June 98.2 97.7 May 46,450. 28.350. July 97.1 91.9 Base Jime 44,360. 26.610, August 104.7 99.8 July 46.150, 30,300. September 101.8 103.0 August 44,790, 29,570, October. .. 95.6. 97.7 September 49,920, 28.530, November. 103.2 102.9 October. . . 60,830, 30,050. December . 99.4 101.0 November. December . 61,490, 53,420. 28.770. 28.440. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 69 o O ij -J! 03 Q iz; a Is 03 OS 1^ O 00 » & w Q pa i fe S d .SP'g o> 05 05 oj 05 03 OS oj 05 en oi 00 ososScndsSSoroooo o o» oi 05 ^ "i)! m CO "-I ^ CO eo o>-<.-(050tot»oO"5oowM SSSS^fcHSsiSan::;^ oio6c^(N(N'ioodMioa» 00 1^ oj 00 00 OS 05 05 05 05 05 05 ooooo50>030>rod5roo5 wS i-H l> O QO*-t U3 O Oi 00^ t^ O O OOCO t* W 00 OiC-^ QOO OJ 05 00 00 00 00 00 00 00 00 00 00 ooi>osos05a5Sooooo -fc>, 03.033 §^§j3 : : : --S S » SI ■lill >-,fag-l rH to O CO OS CO to N ■* N ooososOT-('-a>o>a>a>a> COCOC4CCCOCOCOCOCOCOCQCO ino5tONOsO'*oot^OOeo fl.9 o 03 -tt^> !^S s « a fl S (u jJ2 P4 Jh g ^ 3 ST « ^ ^ HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 71 I o o n n 02 m n OS 03 o OS p^ C3 I? !«! S5 3 P3 11^ l; 1^1 * t^ ■^ "5 so M CO «0 to O m "5 O00O.-liOON«DN05'*rH o 00 ffi o 00 to a> i-H a> ;o t~ r- o t^ o to oo i> f< t-3 a> o5 !0 eo CO o» t- N t» u3 lO us r(i 00 os ea os m w* lo "* m e<5 o t« 3l2!5S3SS'0'>«ooo«>o=oo ooooxooacaxcococo t~tot»t>.oi>ooooooc5osoi 98S;5aSS;S!SS!S3l!5?52 iSaccdrHO^iOModines 03 OS 03 00 CD O) O^ C3 1-H *-4 O O O i-t »-( Oi-t O 003 W05 o L i-j fe g -"ij 2 1-5 1-5 <) cQ o ?; o S o> rH iH c4 o as a> a> CO a> 00 o o> m t~ i-i o ^ti oi o» tji ■* o> o 03oooob-0300CT>a>< OOi005INiOt-tDi-l05^0» 003i-t-HC-4C303000>0} ooosor-Ntomusiototo ^OOOt»eDlOt^«DOOC0'-iOPiooo^c0 Q0ccc4O300tf9co<»ra<-iaa coeoTONCTedcaeqNwmco I I pq S.!3 1^ NOOJOOOOt-OOOOt-O'O'O ^coropococccocororo^^ OOOi-t*H»-HOOOO»-iO gooo oooSoooo S'l', i-s|Mil'lll|| i2gd^g_^ CQ O —I -H >-i O ■* IN N "H ■* Tfi CT> OiOOOJINOCOUSCOOiiON COT(i>2lN(N(MN0005o6i-IO O»HOO(NTOC0i-li-l(M-o^coo>n 05000f-^C . ■ . . . .^ h-Q^ ggja : ; : --sa^al _ja : : ; ■■£ Ss S a > o HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 73 TABLE J— INDEX NUMBERS OF SERIES IN THE GERMAN BANKING GROUP Open Reserves Deposits Loans Market Rate Bank Rate Jan 107.8 102.4 85.5 89.2 57.6 Feb 107.5 123.2 92.5 106.7 65.7 March. . 108.7 110.3 90.3 92.8 67.7 April. . . 108.0 97.8 88.5 83.3 70.0 May — 108.4 93.5 83.7 97.1 72.5 1902 June 107.9 103.9 82.7 93.5 73.7 July.... 107.0 95.5 84.3 93.5 75.0 Aug 105.4 96.3 84.6 99.3 75.0 Sept.... 102.8 98.4 81.8 91.5 75.0 Oct 103.1 95.4 86.7 83.3 71.2 Nov. . . . 100.7 88.2 82.5 95.0 62.6 Dec 100.0 102.4 85.6 91.7 60.0 Jan 98.2 98.3 95.1 78.0 76.7 Feb 96.2 91.8 88.3 76.2 87.6 March . . 95.1 99.6 85.3 61.9 79.0 April. . . 91.0 90.3 87.8 72.8 81.6 May 92.2 111.2 94.5 92.9 84.5 1903 June 92.8 103.6 99.7 97.2 86.1 July.... 95.7 90.2 95.6 93.5 100.0 4 ^ Aug 96.3 94.1 93.8 103.3 100.0 Sept 99.0 89.6 90.2 106.7 100.0 Oct 104.9 89.7 92.1 100.6 95.0 Nov. . . . 102.1 90.5 92.8 83.1 83.5 Deo 101.8 95.1 94.1 80.4 80.0 Jan 99.6 97.4 97.6 69.7 76.7 Feb 96.7 94.5 95.0 72.3 87.6 March. . 96.5 90.4 95.5 92.8 90.3 April. . . 95.0 97.0 101.3 90.3 93.3 May.... 95.9 80.1 95.2 92.9 96.6 1904 June 95.7 85.1 89.4 93.5 98.3 July. . . . Aug Sept Oct 94.5 94.7 89.0 97.2 100.0 95.7 89.3 88.6 82.8 100.0 97.0 90.0 86.0 79.8 100.0 97.4 93.3 87.1 86.7 95.0 Nov. . . . 107.0 93.1 82.3 97.8 104.3 Dec 115.2 94.4 81.5 83.1 100.0 Jan 115.5 97.4 82.1 83.6 96.0 Feib 113.2 98.7 87.1 72.3 87.6 March . . 112.0 106.6 88.8 54.2 79.0 April. . . May June July. . . . Aug Sept. . . . Oct Nov Dec 113.1 109.6 88.8 69.4 70.0 1905 108.6 107.6 102.2 98.7 97.1 93.1 93.3 95.5 107.6 102.1 97.7 92.9 98.1 98.5 95.2 94.5 98.9 99.0 103.3 101.2 106.1 105.8 105.4 99.1 64.8 70.1 62.3 66.2 76.2 93.6 106.9 105.9 72.5 73.7 75.0 75.0 75.0 95.0 104.3 110.0 74 UNIVERSITY OP WISCONSIN STUDIES TABLE J— -Continued Open Reserves Deposits Loans Market Bank Rate Rate Jan 101.9 99.9 99.8 94.7 116.2 Feb 101.2 100.6- 100.1 99.1 109.4 ■" Mareh . . 100.0 100.5 104.5 112.0 112.8 April. . . 102.0 99.4 98.4 114.4 116.5 May 101.8 92.0 97.2 105.1 120.9 1906 June 99.7 91.1 95.9 106.0 110.7 July.... 94.9 104.2 106.4 120.6 112.5 Aug 93.7 94.9 107.9 111.6 112.5 Sept. . . . 91.2 87.6 103.4 106.7 112.5 Oct 83.4 97.6 115.6 121.4 118.8 Nov. . . . 86.8 97.4 118.6 124.7 125.2 Dec 86.1 101.8 117.6 114.7 120.0 Jan 86.3 104.2 111.8 128.2 134.4 Feb 89.9 100.1 111.9 133.2 131.3 March . . 91.6 , 95.9 116.2 150.8 135.4 April. . . 91.3 108.1 120.3 156.1 139.9 May 93.5 106.6 118.6 129.4 132.9 1907 June 95.0 110.0 123.1 143.9 135.2 July. . . . 90.8 98.6 119.4 148.0 137.5 Aug 96.0 112.6 119.7 144.7 137.5 Sept.... 93.7 113.2 129.0 141.0 137.5 Oct 90.1 101.6 118.1 146.8 130.7 Nov. . . . 85.2 108.1 130.9 130.6 135.8 Dec 78.6 85.7 132.5 160.6 150.0 Jan 90.6 100.5 128.2 156.1 144.1 Feb 94.8 91.1 124.3 140.9 131.3 March . . 95.6 96.8 119.9 136.2 136.4 April. . . 100.0 97.8 114.8 114.4 128.2 May 99.8 108.8 112.0 117.1 120.9 1908 June 101.6 104.5 109.8 97.2 122.9 July. . . . 114.3 119.6 102.0 85.7 100.0 Aug 114.5 120.1 104.4 91.1 100.0 Sept 118.7 122.9 102.9 99.0 100.0 Oct 128.1 124.4 94.7 69.4 96.0 Nov. . . . 125.1 127.4 88.0 62.2 83.5 Dec 122.7 (000) 126.2 (000) 89.1 (000) 62.8 80.0 Jan 41,890, 26,240, 57,520, 4.48 6.21 Feb 47,330, 24,720, 42,270, 3.28 4.67 March . . 48,330, 28,630, 42,470, 3.23 4.43 AprD. . . 44,930, 27,380, 53,230, 3.60 4.29 May 47,930, 28,230, 47,150, 3.09 4.14 Base June 60,100, 29,760, 46,330. 3.21 4.07 July 46,280, 26,950, 53,860, 3.21 4.00 Aug 48,120. 26,040, 45,500, 3.02 4.00 Sept 46.790, 28,870, 47,280, 3.28 4.00 Oct 40,560, 26,610, 61,120, 3.60 4.21 Nov 42,850, 24,920, 62.990, 4.21 4.79 - Dec 43,350, 27,770, 49,800. 4.36 5.00 HANSEN— CYCLES OF PROSPERITY, AND DEPRESSION 75 ¥ I « H PQ fl ;z; d ^ ^ H 3 s .? <) UJ, 9^ C5:S a §11 ill O 13 ■S Oft •3:3 a :alg. •■g sg M 2: o 5 ^^ •Sin a III •S-§ S* ++++++++++ 1 + I i + i + i I I I II + 1 1 ++ 1 1 1 1 1 1 1 1 1 I I I I I I M I +++ eoNeoe-ioooorH'5tii-i +++++I 1+4-1 + 1 i-It-IOCO^COOi-IUJ^Oi-I + 1 I I 1 l.+ l I 1 + 1 ++I++++1++I I SNNOietDeO'-ioqjt-ioo WrHONi-iciONOeoo I I + M +++ 1 I + I I I I ++++ I ++ MOONfJr-li-HOeOi-l'OtO 1 + 1 I I I I I i M I tS^os|^^^~«Dl^^eo■*t»^oo +++++ 1 1 I 1 11 ++ I I 1 I I II I II 00 '* o «5 oo 05 to o OS t~ 50 eo ej "-i t- o t- 1- eo ® oo eo t- sj 1 11 1 1 1 1 1 1 1 1 + +++++++ 1 1 1 1 1 ScjeoeootousooootO'*© Or-i^cootot-oooasoo lO-^NNl-SJi-lOQOlOO^eO ei5-HPi>o>-iSsioN'-iO>-i 1 1 1 ++++++++ 1 1 1 1 1 1 1 1 1 iT 1 1 E?!" 5|||liitl|l!l iilli •S-Q ■ :-s as a a 76 UNIVERSITY OF WISCONSIN STUDIES Si's OlOCOCONOitDOOrtOCTlO 05t^030«DCOOMCOTf>OM I I I I ++ ++++++ 0.2 . .-iooooecooc<)o>TitN'*io ■-ioO'*oeooi>oooooo^ ++++++++ I I 1 + I PQ m;oiN(Nroi't-(eoo>-i ■nrtii-ii^ooiooorHOsNi-ieo '-icor~eo<-(N-l I I I M I I I I I I I ++++++ 1+++++ 1.^ 1 1 iTTi I 1 I+++ sg.ss'Sb a5Jw ft,S 3 3 P « o£^ HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 77 l3SS^fe^53'iE?S!2S<' ++1 + I I 00 1- to «3 to 00 U5 to ffl l- 00 1> OOOOOClOOOSOOt^uS OOTOMMOOOOmt-tOC^'Ht-. cot-.oo-meO'-it» tot^t-^ecNcot^iOi-iioto OinwuscomO^toeortio o^cocousotoc^rooiOin ++ ++ I I 1 I I I I 1 1 1 eoNi-ioto«toco>2J>g«o eomt^^cc^t^OosOooto -Oioeooo.-iMOsb-gOcj>o Ut~tO'4<>O>n>O'^^tO00e4 Oeo^ooaOTf'l'eO'^TitMOS ^lOOlQi-lOOC^tvOi^CStO •^v-iooo30e«?ooc4C40ooto. ++++++++++++ ++++ g^£5SS^2^SS:SS Sp-S, 78 UNIVERSITY OF WISCONSIN STUDIES I I 5 ^ Hi V Q o 03 l-H CO i as a s g 3 O a" ■S^ a •-'OS 9^ IP s I I ++++++++ >-Hto.-i'0(Nf''i'9*> iCU30eOTtitO>OOONINOS ++1 1 1 1 1 1 1 1 1 gOOCO'-tCOCO«^lOOi-HO »-H i-H 1-4 l-H I I I I i I I M i I I eoMwoooeoi-iOJi-i-^O'* T~* tH T-( 1-4 rH W »H I +++++++++++ ++I 1 1 1 1 1 1 1 1 1 «DCOCOCOCOO>C^lOCOCOC3t? t^t^OOOOiC^CDTjli-HC^OO I I I I I I M I i I C4i-ir-irtiu;tDor^i-i<-icoe!| I 1++++++++++ mt-Ncai-iNOOeoio^t^ OC4 0^COU5iocO*-4i-iOcO 1 1 I I C^ N QOOSiH-^ cocoes NTft^ TTi 1 1 1 1 1 1 1++ (11 d '^ -illlli^lll i-s P^ g :;►:;-< 02 O !^ Q CHAPTER IV THE THEORY OF PROSPERITY CYCLES A. Introduction Theories of prosperity cycles may be divided into two main classes : first, those which hold that prosperity and depression are due to economic relations growing out of the modern in- dustrial system of production and exchange, and second those which hold that these cycles are based on crop-yield cycles which are due in turn to cyclical fluctuations in temperature and rainfall. In this chapter will be treated those theories which find the causal factors of prosperity cycles within the industrial and business mechanism itself and not in meteorological phenom- ena. These theories may be classified under three main heads : ( 1 ) those that place the emphasis upon producers' goods ; (2) those that place the emphasis upon consumers' goods; (3) those that place the emphasis on money, credit, prices and capitalization. Those theories which are concerned mainly or wholly with financial panics are here passed over entirely. They have in fact nothing to do with economic or industrial fluctuations proper. A financial panic is merely the seething foam of an industrial storm, and makes its appearance only in those coun- tries which have a totally inadequate banking system. A panic obtains when thoroughly sound business firms are unable to get credit because of an inelastic system of currency and re- serves. Such a situation has not obtained for a generation in any advanced European country. The older and now obsolete theories of crisis are also passed by. The two categories into which they generally fell are in- dicated by the two formulae in which their arguments were put — over-production and under-consumption. Several mod- ern theories may likewise be classed under these two general 80 UNIVERSITY OF WISCONSIN STUDIES heads, but modern theories have analyzed over-production and under-consumption with much greater detail and discrimina- tion. The one finds the causal factor of crises in the under- consumption of producers' goods, the other in the under-con- sumption of consumers' goods. Only the newer formulations of the production and consumption theories will be dealt with here. We have then the following classification : A. Economic Theories. I. Those that emphasize Producers' Demand. II. Those that emphasize Consumers' Demand. III. Those that emphasize Money, Credit, Prices and Capitalization. B. Meteorological Theories. That modern economic theories of industrial fluctuations may be classed under three main heads may at first seem du- bious. Mitchell describes modern theories under the follow- ing numerous heads: Competition Theory, Discrepancy be- tween Wages and Productivity, Over-saving, Theory of Di- minishing Utility, Over-capitalization, Ill-balanced Production of Industrial Equipment and Complementary Goods, Changing Costs of Construction, Variations in Prospective Profits, Dis- crepancy between Prospective Profits and Current Capitaliza- tion, Uneven Expansion in the Production of Organic and In- organic Goods, Dissimilar Price Fluctuations of Producers' and Consumers' Goods, Theory of Lagging Adjustment of In- terest, Theory of Impair Savings.^ But when we come to look at the matter closely we find that one group finds the key to the situation in the over-production and under-consumption of producers' goods, another finds it in the over-production and under-consumption of consumers' goods, while a third group finds it in money, credit, prices and capitalization. « Mitchell, Business Cycles, pp. J-18. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 81 B. Economic Theories of Prosperity Cycles 1. theories emphasizing producers' demand (a). Minnie T. England^ Mrs. England's theory places the emphasis definitely and entirely on the demand for producers' goods. Promotion is the cause of prosperity. Promotion implies the investment of social savings. When this investment is going on good times obtain ; when it slows up depression appears. It is not a ques- tion of the "under-consumption" of consumers. It is a ques- tion of the "under-consumption" of investors. Increased prosperity is merely an increased demand for goods, but the goods in question are not consumers' goods but producers' goods. This increased demand for capital goods causes in- creased prices in capital .goods, which results in larger profits for their producers. Higher wages are paid in these indus- tries, more men are employed and there results an increased demand for consumers' goods. But this is a result and not a cause. Promotion is carried on largely with borrowed funds ob- tained chiefly from banks. Thus promotion results in an in- crease in bank loans and bank deposits. This expansion of credit results in the demand which produces the rise in prices mentioned above. Hence the sequence runs as follows: in- creased promotion, expansion of credit, rise in prices. The important point to notice in this theory is that the increased loans leading to higher prices are primarily due to the pur- chase and production of capital goods which results from pro- motion, and not due to the purchase of consumption goods. This conclusion is substantiated by the fact that the prices of producers' goods rise before a rise occurs in the prices of con- sumers' goods ; and also by the fact that the rise is higher for producers' goods. 'M. T England. "Fisher's Theory of Crises," Q. J. Econ., XXVII, 95- 106 ; "Promotion as the Cause of Crises," Q. J. Boon., XXIX, 831-41 ; "Economic Crises," J. Pol. Econ., XXI, 345-54 ; "Analysis of the Crlse« Cycle," J. Pol. Econ., XXI, 712-34. 82 UNIVERSITY OP WISCONSIN STUDIES Likewise when depression sets in the prices of producers' goods fall before the prices of consumers' goods, indicating that the check to prosperity is due to a falling off of promotion activity. Depression is brought on by the reverse of the forces which produced prosperity. Business failures occur which re- sult in a loss of confidence in further investment. The de- mand for capital goods falls off, credit is contracted, and prices fall. Forced economy in consumption results, but the reduced demand for consumption occurs as a result of the falling off in the demand for producers' goods. (b.) George H. Hull" ' Hull offers the theory that prosperity and depression are nothing more or less than a variation in the amount of con- struction work. He holds that there are certain classes of goods that do not admit of any great fluctuations in demand. These are the necessities of life. Agriculture, commerce and finance are the departments of economic life that supply these necessities. In industry alone do we find a department of eco- nomic activity capable of sudden expansion or contraction. Three-fourths of industrial operations, it is claimed, consists of construction. Two-thirds of this construction consists of repairs, replacements and such extensions as are required by the steady growth of population. Therefore a large propor- tion of industrial operations are also incapable of any great extension or contraction. The other industrial operations are what Hull calls "extra" construction, or "investment" con- struction. Extra construction is undertaken only in a period of low prices when far-seeing investors enter upon a large amount of construction work. Others follow these leaders and the result is a great demand for iron and steel, lumber, cement, brick and stone. This creates a boom in the indus- tries producing these products. Labor and raw materials are demanded on a large scale, and neither can be secured to the required extent. The inevitable result is a rise in wages and the price of raw materials, and with that high prices for con- ■ Georse H. Hull, Industrial Depreaaions (New York, 1911). HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 83 struction goods. Far-seeing industrial leaders now cease the extension of construction work. The demand for construc- tion material drops off. Laborers engaged on constructional enterprises suffer from unemployment and reduction in wages. Prices and wages fall until the low costs again make construc- tion work profitable, and a new era of prosperity follows. Prosperity then has nothing to do with the variation in the demand for consumers' goods. That remains relatively con- stant. But the waves of prosperity and depression are the re- sult of variations in the demand for construction work. (c). D. H. Robertson* Robertson in his Study of Industrial Fluctuations aims to present a complete statement of all the factors affecting pros- perity waves. He discusses these factors under the two head- ings of supply and demand. With regard to supply he dis- cusses the following points : ( 1 ) the influence of the time re- quired to construct instruments of production; (2) the influ- ence of the length of life of the instruments of production; (3) the influence of fluctuations in the cost of construction; (4) the influence of invention. Under "demand" he discusses : (1) changes in demand due to fashions, tariffs and wars; (2) the influence of the volume of crops on the demand for rail- road equipment, shipping, constructional work, and iron and steel exports. Other points of less importance are also dis- cussed. Production begins to increase under one or more of the fol- lowing influences : ( 1 ) a general increase in the physical pro- ductivity of effort due to the adoption of improved methods under the stimulus of depression; (2) an increase in the ex- change value of industrial products against the products of agriculture due to an increased bounty of nature; (3) an ex- pansion due either to an increase of confidence or an increased supply of gold or credit currency, which affords an additional bonus to business men because of the relative fixity of wages and interest rates ; (4) an increase in the expected future pro- •D H Robertson, Study of Induntrinl Fluctuationn (London, 1915); "Study In Trade Fluctuations," J. B. B., LiXXVI, 169-7S. 84 UNIVERSITY OF WISCONSIN STUDIES ductivity of constructional goods due either to a wearing out of an exceptionally large number of existing instruments, or to the discovery of the industrial possibilities of a new coun- try or to some physical or legal invention. In the course of time the physical productivity of effort de- clines owing to the relapse into wasteful methods of produc- tion and to the operation of the law of increasing cost; agri- cultural shortage turns the ratio of exchange against industrial products ; the monetary stimulus to increased production is re- versed by a depletion of gold reserves and an increase of in- terest and wages in accordance with the rising price level ; and a decline in the demand for construction goods occurs because of over-investment in these goods. Here are many points familiar to crisis theories. The con- tribution made by Robertson is his discussion of the influence of the time required to construct instruments of production, and the influence of the length of life of these instruments. The longer the time required to construct new instruments the greater will be the over-production of capital goods. An increased demand for certain producers' goods will make the production of these goods profitable because of their high price. But this high price will continue until the new batch of instruments is brought on the market. The longer the time required to bring this new batch on the market, the longer will be the period during which the production of these goods is stimulated, and the greater will be the quantity of capital goods finally produced. This discussion is borrowed largely from Aftalion, whose theory will be developed later. The influence of the length of life of the instruments of production is the distinctive contribution of Robertson. Dur- ing the rising price period a great quantity of industrial in- struments are produced. These wear out simultaneously pro- ducing an appreciable shortage. This leads to high prices and a fresh burst of investment. Thus once started the cycles tend to be self -perpetuating. Meager statistics are presented in support of this theory. The longevity of iron rails, ships, cotton-spinning machinery, coal mines, etc., is considered. The facts do not seem to fit the theory very successfully. HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 85 Robertson's theory is by no means clean cut. On the whole, however, he places the emphasis on the demand for producers' goods. Depression is caused by the cessation of demand for producers' goods resulting from an over-production of these goods due to the length of time required to construct them. Prosperity is caused by the increased demand for producers' goods growing out of the shortage due to the simultaneous wearing out of the instruments of production constructed in a previous period of prosperity. 2. THEORIES EMPHASIZING CONSUMERS* DEMAND (a). Aftalion'^ Aftalion's explanation of crises places the emphasis on the demand for consumers' goods. Assume as a starting point an insufficient satisfaction of wants obtaining because of under- production of consumers' goods. This results in high prices for consumers' goods, and a great increase in productive ef- fort to supply more of these goods. But the great increase of production resulting fails to supply the wants of consumers or to weaken prices. The reason for this strange anomaly lies in the fact that the increased productive effort is not applied to the production of consumers' goods directly, but rather in- directly by a round about method which necessitates the pro- duction of capital goods before there can be an increase in consumers' goods. Until the new capital goods can be finished and put to work producing consumers' goods the demand for the latter remains unsatisfied. The fluctuations in the prices of consumers' goods give rise to still greater fluctuation in the prices of producers' goods. In fact a relatively small change in the demand for consumers' goods may produce a very large proportionate change in the demand for producers' goods. If for example 10 per cent of a certain commodity is produced by new equipment every year, an increase of 10 per cent in the demand for this commodity would result in an increase of 100 per cent in the demand for new equipment. Thus an increase in the demand for con- «A. Aftallon, Lea crises periodtguea de aitrproiucHon (Paris, 1913). 86 UNIVERSITY OF WISCONSIN STUDIES sumers' goods stimulates a still greater increase in the produc- tion of fixed capital. But while this production is going on, consumers' goods are no more numerous than before, and there- fore the demand for consumers' goods persists which in turn induces the demand for producers' goods. These producers' goods are not immediately forthcoming. Statistics are pre- sented showing that the horse power of machinery in various industries does not increase notably until a considerable time after the beginning of a boom period. It is only when the new instruments of production begin to pour out consumers' goods that the consumers' demand becomes satisfied and prices begin to drop. That affects the value of producers' goods, the demand for new construction falls, and prosperity wanes. Thus the demand for both consumers' and producers' goods is prolonged by the fact that it requires a considerable length of time before the new instruments of production can be com- pleted. And not only is prosperity prolonged by the long time required to produce new capital goods, but depression as well is prolonged by the same fact. Instruments already in process of production must be completed. Therefore the production of fixed capital continues even after the crisis period. Aftalion presents statistics to show that the horse power of machinery in various industries continues to increase from one to three years after the break in prices. Thus the curve of the pro- duction of capital goods lags behind the curve of general pro- duction and general prices one to three years. But this overly large supply of industrial equipment con- tinuing to be poured on the market for a considerable time after the drop in prices, must be put to use in order to get something out of it. Hence consumers' goods are poured out in greater and greater quantities, and depression is prolonged and aggravated. This state of affairs continues until the time has arrived when the demand for consumers' goods has again outstripped the industrial equipment. Then the rise in the prices of consumers' goods stimulates a new demand for pro- ducers' goods and another period of prosperity is launched. It is therefore the fluctuation in the prices of consumers' goods which is at the bottom of economic cycles. HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 87 (b). Carver^ Professor Carver's theory resembles Aftalion's in many re- spects. He holds that a small increased difference between selling prices and expenses results in a large increase in profits. This large increase in profits results in a much higher capital- ized value of the industrial equipment. The industrial equip- ment produces finished products which are either consumers' goods or at least much farther forward in the march toward consumers' goods than is the industrial equipment. A rela- tively small increase in the value of the finished product re- sults in a much greater increase in the value of the fixed cap- ital. This means that the value of producers' goods tends to fluctuate much more violently than the value of consumers' goods. The enhanced value of the producers' goods due to larger profits stimulates the production of producers' goods much more than of consumers' goods since the value of the latter does not rise nearly as much proportionally. Less energy is therefore devoted to the production of consumers' goods. They become relatively scarcer and a still greater rise in prices re- sults. That in turn leads to still larger profits and higher capitalized value of producers' goods. This condition of af- fairs continues to obtain until the new stock of producers' goods begins to pour out consumers' goods. Then prices drop, profits fall more than prices, and the value of producers' goods declines in proportion to the decline in profits. The produc- tion of capital goods is then checked and depression appears. Here, as in Aftalion's theory, prosperity and depression grow out of fluctuations in the prices of consumers' goods. (c). Hobsori' Hobson's theory is a modification and improvement of the socialistic theory of under-consumption. He believes that the fundamental cause of crises may be found in the existence of surplus incomes. Wealthy people with very large incomes are •T N Carver "A Su^eestlon for a Theory of Industrial Depressions," O j'ofEoon. (May, 1903), pp. 497-BOO. 'J. A. Hobson, The Industrial System (London, 1909). 88 UNIVERSITY OF WISCONSIN STUDIES unwilling to consume it all by themselves. They desire to in- vest a considerable share of their incomes in producers' ?oods in order to increase their fortunes. These producers' goods necessarily emerge ultimately in the form of consumers' goods. The masses of the people with their limited incomes are un- able to purchase all these consumers' goods. The inevitable result is a congested market, which leads to lower prices, less profits, and smaller incomes for the very rich. These reduced incomes force the wealthy classes to spend a greater propor- tion of their incomes and less is invested in capital goods. Thus consumption is given a chance to catch up with the ca- pacity of the industrial equipment, surplus goods are worked off, and prices again rise. With the return of higher prices, profits are increased, incomes are greater, a larger and larger proportion of the surplus incomes are invested in capital goods, which are used in the production of consumers' goods. Thus production again outruns consumption. This argument obviously disposes effectively of Mill's an- swer to the theory of under-consumption. Mill claimed that there could be no such thing as over-production because the doubling of the supply of commodities in every market would by the same stroke double the purchasing power. The means of purchase would always be present. Hobson does not deny that the means of purchase is present but he denies that the recipients of surplus incomes would ever be willing to spend enough of their income to prevent the over-production of con- sumers' goods. No matter how much production is directed toward the things that would appeal to the rich, even their ostentatious wants are so amply provided for that always will they desire in periods of prosperity to invest too large a pro- portion of their incomes in further production. Since they themselves are unwilling to spend the proper proportion of their incomes on consumers' goods, this investment must neces- sarily result in the production of goods intended for the masses. Because of the limited incomes of the masses this leads to the over-production of consumers' goods. Thus there is a reserve of capital just as there is also a re- serve of labor. Surplus incomes cause the incessant attempt HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 89 to employ capital in excess of the demand of the ultimate con- sumer. One of two things must be done. Either the rich will have to abandon their excess investments and resort to greater spending, or else surplus incomes must somehow be reduced and greater equality of incomes attained. This would raise the standard of spending and thus limit saving. This end may be accomplished by the taxation of large incomes, by raising wages, and shortening the working day. These measures would result in greater purchasing power on the part of the masses and a balance would result between demand and supply. 3. THEORIES EMPHASIZING MONEY, CREDIT, PRICES AND CAPITALIZATION (a). MitchelP Mitchell finds the persistent and recurring causes of busi- ness cycles in the fact that the industrial process of making and the commercial process of distributing goods are thorough- ly subordinated to the business process of making money. In- dustry expands actively when business men find the prospect of profit-making good, and contracts when the money-making outlook is discouraging. It is the changes in business men's demand with which Mitchell is chiefly concerned. It may therefore be said that he also emphasizes the demand for pro- ducers' goods. But the important thing is his analysis of the origin of this demand. That is found in the profit margin; in the spread between selling prices and costs. Profits are made on the margins between buying prices and selling prices on the one hand and the volume of transactions on the other.* The margin between the prices at which goods are bought and sold is the more fundamental of the two, and "forms a tolerable business basis for making profits. . . . "^'' Industrial activity is guided by the prospect of profits, and the prospect of profits depends on price-margins. 'W. C. Mitchell, Business Cycles (Berkeley, 1913). ' Ibid., p. 28. »" rbid., p. 27. 90 UNIVERSITY OP WISCONSIN STUDIES A brief description of the different phases of the business cycle will indicate more clearly Mitchell's analysis. He begins with a description of the trough of the wave when a revival of prosperity is beginning to cumulate. Low selling prices, low costs, a narrow margin of profits, large bank reserves, low capitalization, conservatism in granting credits, moderate stocks of goods, and cautious buying obtain. Then expansion begins for some reason or other ; it may be good harvests, heavy pur- chases by the government or an increase in the demand for ex- ports. Expansion spreads to other fields because of the inter- related interdependence of the modern industrial society. Sell- ing prices rise. Costs in the form of wages, interest rates and rents lag behind; raw material alone of buying prices rises higher than selling prices. The increased margin between costs or buying prices and selling prices as well as the greater physical volume of sales leads to larger profits. This increase in profits leads to an expansion of investments, heavy orders for new machinery, large contracts for new construction. Busi- ness is booming. But stresses soon begin to accumulate within the business system. Costs begin to increase. Higher money wages are paid with extra pay for overtime. Efficiency of labor declines because of weariness due to overtime, the employment of un- desirables, and the slowing up of work due to the knowledge on the part of the worker that jobs are numerous. Old leases expire, and new ones are made under less favorable terms. Interest rates rise because of the increased demand for loans and the depletion of cash reserves. Trade outstrips its ca- pacity, and antiquated equipment and poorly located plants are brought into operation. The price of raw materials gains on the price of the finished products. Selling prices cannot rise indefinitely in all industries; in the public utility field rates are fixed by commissions; organic prices depend on harvests; production in some lines exceeds demand because of mistaken investment and this group widens and affects all the rest with a resulting decline in prices. Two effects result from the foregoing : first, the price-margin is narrowed by the rising costs and the falling off in the rise HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 91 of selling prices ; second, the demand for industrial equipment is affected by the stringent condition of the money market and the high cost of construction. Orders for steel mills, foun- dries, machine factories, copper smelters, quarries, lumber mills, cement plants, raw material, and supplies are cut off, and thus the volume of trade in producers' goods is diminished. This narrowing of the price-margin and the reduction in the volume of trade reduce profits. The declinmg profits lessen the security of outstanding cred- its. Capitalization is scaled down both because of lower prof- its and also because of higher interest rates which affect the rate of capitalization. Inadequate security results in refusal to renew old loans. Settlement of old accounts is pressed and liquidation of huge credits results. Bankruptcy of large con- cerns ensues. Banks are hard pressed. An effort is made to replete reserves by the importations of gold, the increase of note circulation and the issue of clearing-house certificates. Stock and bond prices fall to an extremely low level. Busi- ness contracts, and workmen are discharged. Depression is now in full swing. Workmen are unemployed, past savings are exhausted, all classes of incomes are reduced, and hence the consumers' demand for goods falls off. Prices drop owing to keener competition to make sales, and every re- duction in price facilitates reduction in other prices. Finally costs are reduced to a low level. Poorly located and ill-equipped plants are no longer used. The efficiency of labor is increased by the discharge of the poorer grade of workers and the fear of unemployment on the part of those retained. The price of raw material drops. Rentals are reduced. Loans are refunded at lower interest rates. Bank loans are readily obtainable. With closer economy on the part of managers and lower capitalization, earnings gradually become more sat- isfactory. The demand for goods returns with the exhaustion of the accumulated stocks, the constant growth of population and the development of new tastes and products. Low inter- est rates encourage borrowing and the investment in industrial equipment returns. Thus the price-margin is again widened, 92 UNIVERSITY OF WISCONSIN STUDIES the volume of trade is increased, profits grow and prosperity returns. (b). Veblen^^ Mitchell's theory corresponds in many respects to Veblen's theory. Veblen finds that modern industry is guided by busi- ness principles. Under the old order industry was a quest for a livelihood; under the new order industry is directed by the quest for profits. Formerly times were rated as good or bad according as the industrial processes yielded a sufficient output of the means of life; now, good or bad times depend on the rate of business profit. The controlling end at present is pecuniary considerations and not abundance of satisfying goods. In modern times therefore the potent factor which serves as an incentive to the acceleration of business is a rise in prices. This rise in prices may be due to an increased demand growing out of governmental expenditures for war or preparations for war ; or it may be due to an increased supply of the precious metals, an inflation of the currency, or a larger use of credit instruments as subsidiary currency. Money and prices, far from being negligible factors, as frequently stated by those who consider crises as the phenomena only of production and consumption, are in fact the primary factors. It is all a ques- tion of prices, business profits and capitalization. Thus an era of prosperity is an era of increased earnings growing out of rising prices. These increased earnings con- sist of a differential gain in the increased selling price of the output over the expenses of production. When this differen- tial advantage ceases the era of prosperity is on the wane. This differential gain arises mainly from two causes. In the first place, certain outlying industries are not affected ap- preciably by the upward movement and the supplies drawn from these industries do not rise in price to any considerable extent. In the second place, wages advance slowly during an era of prosperity. The latter is the chief and most secure differential advantage. "T. B. Veblen, Theern of Business Enterprise (New York, 1904). HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 93 These increased earnings or expected earnings lead to a higher market capitalization of industrial equipment. This higher capitalized market value increases the value of the prop- erty as collateral. Increased borrowing may take place on the basis of this higher value. Or contracts for the purchase of supplies may be entered into which are in effect an extension of credit. Thus the heightened market capitalization becomes the basis of a greatly extended credit either in the way of orders or formal loans. But this period of increased earnings upon which the higher market capitalization is based finally comes to a close. The differential advantage mentioned above terminates because the necessary expenses of production presently overtake or nearly overtake the selling price of the output. "Increasing wages cut away the surest ground of that differential price advan- tage on which an era of prosperity runs."^^ The rate of earn- ings then falls off, the enhanced market capitalization proves to be too great for present earnings, the collateral consequently shrinks to a point where it will not support the credit exten- sion resting on it in the form of outstanding contracts and loans. Loans are called or additional collateral is demanded, and liquidation ensues. Because of the interrelation of cred- itors and debtors such a movement once started has far-reach- ing effects. Depression as well as prosperity is a product of pecuniary considerations. The pecuniary exigencies of the situation in- hibit industrial activity. Depression means that business men do not derive a satisfactory gain from letting industrial activ- ity continue at full capacity. There is an excess of the means of producing goods above what is expedient on pecuniary grounds. There is under-production in the sense that the sup- ply of goods which finds its way into the hands of consumers is too scant for comfort, but there is over-production in the sense that there is more of an output offered than can be car- ried off at a fair price and an ordinary profit. It is a question of "fair prices" and "reasonable profits." •Ibid., p. 212. 94 UNIVERSITY OF WISCONSIN STUDIES A reasonable profit means a satisfactory return on the cap- italized value of the enterprise. But a discrepancy arises be- tween the high capitalization based on former high earnings or anticipated earnings and the present diminished earnings. Not only is the capitalization too high for present earning ca- pacity, but it is also too high to fit the lowered cost of indus- trial equipment. Thus the capitalization is too high both from the standpoint of cost and earning-power. But interest bearing securities cannot be reduced except by reorganization, and other forms of capitalized wealth are reduced or scaled down with extreme reluctance. Some concerns are forced into bankruptcy, and are reorganized and capitalized on the basis of the reduced earnings. New competing concerns are coming in with plants built at lower cost, and fixed charges carrying lower rates of interest. These unemcumbered com- petitors are making "reasonable profits" at current prices be- cause their capitalization is based on lower cost and present earning-capacity. Their competition precludes an advance in prices to a point which would afford a "reasonable profit" to the other establishments paying interest and dividends on over- capitalized property. Veblen advances the novel theory that under the fully de- veloped regime of the machine industry chronic depression tends to become normal. Under fully developed machine pro- duction a persistent divergence arises between the past cost of production of a given equipment and the current cost of an equivalent equipment at a subsequent date. This discrepancy results from the gradual but uninterrupted progressive im- provements of industrial processes. This discrepancy requires a progressive readjustment of capitalization to correspond with the continuously decreasing cost and lowered earning power. Therefore a "fair" rate of profit is not permanently attainable on the basis of the old capitalization. Depression is therefore the normal situation. But this state of affairs did not obtain during the early part of the nineteenth century. Not until about the decade of the seventies did the efficiency of the machine industry in the pro- HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 95 duction of capital goods become so great that the cost of their production was lowered too rapidly to permit the progressive reduction of capitalization to keep pace with it. In other words up to the period of the seventies the shrinkage of capitalization following a crisis would be sufficient to maintain an appreciable under-capitalization for a considerable length of time before reduced cost of capital goods would again leave the capitali- zation too high. This period of under-capitalization would permit of "reasonable" profits and prosperity. But since the seventies the machine industry has become so efficient and the cost of producers' goods has been lowered so rapidly that any under-capitalization which might follow a crisis would quickly disappear without allowing time for recovery and boom. Hence depression is normal to the modem industrial situation. (c). Fisher'^^ Fisher's theory places still greater emphasis on the monetary and credit aspects. Assume as a starting point a slight initial disturbance such as an increase in the quantity of money. This results in a rise in prices. The profits of business men increase greatly because, while prices rise, expenses such as interest on past loans, rent, wages, and salaries remain unaffected or are little aflFected. Larger profits encourage business men to ex- pand their businesses by increased borrowings. These borrow- ings are mostly in the form of short time loans from banks. Such loans engender deposits, and deposit currency is there- fore increased. Thus in spite of greater activity in trade and increased production prices continue to rise because of the ex- pansion of deposit currency. The period of prosperity obtains as long as enterprisers' profits continue abnormally high. But these profits are finally cut into from both sides. Interest rates, rent, wages and sal- aries ultimately rise, and costs are greatly increased. On the other hand prices are checked by the fact that deposit currency is contracted through the refusal of banks to extend loans ex- cept on hard terms if at all. Banks are compelled to dis- " Irving- Fisher, The Purchasing Poxoer of Money (New York, 1911); Why M the Dollar Shrinking t (New York, 1914). 96 UNIVERSITY OF WISCONSIN STUDIES courage loans because they cannot permit a too abnormal ex- pansion of loans relatively to reserves. Loans thus cease to expand and prices are checked on the one side while costs mount up on the other and profits are reduced. Bankruptcies and business failures ensue. Enterprises which were started by borrowing expect to be continued by renewed borrowing. When borrowing becomes more and more difficult insolvency necessarily follows. These bankruptcies tend to spread be- cause the creditors of the insolvent firms necessarily are af- fected. Contracted loans, low prices, high costs, and small profits continue and depression rules. This contraction becomes self-limiting, as soon as loans are easier to get. When reserves accumulate banks are led to make loans on easy terms. Borrowers again become willing to take ventures, loans are again demanded, prices begin to rise, bus- iness becomes profitable, and there occurs a repetition of the upward movement. C. Criticism of Theories The vital point of conflict between the first two classes of theories discussed is found in the insistence on the part of one group that the trouble which results in crises begins with a lessening of demand on the part of the consumers, while on the other side it is claimed that the initial diminution of de- mand is on the part of business men for producers' goods. This conflict leads us to a comparison of the fluctuations of the prices of consumers' goods and producers' goods. The available monthly data is for the United States and Germany. For the United States the relative prices of con- sumers' goods were obtained by averaging the monthly relative prices of food, clothing and house furnishings as given by the Bureau of Labor Statistics.^* The relative prices for producers' goods were obtained by averaging the monthly rel- ative prices of metals and implements, lumber and building material. These relative numbers were in turn reduced to the monthly bases used throughout this discussion. The rel- "U. S. Department of Labor Bulletin, 1912, pp. 620-23. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 97 CHART 11; PRICES, OTITED STATES 130 ISO 1902 1903 1904' 1908 1906 ' 1907 ' 1903' ative prices of producers' and consumers' goods for Germany were calculated from original data by the writer.^^ The price ^ Vierteljahrsheftetij 1902-1909. Sixteen commodities are included in the producers' goods series, as follows : Haute und Felle, Wolle, Baumwolle, Baumwollengarn, Leinengam, Rohseide, Hauf, Mexikaneskhe Paser, Rohjute, Blsen, Blei, Kupper, Zink, Zinn, Steinkohlen, Petroleum. The method used in computing the index numbers is similar to that used by Bradstreet, Bradstreet simply added together the prices per pound of the various articles used. The method here used was to add together the prices per 100 kg. of most of the commodities named but in some cases a different unit was used. Thus for Rohseide the prices of 1 kg. were used, and for Eisen and Steinkohlen the prices of 1,000 kg. were used. The sum- mations thus obtained were reduced to Index numbers with the monthly averages used as bases. Fourteen commodities are used In the consumers' goods series as fol- lows : Kartoffeln, Rindvieh, Schweine, Kalber, Hammel, Roggenmehl, Weizenmehl, Butter, Zucker, RUbol, KafEee, Tee, PfefEer, Schmatz. The prices were summated as before. One hundred kg. was used as the unit In most cases with the following exceptions: Kartoffeln 1,000 kg., Rog- genmehl 1,000 kg., Weizenmehl 1,000 kg. Index numbers were computed by dividing the monthly averages into each of the foregoing summations. '7 98 UNIVERSITY OF WISCONSIN STUDIES fluctuations of the two groups for the United States are given in Chart 11, and for Germany in Chart 12. The relative numbers are given in Table XI. From the charts and table the following facts become evi- dent: (1) In both countries the prices of consumers' goods T^O^ CHABT 12: PRICES , GERHAKT roODtJCERS' GOODS "iPO HO- /| MO ,.rt. ..^ / b ■-.i'-T ' '■y ' \ ""■• Qft- Vv 80 r^ I 70- 1902 1903 1904 190B 1906 1907 1908 begin to decline about seven months after the decline in the prices of producers' goods. (2) In both countries the prices of producers' goods fluctuate more violently than the prices of consumers' goods. In Germany producers' goods fluctuate 150 per cent more than do consumers' goods, while in the United States the fluctuation is 100 per cent greater. (3) The prices HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 99 of both consumers' and producers' goods fluctuate more widely in Germany than in the United States. The fluctuation of consumers' goods is 25 per cent greater, and 50 per cent greater for producers' goods. These facts would then seem to prove conclusively that the initial disturbance arises in a diminution in the demand for producers' goods. It has been suggested however by both Aftalion and J. M. Clark^° that the apparent conclusion is exactly the opposite of the truth. The change in the demand for consumers' goods is in reality the cause of the change in the demand for pro- ducers' goods even though the maximum and minimum points of the latter precede the maximum and minimum points of the former. The reason for this may be indicated by distin- guishing between a change in absolute demand, and a change in the rate of increase in demand. There are two distinct de- mands for producers' goods : first, the demand for the main- tenance and replacement of existing capital goods ; second, the demand for new construction. The first demand depends upon the life of producers' goods, or the rate of depreciation, and the amount of consumers' goods continually needed. The second demand depends upon the increase in the demand for consum- ers' goods. Suppose 10 per cent of the existing capital goods has to be replaced every year, and suppose the increase in demand is so great that an additional 10 per cent of the present supply of producers' goods must be forthcoming in order to meet the increased demand. Then the equipment for the pro- duction of capital goods must be large enough to supply 20 per cent of the existing capital each year. Now any lessening in the rate of increase in demand for consumers' goods would re- sult in an absolute diminution in the demand for producers' goods. Suppose the increased demand for consumers' goods is "reduced to a point which will require only an additional 8 per cent of capital goods over and above replacement. Then the total demand for producers' goods is reduced from 20 per cent of the existing equipment to 18 per cent, an absolute de- "J. M. Clark, "Business Acceleration and tlie Law of Demand: A Tech- nical Factor in Economic Cycles," J. of Pol. Econ., XXIV, 217-35. 100 UNIVERSITY OF WISCONSIN STUDIES TABLE XI— INDEX NUMBERS OF WHOLESALE PRICES OF PRODUCERS' AND CONSUMERS' GOODS IN THE U. S. AND GERMANY Producers' Goods — U.S. Consumers' Goods — U.S. Producers' Goods — Ger. Consumers' Goods — Ger. 1902 1903 1904 1905 January. February March . April . . . May . . . June . . . July. . . August. Sept.. . October November December January . February March April . . May.. June . . July. , August September October . November December January . February March. April . . . May . . . June . . . July. .. August . September October. . November December January . February March . April... May . . . June. .. July . . . August . September October. . November December 88.8 88.8 89.8 90,6 93.3 94.2 94.2 95.1 95.0 94.6 94.5 94.0 95.7 95.6 96.4 95.6 94.1 93.8 93.5 92.8 92.4 92.8 91.6 90.9 92.5 92.0 91.6 91.8 91.6 91.5 91.3 90.9 90.7 89.7 90.3 91.5 93.8 95.3 95.7 96.1 96.5 98.3 97.6 99.6 100.0 100.8 102.0 102.4 95.9 95.9 96.1 96.1 97.4 96.4 96.3 95.8 95.3 96.3 96.0 96.1 97.1 96.8 97.5 97.2 96.4 96.9 96.5 96.2 96.9 95.8 95.8 95,6 97.0 98.0 98.0 97.9 97.7 97.7 96.9 97.1 97.1 96.5 96.7 96.8 97.7 97.7 96.9 96.9 96.2 96.0 96.6 97.6 98.1 97.9 98.1 98.3 81,1 82.5 82.7 84.1 85.2 85.5 84.9 84.3 85.0 84.4 83.7 83.7 87.9 90.1 91.9 92, 92. 93. 93. 94. 93.3 92.4 93.0 95.9 100.6 98.6 98.5 98.1 95.2 92.4 91.6 91.9 93.3 92.8 93.4 91.7 92.2 91.9 92.0 92.3 92.0 94.8 98.6 100.3 100.4 101.1 103.2 105.1 94.7 94.9 96.6 96.6 96.9 96.6 95. 96. 96. 96. 96. 94.9 95.4 95.1 95.7 96.4 94,7 94.4 93,2 93,7 93.3 93.3 93.2 92.6 92.8 95.2 95.6 94.1 92.7 93.2 96.2 95.4 95.6 95.8 96.1 97.0 98.2 98.5 96.1 98.9 98.4 99.3 99.1 100.6 99.4 100.1 101.5 102.0 HANSEN— CYCLES OP PROSPERITY AND DEPRESSION 101 TABLE XI— Continued Producers' Goods — U.S. Consumers' Goods — U.S. Producers' Goods — Ger. Consumers' Goods — Ger. 1906 1907 1908 Base January. February- March. April . . May.. . June . . . July... August September October. . November December January. February March . . April May June .... July.... August . . September October. . November December January . February March. . April May June .... July.... August . . September October . . November December January . February March . April . . May . . . June . . , July . . , August September October . . November December 106.0 106.4 106.6 105.9 106.6 106.5 107.7 107.1 108.1 110.3 111.9 113.8 117.1 117.0 117.2 117.2 117.0 116.3 116.2 114.5 113.7 111.1 109.2 104.6 106.1 104.4 102.7 102.5 100.6 99.0 99.2 99.8 100.0 100.4 100.7 102.6 125.4 126.7 127.1 127.6 128.8 128.1 127.4 127.4 127.2 127.0 127.6 127.5 100.6 100.5 100.4 100.6 100.8 101.2 102.3 102.4 101.7 101.7 103.1 103.6 104.9 105.4 105.8 105.6 106.4 107.5 107.8 108.1 108.4 109.6 108.6 107.3 106.8 105.7 105.4 105.7 105.2 104.3 103.8 102.7 102.6 102.4 101.6 102.1 112.8 112.9 112.9 112.5 111.8 111.8 112.0 112.2 112.8 113.3 113.9 114.3 107.2 106.4 106.3 109.0 112.2 112.3 111.6 112.1 113.4 119.3 119.8 120.9 122.4 123.0 123.2 123.3 124.0 123.8 123.2 120.3 118.9 114.6 111.6 107.9 108.4 107.3 105.5 100.9 98.7 98.4 96.9 97.2 95.6 95.1 95.1 94.8 1,795 1,800 1,811 1,810 1,822 1,820 1,818 1,816 1,804 1,805 1,814 1,824 103.7 104.0 103.8 103.2 101.5 102.2 103.7 102.7 103.9 103.9 103.5 103.8 105.2 105.0 105.5 105.3 109.1 108.6 106.8 108.2 108.3 109.1 108.4 108.9 109.9 107.5 106.6 105.8 106.5 105.4 105.7 102.8 102.9 101.5 101.1 100.4 1,743 1.740 1,722 1,718 1,720 1,714 1,746 1,777 1,793 1,810 1,806 1,776 102 UNIVERSITY OF "WISCONSIN STUDIES crease. Thus part of the equipment prepared to produce cap- ital goods must remain idle. The demand for consumers' goods is still increasing but the rate of increase is less than before. A reduction in the rate of increase in the demand for consumers' goods produces an actual decrease in the demand for producers' goods. Thus while the curve of demand for consumers' goods is still rising, though at a diminished rate, the curve of demand for producers' goods is actually falling. The change in the demand for consumers' goods is the causal factor, but the fact that the curve for producers' goods falls while the curve for consumers' goods is still rising gives the false impression that the initial trouble begins with the demand for producers' goods. Is there then any evidence to show that the prices of pro- ducers' goods fall because of a diminution in the rate of in- crease in the prices of consumers' goods ? The index numbers given above indicate that there is not any such evidence. The high point in the prices of producers' goods is reached in April, 1907, in the United States, and in May, 1907, in Germany. If the theory just referred to were true, the rate of increase in the prices of consumers' goods should show a decline before this point is reached. No such decline is indicated. On the contrary the prices of consumers' goods continue to rise in a remarkably even course until Octo- ber, 1907, in the United States, and until January, 1908, in Germany. The following table gives the average monthly rate of increase in the prices of consumers' goods in each country by periods of five months. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 103 United States Germany Period Average Kate of Increase Period Average Kate of Increase March-July, 1906 August-Dec, 1906 January-May, 1907 June-October, 1907 Pet. 0.4 0.3 0.5 0.6 June-October, 1906 November, 1906 1 March, 1907 j April-August, 1907 September, 1907 1 January, 1908 j Pet. 0.5 0.3 0.5 0.3 There clearly is no evidence of any decline in the rate of increase in the prices of consumers' goods. In fact, so far as the United States is concerned, the rate of increase appears if anything to increase after the fall in the prices of producers' goods. It may also be profitable in this connection to examine the curves given in Charts 11 and 12. So far as the evidence goes it does not appear that the prices of producers' goods fall because of any decline in the rate of increase in the prices of consumers' goods. In short, the theories emphasizing con- sumers' demand do not appear to harmonize with the statisti- cal facts. Aside from the question as to whether the initiatory demand begins with consumers' goods or producers' goods, is the ques- tion as to the fundamental nature and cause of increasing and decreasing demand. It is the contention of the third group of theories discussed that the real basis of demand cannot be found in questions relating to production and consumption alone, but must in the modern business economy be sought in price margins and capitalization, in monetary and credit phenomena. 104 UNIVERSITY OP WISCONSIN STUDIES D. Conclusions from the Study of Monthly Data The writer believes that the conclusions derived from this study of monthly data bring support on the whole to the third group of theories. Demand is based on purchasing power. The source of pur- chasing power is income, and the source of income is the pro- duction of material goods and services. Production gives rise to income, income means purchasing power, purchasing power is the basis of demand, and demand in turn regulates production. In short goods and services are exchanged against goods and services. On this basis one would expect produc- tion to run an even course, and not to run in cycles. And in- deed in the barter economy there were no business cycles. But modern purchasing power functions largely through bank credit. We shall now consider the phenomenon of bank credit and its effect on purchasing power. The nominal purchasing power obtaining in any society at any given moment may be measured substantially by the amount of money in hand to hand circulation and the volume of bank credit in the form of deposit currency. Doubtless it exceeds the above somewhat because individuals, firms, cor- porations and governmental units are able to make use to a cer- tain extent of their personal credit directly without exchang- ing it for bank credit. Thus purchases may be made against personal notes, secured or unsecured, and time drafts or bills payable, without the purchaser making use for the time being of money or bank credit. Such personal credit, however, is ordinarily converted into bank credit sooner or later. The per- sonal notes or time drafts received against sales may be dis- counted at a bank, and the individual or firm heavily loaded with bills receivable will probably be compelled to borrow on its own notes at some bank. In one sense it might be argued that the total purchasing power of a nation is equivalent to its total wealth. But as an actual fact this is untrue. The extent to which wealth repre- sents purchasing power depends on the extent to which it can be used against purchases, or the degree of its acceptability as a HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 105 means of payment. In as far as barter is an unacceptable economy, just so far most forms of wealth become utterly useless as means of payment against purchases. Money is the only form of wealth which is generally acceptable. AH other forms of wealth have varying degrees of acceptability rang- ing all the way from coupon government bonds to real estate. These forms of wealth can be said to have real purchasing power only in so far as they may be converted into bank credit. Only that portion of the wealth of a nation which has been or can readily be hypothecated at a bank and converted into bank credit in the form of bank deposits or bank notes may be said to have effective purchasing power. Now it is impossible for all the wealth of a nation to be thus converted into purchasing power at once, because banks are limited in the extent to which they may extend their credit by the supply of their reserves. These reserves in turn are de- pendent in volume largely upon the quantity of lawful money in the given country, and ultimately in the world. But a more fundamental reason lies in the fact that a definite relation must always exist between the money value of a nation's wealth and its supply of money and bank credit. A nation could never have a supply of circulating media equal to the money value of its property because with every increase in the supply of circulating media the value of property would rise. Actual purchasing power, therefore, in the form of bank credit could never overtake the nation's wealth for two reasons : first, be- cause the volume of bank credit is restricted by law or bank- ing prudence to a certain proportion of the money available for reserves ; and second, because property values would them- selves be inflated by any increase which might occur in bank credit. Personal credit measured in terms of the total wealth can therefore never all be converted into bank credit or ready purchasing power. According to Fisher's estimate the wealth of the United States is normally about twenty times the aver- age amount of deposit currency. Up to the time of the estab- lishment of the federal reserve system, deposit currency would fairly measure the bank credit in the country. 106 UNIVERSITY OF WISCONSIN STUDIES It is therefore obvious that the possible extension of bank credit has no Hmits so far as personal credit is concerned. It is limited, however, by two things : first, by the quantity of re- serves ; second, by the desirability of converting personal credit into bank credit, and this depends upon the discount rate and the profitableness of the employment of capital in industry. There are therefore limits to the extent to which property can be converted into immediate purchasing power through the issuance of bank credit. But to the extent that bank credit is extended it appears that a portion of the purchasing power of the community comes from sources other than income. But this addition to the total purchasing power of the community is nominal rather than real. To the extent that present pur- chasing power is nominally increased through the issuance of bank credit, to that extent there is also an addition to the circulating media. The effect is an increase in prices and therefore no increase in real purchasing power. The nominal incomes of people generally are as before, but their real pur- chasing power is reduced because of the increase in prices. The issuance of bank credit simply re-distributes purchasing power, reducing the real purchasing power of income receivers generally, and increasing the purchasing power of entrepre- neurs able to secure bank credit. It is this redistribution of purchasing power, accomplished through the instrumentality of banking institutions, that changes demand, upsets prices, affects the profit margin, and therefore production. Here in short, may be found the fundamental cause of the business cycle. Bank credit may be likened to a spiral spring which may be stretched within certain hmits of safety. These limits de- pend upon the amount of reserves needed to maintain the sol- vency of the banking system. The magnetic force which draws out the extensible bank credit is the entrepeneur's anticipation of profit. When accumulated stocks have run out, when costs are falling, when labor is easily obtainable, when loanable funds are plentiful and interest rates run low, then prospects for profit-making are bright and entrepreneurs apply for bank credit. The issuance of bank credit increases HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 107 the purchasing power of entrepreneurs. The result is increased bidding for raw materials, capital equipment, construction work, etc., with a consequent increase in prices. The effect is increased profits for entrepreneurs producing raw materials and equipment. They in turn will apply for bank credit with which to expand their business. Thus in turn their purchasing power is increased, adding further force to the upward move- ment of prices. So long as bank credit continues to be capable of further expansion, prices continue to rise. This upward movement comes to a close only when bank credit can no longer be further extended for the reason that it has already reached the limit of banking safety. The demand for bank credit continues to be strong while prices are rising owing to the resulting margin between costs and selling prices. But rising prices result in more money being drawn out into hand to hand circulation. The effect is an actual diminution in bank reserves in the very period when bank credit is being extended. It therefore becomes necessary not merely to stop the expansion of bank credit, but actually to reduce the outstanding volume. The demand for bank credit is not lacking, but the supply is strained to the limit of safety. The banks protect themselves by raising the discount rates and scrutinizing more carefully the solvency of borrowing firms. A gradual reduction in outstanding bank credit is forced. This movement results in the forced sale of securities because of the inability of borrowers to renew their loans. The stock market begins to decline, trading on the stock exchange is reduced, and bank clearings fall off. New securities are issued with difficulty, which, coupled with the inability to obtain loans at the bank, reduces the purchasing power of business enterprises. Presently building falls off, then production, imports and commodity prices. Thus the limitation in the volume of bank credit gradually drags down stock prices, shares traded, bank clearings, building, employ- ment, imports, production, prices and earnings. When the diminution in profits appears, the downward movement is further accelerated by the letting up in the demand for bank 108 UNIVERSITY OP WISCONSIN STUDIES credit. Thus the downward movement like the upward move- ment tends to become self-perpetuating. But as the upward movement culminates because of the strain placed upon bank reserves through an undue extension of bank credit, so the downward movement comes to a close because of the great accumulation of bank reserves due to the reduction of outstanding bank credit and the return of money from hand to hand circulation following the decline of prices. This continued accumulation of reserves leads bankers progressively to lower discount rates to a point low enough to make the employment of bank credit again profit- able. New securities are freely issued, bank loans are readily obtainable, and the purchasing power of business enterprises increases. Thus the upward swing returns and the cycle re- peats itself. The increased demand which results from the extension of bank credit soon shows itself in a rising stock market, greater production, more imports, larger employment of labor, in- creased immigration, and rising prices. Rising prices and the increased volume of production result in increased earnings and profits. Thus the movements of reserves, bank credit and discount rates pull up after them first, the investment series, stock prices, shares traded, bank clearings, etc., and second, the series which represent industrial conditions per se, com- modity prices, production, imports, employment, immigration, and earnings. That the above analysis finds verification in the monthly data presented in this study may be seen from a reference to the charts and tables given in Chapter II. The first move- ment takes place in bank reserves, loans, deposits and discount rates. In the United States reserves began to accumulate late in 1903. With the upward swing of reserves, loans and de- posits were extended. The banking group as a whole began to rise in December 1903. The extension of bank credit in- creased the demand for securities. The stock and bond market began to rise in the early part of 1904. Building began to increase in May, the production of pig iron began to increase HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 109 in earnest in September, imports started upward in August, commodity prices in July, and railroad gross earnings in August. The average of the Industrial group started upward in August. It will be noticed that in nearly every case there was a short preliminary rise which, however, received a set- back, and was disregarded in the above statements. Thus the upward swing of reserves, bank deposits and loans, the easing up of discount rates, pulled up, one by one, first the various series coimected with the security market, and then the series associated with industrial activity itself. The downward movement again began with reserves, de- posits, loans and discount rates. This group began to decline in the first half of 1905. The reduction of bank credit af- fected the security market and stock prices began to drop. The average of the investment series began to turn down in the early part of 1906. Industrial activity still continued to increase for a time, but gradually the inability to float new securities or to get bank credit had its effect. Building began to decline in May, 1907, unemployment in July, and the indus- trial barometer, composed of production of pig iron, imports, commodity prices, railroad gross earnings and immigration, in August. Similar facts appear in the upward movement following the crisis of 1907. Reserves, deposits and loans started upward in September, 1907. Discount rates eased up. Stock prices followed in the early months of 1908. Building increased in March, and the industrial barometer started on the upward movement in June, 1908. The movements for Great Britian and Germany correspond with remarkable closeness of detail to those in the United States, and verify the conclusions stated. No economic phe- nomena are so international in their interrelation and inter- dependence as are the movements of the money market. That fluctuations of prosperity and depression are world-wide, at least so far as the advanced countries of the world are con- cerned, would certainly bring some support to the conclusion that these fluctuations are, at bottom, movements of money, 110 UNIVERSITY OF WISCONSIN STUDIES credit and prices. Certainly no other economic factors can be claimed to be so international in scope as the movements of the money market. Crops, favorable or unfavorable legis- lation, governmental demands, local catastrophes, etc., all modify the course of the fluctuations in the several countries, but the dominant factors are the great international move- ments of money, credit and prices. That the cycle of prosperity and depression is at bottom a question of money, credit and prices is also supported by the historical fact that during the long period of declining prices from 1873 to 1897 depression was chronic both in the United States and Great Britain, and tO' some extend in all countries. Continued depression was broken only by two brief periods of prosperity. Since 1897 prosperity has been chronic, so to speak, broken only by temporary periods of depression. The reason lies in the fact that the period from 1873 to 1897 was a period of falling prices broken only at short intervals by tem- porarily rising prices. The period from 1897 to the present has been a period of continually rising prices, broken by short intervals of falling prices. Falling and rising prices are gen- erally conceded to be mainly monetary and credit phenomena. The analysis of monthly data presented in the foregoing pages would indicate the following points : 1) That the first movement in the prosperity cycle begins with reserves, loans, deposits and money rates. 2) That the movement of reserves, loans, deposits and money rates is the causal factor working out its influence on stock and bond prices, transactions on the stock exchange, bank clearings, business failures, building, employment, pro- duction, imports and exports, prices and profits. HANSEN— CYCLES OF PROSPERITY AND DEPRESSION 111 BIBLIOGRAPHY Aftalion, A. Les crises periodiqu.es de surproduction Paris 1913. Babson, Roger W. Desk Sheet of Tables. Banker's Magazine, London, 1902-1909. Beveridge, W. H. Unemployment. London. 1912. 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